HDR1011800301320623951500 DAIRY OUTLOOK June 23, 1995 Approved by the World Agricultural Outlook Board ---------------------------------------------------------------------------- DAIRY OUTLOOK, a supplement to the Livestock, Dairy, and Poultry Monthly report, is published five times a year by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20005-4788. LDP-D-7. Subcriptions to the printed version of this report are available from the ERS-NASS order desk. Call, toll-free, 1-800-999-6779 and ask for stock #LDP-D, $22/year. A consolidated subscription to all of the livestock, dairy, and poultry reports (34 issues/year) is also available as stock #LDP-A, $66/year. ERS-NASS accepts MasterCard and Visa. ---------------------------------------------------------------------------- Dairy markets are coping with a volatile mix this spring and summer: faltering gains and expected recovery in milk production, very strong export demand for milkfat, a reduced Dairy Export Incentive Program (DEIP), large nonfat dry milk stocks, and modest gains in commercial use of skim solids. Cheese prices and farm milk prices are expected to be about flat until midsummer and then post moderate seasonal gains. For all of 1995, farm milk prices are projected to average 3 to 5 percent below a year earlier, the result of a 3-percent rise in production and only a 2-percent increase in skim solids sales. In 1996, milk prices are expected to be about unchanged. Both milk output and commercial use of skim solids are projected to grow about 2 percent. While the surplus of skim solids will be substantial, almost all of the available milkfat beyond domestic sales is projected to be exported without subsidy. Brisk Output Growth To Resume Milk production is expected to show large increases during the second half of 1995--if the currently sluggish milk per cow in western areas can recover. Cow numbers are expected to be barely below a year earlier, while milk per cow, aided by further adoption of bovine somatotropin (bST), posts large gains. The 1995 total milk production is projected to rise about 3 percent. Milk per cow in the 22 monthly reporting States during April-May rose only 1.5 percent, less than half the January-March gain. While most States continued to show relatively large increases, all the western States were about steady or below a year earlier. In 1994, western cow numbers rose enough to pressure alfalfa supplies, boosting hay prices despite a relatively large crop. When weather curtailed hay production early in the 1995 season, milk producers probably had exhausted supplies of high quality forage. In addition, weather reduced milk per cow in some areas. The weather and feed effects may have been compounded by farmers temporarily ceasing bST injections of affected cows. Milk cow numbers this spring were close to a year earlier. The milk prices of 1992-94 have slowed farm exit and encouraged farms to expand, even in areas that had rapidly lost dairy farms. Milk-feed price ratios during the rest of 1995 and 1996 are projected to be mediocre or unfavorable. Along with an expected slower expansion in bST use, restrained increases in concentrate feeding will temper growth in milk per cow. However, ample water supplies promise to ease western forage problems later this year. Output per cow is projected to increase about 3 percent during the second half of 1995, followed by a 2-percent growth in 1996. Lower milk prices are expected to start milk cow numbers edging lower. However, anticipated changes in milk and feed prices are not projected to be enough to substantially alter recent structural patterns. Milk cow numbers in 1996 are projected to average less than 1 percent below 1995. Milk production in 1996 is projected to rise about 2 percent. Ample high quality western alfalfa probably is crucial to this increase. If lack of hay limits western expansion, much higher milk prices probably would be needed to bring forth a significant increase in total milk output. Wholesale Prices Mixed Nonfat dry milk prices were basically steady this spring, running near the support purchase price in the West and 3 to 4 cents above support in the Midwest. However, powder has been backing up recently as DEIP shipments started to tail off and production was heavy seasonally. Prices are expected to be fairly weak through most of summer. Exports under DEIP may not absorb all of the difference between production and commercial use of skim solids, let alone the backlog. Butter prices in mid-June moved higher for the usually tight summer season. Further increases may occur but are not certain. Fat users moved aggressively last winter to build stocks and obtain supply commitments for the second half of 1995. However, they probably underestimated the continued strong international prices and the export pressure on domestic supplies. Export demand may be an increasingly important factor in butter prices. Domestic butter prices currently are quoted at about 81 cents per pound (Grade AA), far below the $1 per pound cited as the European export price. While U.S. butter currently is a bargain, the price gap is far less than it appears. Most