June 15, 2010

 

US milk output set for record amid lower price outlook

 

 

US dairy producers are ramping up output sooner and faster-than-expected following last year's price crash, and government forecasters are still playing catch-up.

 

In its latest report, USDA boosted projected milk production for 2010 to a record 190.4 billion pounds, up 200 million pounds from a May estimate. That marked the 11th consecutive month the USDA raised its forecast, and signalled that a 2009 dip in milk production probably will be one-year phenomenon.

 

As recently as February, the USDA estimated nationwide milk production in 2010 would decline from the 189.3 billion pounds in 2009. While tweaking production estimates is routine, the direction of change is a clear indication that USDA analysts underestimated the increase in production that became evident in early 2010, said economists.

 

Dairy producers appear to be motivated by higher milk prices earlier this year, as well as cheaper corn. Although milk production was retreating in the last quarter of 2009, the modest price rise entering 2010 seems to have been just enough to inspire higher levels of production, economists said.

 

Meanwhile, corn prices are considerably better for livestock users than the previous year; and this improvement in the milk price cost relationship was not so obvious or assured in late 2009.

 

Higher milk production reflects a slower decline in cow numbers and stronger than expected growth in milk per cow, according to the USDA report. Still, the dairy industry's 2010 profit prospects have faded as milk prices sank and cheese stockpiles swelled in recent months, economists said.

 

The USDA cut slightly its forecast for Class III milk prices, an industry benchmark, while milk futures traded in Chicago fell to lows for the year this week.

 

For most dairy producers, analysts believe that this year is expected to be "significantly better" than last year, likely bringing sufficient returns to ensure positive cash-flow from operations.

 

Class III milk, used to make cheese, is expected to average US$13.95 to US$14.35 per hundred pounds this year, the USDA said yesterday, compared with a previous estimate of US$13.95 to US$14.45. That's still up from US$11.36 in 2009.

 

In mid-morning trading today, CME Group Class III milk futures for July delivery fell 9 cents to US$13.31 per hundredweight, down almost 17% from US$15.96 at the end of 2009.

 

While heavy supplies are dragging cheese prices down, quite the opposite is occurring in the butter and nonfat dry milk sectors, which have been buoyed by greater optimism about international markets, analysts said.

 

The price premium in the East may be around 50 cents per hundredweight this year, potentially reaching US$1 during the second half of 2010, analysts said.