Milk Prices: Is There Hope in the Near Term

Dr. E. Bruce Godfrey
USU Extension Economics Specialist

    Most dairymen will remember the last few months of 1998 as one of the most prosperous periods for milk production in most people�s memory. Milk prices were at an all time high and feed prices were lower than they had been for several years. While feed prices remain relatively low, milk prices have declined sharply. The decline was expected by most producers, but the magnitude of the decline caught most people (including me) by surprise. For example, the decline in the BFP this spring was the largest in history. The reasons for these changes provide us not only an explanation for the increased prices that occurred in late 1998 followed by the decline in 1999, but also provide some insight into the future of milk prices.

    Milk production in the United States increased about 1 percent in 1998 from 1997 levels. This occurred at the same time that use (disappearance) increased more than 2.5 percent. This increase in production was followed by a rapid further increase in production in early 1999. For example, milk production in California (the nation�s leading milk producing state) increased about 10 percent in March from the amount produced in the same month in 1998 This was the result of an increase in the number of cows being milked, as well as an increase in production per cow. To gain some insight into how large a change this represents, one can compare this with milk production in Utah. For example, there are approximately 90,000 dairy cows in this state. The increase in the number of dairy cows in California between March 1998 and March 1999 was 44,000 head. Thus, California producers added about half the total number of cows in Utah in one year. The change in production is even more impressive. Milk production in California increased by 250 million pounds in March 1999 as compared to 1998. This is nearly twice the total amount of production in Utah for the first quarter of the year (January through March). While California has been used as the example, other states have also increased production. For example, Idaho�s production increased by 44 million pounds in March 1999 as compared to March 1998. This increase is about one-third of Utah�s total production in March. These changes suggest that Utah�s 5 percent increase in production (18 million pounds) during the first quarter of 1999 is impressive, but is still small when compared to many states in the west. This large increase pushes total milk production in the United States to 14.2 billion pounds in March 1999. This represents the largest single monthly level of the production ever recorded. This high level of production when coupled with a moderate increase in use led to the large decreases in milk prices that have occurred.

    It will take some time before increases in production will begin to moderate. This will occur as cows are culled and some producers choose to leave the industry. No one can predict what prices will do, but some indication is provided by the current futures market prices at the Chicago Mercantile Exchange.

Month BFP Future Price
April 99 $11.62
May 9911.36
June 9911.09
July 9911.49
Aug 9912.20
Sept 9912.61
Oct 9912.87
Nov 9912.80
Dec 9912.62
Jan 0012.15
Feb 0012.00

    These data suggest that milk prices probably will not start to increase until fall when milk production normally declines and children return to school. However, block cheese prices at the CME have remained steady for about 10 weeks. This suggests that declines in milk prices in May and June may not be as great as projected. One should remember that the prices shown above are for class III milk. As a result, milk prices will probably be higher than those indicated above for most producers. They do indicate, however, that much of 1999 will be a period when dairy profits will be relatively low for many producers. ©