of the butter traded internationally is 82-percent fat and unsalted, compared with 80-percent fat, salted U.S. butter. In addition, the highest prices tend to come from relatively wealthy importing countries dealing with established suppliers. To break into these markets U.S. suppliers probably will have to make a longterm commitment to provide what is (by U.S. standards) a specialty product carrying some additional cost. The former Soviet Union, particularly Russia, is one market where large quantities of U.S. butter probably could be sold easily. However, Russia is a relatively low priced market where prices may be discounted a dime or more even in tight markets. The United States is at a locational disadvantage to European exporters in either Russian or Arab markets of 2 to 3 cents. Finally, international prices are f.o.b. ocean ports while domestic prices are quoted f.o.b. interior plants, a difference worth 6 to 7 cents. Supply commitments made early in 1995 are the major force keeping the price gap from closing. Even if the commitments are not legally binding, failure to honor commitments to good customers carries longrun costs to the supplier. As long as these commitments reserve enough product for the domestic market, there is only limited pressure for prices to rise in response to export prices. The effect is temporary though, and prices are expected to be closer to international prices in autumn and winter. Cheese prices are caught by the conflicting forces of weak nonfat dry milk markets, strong butter markets, uncertain continued growth in milk production, and mediocre gains in cheese use. Although block prices rose at the end of May, that increase met resistance, and barrel prices have not followed. Cheese prices are expected to be fairly flat until midsummer as the backlog of skim solids is worked off. Prices then are projected to post moderate seasonal rises during the rest of 1995. Farm Milk Prices Steady Except for the premature December-January declines, manufacturing milk values since spring 1994 have shown a more typical pattern than in recent years. Spring values remain well above the support price and will follow rises in cheese prices during late summer and autumn. Average milk prices were 6 percent below a year earlier during January- June because commercial use of skim solids failed to keep pace with growth in production, and prices during the preceding autumn were below a year earlier. Second-half prices are projected to average near a year earlier, leaving the annual average down 3 to 5 percent. Farm milk prices in 1996 are projected to be similar to 1995. Retail Prices Steady Retail dairy prices were relatively flat during January-May and ran only fractionally higher than a year earlier. Increases in dairy product prices were once again considerably smaller than rises in all food or all consumer items. The farm-retail price spread for dairy products during January-May rose about 4 percent from a year earlier, about the same as general inflation. The second-half spread may widen slightly less, allowing retail prices to remain near recent levels. Retail dairy prices are projected to increase 1 to 3 percent in 1996, following near stability this year. Manufacturing Supplies Larger Milk used in manufactured dairy products thus far in 1995 was slightly higher than a year earlier. Given the large milk production, the increase would have been larger if not for cream being stored for summer use. This stored cream and expected increases in milk production should provide large summer supplies of fat for manufacturing. Skim milk supplies probably also will be large, although changes in skim milk supplies in recent years have been obscured by extensive use of nonfat dry milk as an ingredient in other dairy products. Stronger cheese sales, more western cheese capacity, and increased milk production in the Midwest continued to boost cheese output. Butter production has been erratic but totaled above a year earlier for the first 4 months of 1995. Meanwhile, nonfat dry milk output fell below a year earlier after starting the year strong. Cheese production is expected to continue growing during the rest of 1995. Butter and nonfat dry milk output may be erratic, but tending to be about the same to below a year earlier. Milkfat Stocks Tight May 1 stocks of cheese were below a year earlier. Commercial holdings of American varieties were near the levels of recent years, but stocks of other varieties were below last year's large inventories. Warehouse stocks of butter in commercial hands were close to the 2 previous years. However, substantial quantities of butter and cream probably also were held outside of cold storage warehouses. Manufacturers' stocks of nonfat dry milk on May 1 were a record for the date. Some of the increase probably was product awaiting DEIP shipment. However, powder stocks grew mostly because DEIP exports were not sufficient to remove the current surplus of skim solids. Stocks of skim solids may be relatively large through much of summer. Fat stocks likely will be tight. Without the reserve of CCC butter stocks, periods of tightness may quickly