A36-Lancaster Farming, Saturday, May 1. 1999
808 CROPP
Dairy Marketing and
Policy Specialist
University of Wisconsin
Cooperative Extension
University of Wisconsin-
Madison
The frequently asked ques
tion the past few days has been,
why the drastic drop in farm
level milk prices? The BFP,
which was $17.34 per hundred
weight for December 1998,
dropped to $16.27 for January
1999 and all the way down to
$10.27 for February 1999. The
$10.27 BFP for February is par
tially the result of using the
NASS survey 40 pound cheddar
cheese prices to adjust the BFP.
NASS cheese prices lag 10 days
to two weeks behind changes in
CME cheese prices. The CME
price of 40 pound cheddar blocks
declined from a high of $1.90 per
pound early January to $1.25
per pound and recovered to
$1.33 per pound where they
have held. But because of the
NASS cheese price lag, not
much of this drop in cheese
prices were captured in the cal
culated January BFP
announced at $16.27. In calcu
lating the February BFP, the
survey of Minnesota and
Wisconsin butter, powder and
cheese plants showed they paid
$14.72 for Grade B milk in
January, not the announced
$l6 27. The $14.72 was the
“base month” price used from
which the change in milk value
during February was subtracted
due mainly to the change in
NASS cheese prices for the
month Because NASS cheese
prices did not fully capture the
January drop in cheese prices in
the January BPF calculation,
subtracting a major share of the
cheese price drop in February
from the tower $14.72 base
Dairy Situation and Outlook
month price, resulted in the low
$10.27 calculated February BFP.
So in reality, the announced
January BFP of $16.27 overstat
ed what was actually paid for
Grade B milk in January.
Likewise, the announced
February BFP of $10.27 will
likely turn out understating
what was paid for Grade B milk
during February.
But why the big drop in
cheese prices? The answer lies
in what is happening to milk
production. Adverse weather
negatively impacted milk pro
duction per cow during 1998. As
a result, milk production
increased only 0.9% for the year
while commercial disappearance
was up more than 2%. The
result was record milk prices for
the last quarter of the year. Milk
production started to recover in
October of last year. This year,
both January and February
have shown relatively strong
growth in milk production, up
from a year ago, 3.5% and 4.3%
respectively, for the 20 reporting
states. More favorable weather,
relatively low feed prices, and
relatively strong milk prices
reduced herd culling and
encouraged herd expansion, all
of which are contributing to
increases in milk production.
For February, compared to a
year ago, milk cow numbers
were down only 0.2% while milk
per cow was up 4.5%.
In the West, for the most
part, states showed relatively
strong increases in February
milk production, compared to a
year earlier, with production up
12.0% in Arizona, 10.9% in New
Mexico, 8.7% in California, 8.1%
in Idaho, and 4.7% in
Washington. California is the
state with the greatest come
back in milk production. For
1998, California showed only a
0.1% increase in milk production
from a year earlier. Each of
these states had more milk cows
than a year ago, except
Washington which had 0.8%
fewer cows. Each had strong
increases in milk per cow except
Idaho, which had no change.
Milk production is also doing
very well in the Upper Midwest.
Milk production was up 2.8% in
Wisconsin and 4.1% in
Minnesota. Both increases were
due to increases in milk per cow
more than offsetting decreases
in cow numbers. Cow numbers
were down only 0.7% in Wiscon
sin and 1.8% in Minnesota.
In the Northeast, production
was up 4.9% in Michigan, and
5.4% in New York. Both states
had more milk cows and rela
tively strong milk per cow. But
Ohio had only 0.3% more milk
with increases in milk per cow
slightly offsetting decreases in
cow numbers, and Pennsylvania
showed a decrease of 0.8%, the
result of 1.6% fewer cows and
only 0.7% more milk per cow.
Milk production is not very
strong in the South and South
east mainly due to a reduction in
milk cows numbers. Milk cow
numbers were down 1.3% in
Florida, 5.6% in Kentucky, and
6.3% in Missouri. The result was
an increase in milk production
of only 1.4% in Florida, and
decreases, respectively, of 5.1%
and 1.0% in Kentucky and
Missouri.
With more milk, the produc
tion of dairy products is natural
ly also up from a year ago.
January butter production was
up 7.7%, American cheese pro
duction up 1.9%, total cheese
production up 2.9%, and nonfat
dry milk production up 14.9%.
What is somewhat encouraging
for milk prices is that some of
the increased milk production is
going into butter and nonfat dry
milk production and not all into
the production of more cheese.
This should help to keep cheese
prices at a higher level and in
turn farm level milk prices.
Stocks of natural American
cheese were at 411.3 million
pounds on January 31st. While
not burdensome, cheese stocks
are more than adequate being
1.1% higher than 1998 and 7.2%
higher than 1997.
So what lies ahead for milk
prices? The March BFP will be
higher than the $10.27 February
BFP. In fact, it is very likely that
the $10.27 February BFP will be
the low for the year. How high
the March BFP will be will
depend on how much more than
$10.27 did Minnesota and
Wisconsin butter, milk powder
and cheese plants pay for Grade
B milk in February. Because of
poor, if not negative plant mar
gins experienced during the
month of January, the plants
will need to recover from some of
these losses in February. There
will not be much strengthening
in the March BFP due to
changes in cheese prices. The
average NASS cheese price used
in the February BFP calculation
was $1.3010 per pound. For the
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week ending March 6th, the
NASS price increased slightly to
$1.3098 per pound. While prices
at this level could yield a BFP
around $12.00, the need for
plants to recover from poor mar
gins experienced in January is
likely to result in a March BFP
less than this. The BFP March
futures settled at $11.30 on
March 16th. My estimate is for a
March BFP of around $11.40.
With milk production in the
Northeast and Midwest
approaching the seasonal flush,
cheese prices will likely decline
some the end of March or early
April. The BFP will follow with
perhaps another low near
$10.75 for May before increasing
slowly starting in June and
peaking in October in the low
$13.00 range. The average BFP
for 1999 could be around $12.20
compared to $14.20 for 1998 and
$12.05 for 1997. This assumes
favorable weather this summer
and fall and good crops. Milk
production for the year is
expected to be up more than 2%
and commercial sales up less
than this, about 1.8%, resulting
in milk prices averaging less
than 1998, but close to the 1997
average.