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Jerry Dryer is the president of Dairy & Food Market Analyst Inc.
After cheese prices shot sharply higher this summer, the milk price advanced dramatically. Ever since, block cheddar sold on the Chicago Mercantile Exchange has traded at $1.60 for 37 trading days.
More of the same, I predict. The U.S. Department of Agriculture's (USDA) just-released milk production estimates give us a few clues as to why.
During August, milk production was down 0.8 percent in the top 20 milk-producting states and down 1 percent nationally, according to estimates released Sept 17.
Unlike the July estimates, which sent Class III prices sharply lower, release of the August estimates was a non-event in the marketplace. Milk futures have since recovered and did not budge following release of the August estimates.
The real story lies in what will happen to milk production over the longer term, but first a look at the August numbers. Milk cow numbers established a new all-time low for the second consecutive month. At an estimated 9.075 million herd, cow numbers are well below the annual averages for 2001 (9.114 million) and 2002 (9.141 million).
Additionally, production per cow slipped below year-ago levels during August after hovering very near year-ago levels every month since March.
Regionally, milk production was down in the Northeast by 3 percent, down nearly 10 percent in the Southeast, flat in the Upper Midwest, and up 0.3 percent in the West. For the most recent three months, the score card looks like this: Northeast, minus 3; Southeast, minus 9; Upper Midwest, plus 1 and West, plus 1.
Where are we headed from here?
"Milk production is not about to rebound anytime soon," said Dr. Bob Cropp, a University of Wisconsin dairy economist.
I agree. Cow numbers will continue to decline and production per cow is stuck in a rut.
Organizers of the CWT (Cooperatives Working Together) program, a milk producer-funded effort to reduce milk production, say they will take about 33,000 cows out of production during October. Other financially stressed milk producers will also exit the business between now and year's end.
Replacement cow numbers are relatively low and cull cow numbers remained high during August, according to USDA. Farmers culled 224,400 head during August; slightly more than one year ago. Through August, slaughter numbers this year were 10 percent greater than one year when the milking herd was larger.
Regionally, the slaughter cow numbers were up 14 percent in California/Arizona and up 16 percent in New Mexico/Texas, but below the national average in all other regions.
Production per cow is also poised to take a hit during the next several months. Weather conditions have already taken a toll on production per cow in the West and it will take several months for them to recover fully. In the Northeast and Upper Midwest, much of this summer's weather was near ideal for milk production, but it raised havoc with crop production.
Overall it has either been too dry or too wet. Forage quality is low, which hurts alfalfa growth, and alfalfa consumption by cows makes milk. Where forage quality is adequate, supplies are low, and if history repeats itself, like I expect it do, the big impact on production per cow will start hitting home early next year.
I think milk production will continue at or below year-ago levels for the next several months. This means, milk and cheese prices will stay near current levels well into the fourth quarter of this year and probably won't decline much until late in the first quarter of next year.
Other commentaries and analysis by Jerry Dryer ...
* CHEESE MARKET ANALYSIS: Cheese prices: How high? How long?
* CHEESE MARKET ANALYSIS: Cheese prices will retreat -- but when?
* Cheese prices to remain low for 2003
* CHEESE MARKET ANALYSIS: Cheese prices are on the way up
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