deplete fat stocks. If fat starts to back up, any butter not needed to meet commitments likely will be exported rather than added to stocks. Dairy Sales Rise Commercial use of skim solids is projected to rise almost 2 percent in 1995. Growth in cheese sales, a slight rise in fluid sales, and continued heavy use of nonfat dry milk in processed foods are expected to contribute. Real retail dairy prices will again be down, and the economy continues to grow, although somewhat slower than in 1994. Spurred by exports, commercial use of milkfat is projected to rise 4 to 5 percent in 1995. Domestic milkfat sales are expected to contribute substantially, as the delayed response to longer-run price declines apparently continues. Commercial use in 1996 is projected to expand further, by 1 to 2 percent for skim solids and 3 percent for milkfat. The favorable demand conditions of recent years are anticipated to continue. However, any faltering of the economy could have a significant effect. In addition, large declines in the typically unsteady international butter prices could drop commercial use of milkfat. In general, January-April commercial use of dairy products was larger than a year ago. Cheese sales rose modestly, while fluid sales were up fractionally. Commercial disappearance of nonfat dry milk was down, probably due mostly to less used to produce other dairy products. Sales of perishable manufactured products generally were weaker, continuing the pattern of recent years. Commercial disappearance of butter soared during January-April. Unsubsidized exports, domestic sales, and the building of pipeline stocks competed for the available butter supplies, but the relative contributions to the overall increase are unclear. January-March export data imply no significant commercial exports but could mislead in a number of ways. Some butter almost assuredly was at least moved into export channels. Similarly, significant amounts probably were moved into storage other than cold storage warehouses. However, it appears that domestic butter sales increased, continuing the response to the lower prices of recent years. Small Milkfat Surpluses Ahead The 1995 surplus of skim solids is projected to be equivalent to 5 to 7 billion pounds of milk, up from less than 4 billion in 1994. Increases in commercial use are not projected to keep pace with expansion in milk production. The skim solids surplus in 1996 may not be much different. If international butter prices stay strong as expected, commercial exports will reduce the 1995 surplus of milkfat to less than half of 1994's almost 5 billion pounds, milk equivalent, and reduce the 1996 surplus even further. Even without the export markets, the milkfat surplus probably would be smaller than the surplus of skim solids. Almost all of this year's surplus removals have been through DEIP contracts. Nonfat dry milk shipments under DEIP have been very large because of an overlap of contracts accepted in late 1994 for 1995 shipment and early 1995 contracts for quick shipment. Net removals of butter would have been quite low if it had not been for a similar DEIP overlap. Implementation of new DEIP allocations for the second half may lead to a minor summer flurry of new activity for nonfat dry milk. However, the new allocations will be considerably smaller, in accord with GATT limits, and some support purchases are likely. International Prices Strong International dairy markets have remained tight in the face of seasonal production increases in the Northern Hemisphere. Prices of butter and nonfat dry milk have been steady to edging higher in recent months, staying far above a year earlier. Cheese prices also have been up from last year, although rises have been tempered somewhat by heavy exports before the GATT export disciplines take effect on July 1. Strong import demand, brisk domestic demand in many exporting countries, weak milk production in Eastern Europe, and very low world stocks have been major contributors to higher international prices. Unexpectedly strong butter demand from Russia and stronger demand from Arab countries absorbed available butter supplies. Nonfat dry milk imports have yet to respond to higher prices, except maybe in Mexico. Demand appears to be particularly good in South America and East Asia. Strong domestic demand in the European Union (EU) and the United States has limited export supplies. Supplies also are lower in the exporting East European countries, while import demand has risen by the region's importers. Although historically large, milk production in Oceania during the season just ended fell short of expectations and supplies were fully committed by early 1995. Meanwhile, EU and U.S. government stocks were tiny. Changes in exchange rates have significantly altered the effects of higher dairy prices on different countries. For example, early June butter prices in U.S. dollars were about 70 percent above a year earlier. However, the price increase was only about 40 percent in Japanese yen or West European currencies and about 50 percent in New Zealand dollars. Meanwhile, the price in Mexican pesos rose more than 200 percent. International