Weekly Dairy Market Outlook

By Ken Bailey

Penn State University

November 7, 2003

Dairy Products Report Released

· Dairy components allocated to cheese

· Butter production down

· Cash cheese prices weaken

USDA released the Dairy Products report this week. It shows how milk components were allocated to the production of dairy products for the month of September 2003. Overall it shows more components were allocated to cheese production and less to butter and nonfat dry milk. If this trend continues, expect lower stocks of butter in early 2004 and more of cheese.

One would expect overall dairy processing to be down relative to a year ago since milk production is lower. For the month of September, USDA estimated U.S. milk production was 13.4 billion pounds. On a daily average basis, the September U.S. milk supply fell 0.5 percent relative to a year ago. According to my calculations for the month of September, the Dairy Products report shows a one percent growth in the amount of protein and other dairy solids components going into manufactured dairy products, and a 4.2 percent drop in butterfat use.

Butter and nonfat dry milk for September 2003 fell 21.6 and 8.9 percent respectively from a year ago. This is the second month of significant declines in butter and nonfat dry milk production. For the period January through September, cumulative butter and nonfat dry milk production fell 7.9 and 6.3 percent respectively. On the other hand, total cheese production in September grew 3.3 percent relative to a year ago; cumulative total cheese production through September 2003 grew 0.4 percent. In the cheese category growth is mainly coming from the production of Italian cheeses, which was up 4.7 percent in September. Cumulative Italian cheese production grew 2.1 percent.

It does not take a rocket scientist to figure out what’s going on here. Milk used for Class IV purposes has fetched a butter and nonfat dry milk price of just $1.18 and $0.80 per pound, respectively. On the other hand, milk used for Class III purposes got a cheese price of $1.60 per pound for blocks and slightly lower for barrels. That has moved milk from butter/powder production into the more lucrative cheese production. Since market prices will respond, this could have the effect of “equalizing” cheese and butter/powder prices.

Cheese prices at the Chicago Mercantile Exchange continued to fall this week. Block cheese prices fell a nickel per pound this week from $1.48 per pound on Monday to $1.43 per pound by weeks end. Barrel cheese prices fell from $1.4550 on Monday to $1.3950 per pound by Friday. Grade AA butter prices strengthened slightly from $1.1850 per pound on Monday to $1.20 per pound by Friday. These price directions made sense given the Dairy Products report.

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