Weekly Dairy Market Outlook

By Ken Bailey

Penn State University

November 19, 2004

Market Continues to Strengthen

· Butter and cheese prices advance

· Holiday sales look promising

· Milk supply growing moderately

The market showed surprising tightness this week with prices rising at the Chicago Mercantile Exchange. Block cheese prices rose from $1.7250 per pound on Monday, November 15 to $1.7950 per pound by Friday, November 19. Barrel prices rose from $1.6925 per pound on Monday to $1.75 per pound by Friday. Butter prices rose as well, from $2.01 per pound on Monday to $2.1025 per pound by Friday.

Its not surprising that demand is seasonally strong this time of year. But demand is above market expectations. While we don’t have the USDA approved numbers yet, USDA is reporting strong demand for fluid milk products and egg nog, dip, bottled cream, sour cream and cream cheese. This demand plus normal consumption for cheese has created a shortage of milk fat. Thus churning activity across the country is very slow. In addition, Cooperatives Working Together (CWT) announced on November 17 that they were accepting bids to retire a total of 51,700 head of milking cows. Thus tightness in the milk supply, stronger than usual demand for Class I and II products, and now the CWT program has resulted in a run up in cheese and butter prices.

Even the market for nonfat dry milk is surprisingly strong. Western powder prices are mostly $0.80-0.89 per pound, whereas world powder prices are just over $1.00 per pound. The U.S. is reportedly selling a lot of nonfat dry milk commercially into export markets. That said, we are still shipping nonfat dry milk each week to the Commodity Credit Corporation (CCC) under the Dairy Price Support Program. Since October 1, 2004 the CCC has accepted 36.8 million pounds, 93 percent of which originated from the West.

The milk production report released this week indicates that U.S. production of milk in October was at 14.07 billion pounds, up 1.2 percent on a daily average basis. This represents a modest rate of growth. U.S. cow numbers remained flat at an estimated 9.038 million head, and production per cow was up an estimated 18 pounds from a year ago. While many states showed reductions in milk supply growth, a number of western states showed strong grains in October. Milk production grew 10.0 percent in Arizona, 5.4 percent in California, and 3.9 percent in Idaho. Other states with positive growth relative to a year ago were Florida (+0.6 percent), Minnesota (+0.6 percent), Ohio (+2.7 percent), Pennsylvania (+0.9 percent), Texas (+4.4 percent), and Virginia (+3.7 percent).

Finally, USDA just released the Cold Storage report. Butter inventories are at 104.7 million pounds at the end of October, down 38 from a year ago. Stocks of American cheese were at 526.1 million pounds, up 7 percent from a year ago. And total cheese inventory was at 752.5 million pounds in October, up 4 percent. I quickly computed commercial use for the recent period August through October and came up with the following changes relative to a year ago: butter consumption up 6 percent, American cheese consumption up 2 percent. My conclusion is that the butter market fundamentals make sense. But the cheese numbers don’t. Thus, either the USDA numbers for cheese inventory are wrong, or the market in Chicago is not reflecting the broader cheddar cheese market fundamentals.

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