market prices are expected to continue strong. The major factors in the recent firmness are not likely to change abruptly and Northern Hemisphere supplies will decline seasonally. Even so, international prices are projected to edge lower by late 1995, when supplies from Oceania will again be available, particularly if world imports begin to respond to the higher prices. U.S. Imports and Exports Higher Imports rose modestly during January-March, mostly because of expanded access under the new GATT agreement. Most of the expanded access was for milkfat and U.S. milkfat prices have not been attractive thus far in 1995. However, exporters may have felt that it was in their longrun interest to establish themselves quickly in the U.S. market. January-March exports were well above a year earlier. Shipments under DEIP were much larger for butter, nonfat dry milk, and dry whole milk because of the strong international markets and a very unusual overlap of exports under 1994 and 1995 contracts. Commercial exports of cheese were higher last winter, mostly going to nearby countries, Japan, and Korea. The winter rise was not significant to the domestic markets but effects could become more important if the United States remains an inexpensive source of milkfat and a not-too-expensive source of skim solids. Agreements for commercial butter exports were reached last winter but the size and timing of these remain uncertain. Commercial exports of butter are projected to continue during the rest of 1995 and in 1996. The export volumes may increase as current commitments to domestic users are concluded and U.S. butter starts to penetrate higher price import markets. Commercial exports of cheese and other products probably will not be large but might begin to have an effect on domestic market prices. New DEIP contracts probably will be reached quickly after allocations covering the second half are implemented. However, DEIP exports of dry milks probably will be much smaller than during the first half of 1995 and may not reach year-earlier levels. U.S. dairy situation at a glance 1992 1993 1994 Milk production Production - 22 States, Mil. lb 129,613 129,577 132,240 Milk cow number - 22 States, Thou. 8,222 8,153 8,096 Milk per cow - 22 States, Lb 15,764 15,893 16,333 Production - U.S., Mil. lb 150,886 150,582 153,626 Milk prices: Dol./cwt All milk 13.09 12.80 12.97 Milk for fluid use 13.16 12.86 13.03 Manuf. grade milk 11.87 11.76 11.83 Minn-Wisc (3.5% fat) 11.88 11.80 12.00 Slaughter Cow, Wisc: 49.69 50.14 45.05 Wholesale prices: cents/lb Grade A butter 82.54 74.36 67.37 Amer. cheese, Wisc. assembly pt. 40-pound blocks 131.91 131.52 131.45 Barrels 125.12 126.12 NA Nonfat dry milk, C. States, 107.13 112.03 107.93 Retail prices (BLS): 1982-84=100 Consumer Price Index 140.3 144.5 148.2 All food 137.9 140.9 144.3 Dairy products 128.5 129.4 131.7 Fluid milk and cream 127.1 128.7 132.2 Manufactured products 130.5 130.6 131.9 Dairy product output: Mil. lb Butter 1,365.2 1,315.2 1,295.9 American cheese 2,936.6 2,957.3 2,977.0 Other-than-American cheese 3,551.7 3,570.9 3,753.1 Frozen products 1/, Mil. gal. 1,195.8 1,198.3 1,244.8 All products (mf basis 2/) 94,036 93,509 94,581 Nonfat dry milk 872.1 954.5 1,215.6 Beginning stocks: Mil. lb Commercial butter 39.0 24.5 14.6 Commercial American cheese 295.6 333.1 356.6 Other cheese 97.5 120.9 107.0 Manufacturers nonfat dry milk 60.9 77.4 79.9 All commercial (mf. basis) 4,461 4,688 4,550 All commercial (ss. basis) 4,755 5,566 5,650 All Government (mf. basis) 11,379 9,526 5,020 All Government (ss. basis) 2,072 265 161 Commercial disappearance: Mil. lb Butter 944 1,040 1,097 American cheese 2,903 2,945 3,034 Other-than-American cheese 3,795 3,884 4,048 Nonfat dry milk 721 649 891 All products (mf. basis) 141,350 145,037 150,217 USDA net removals: Mil. lb Butter 439.5 288.8 204.4 Cheese 14.4 8.3 6.9 Nonfat dry milk 136.7 304.3 302.3 All products (mf basis 2/) 9,935 6,656 4,810 All products (ss basis 2/) 1,989 3,876 3,839 Imports (milkfat basis 2/) 2,522 2,806 2,871 International prices: $/metric ton Butter 1,498 1,343 1,404 Nonfat dry milk 1,685 1,545 1,660 1/ Hard ice cream, ice milk, and sherb 2/ Milk equivalent. NA = Not Available. U.S. dairy situation at a glance Feb-95 Mar-95 Apr-95 May-95 Milk production Production - 22 States, Mil. lb 10,441 11,698 11,477 11,964 Milk cow number - 22 States, Thou. 8,088 8,103 8,097 8,095 Milk per cow - 22 States, Lb 1,291 1,444 1,417 1,478 Production - U.S., Mil. lb 12,176 13,641 13,344 13,911 Milk prices: Dol./cwt All milk 12.60 12.70 12.40 12.30 Milk for fluid use 12.60 12.70 12.40 12.30 Manuf. grade milk 11.60 11.70 11.20 11.10 Minn-Wisc (3.5% fat) 11.79 11.89 11.16 11.12 Slaughter Cow, Wisc: 44.50 41.25 39.94 38.95 Wholesale prices: cents/lb Grade A butter 65.46 66.50 66.50 66.50 Amer. cheese, Wisc. assembly pt. 40-pound blocks 130.39 131.11 122.81 122.06 Barrels 126.86 127.47 NA 118.42 Nonfat dry milk, C. States, 107.11 107.77 107.56 106.84 Retail prices (BLS): 1982-84=100 Consumer Price Index 150.9 151.4 151.9 152.2 All food 147.4 147.4 148.4 148.3 Dairy products 132.1 132.2 132.1 132.8 Fluid milk and cream 131.9 131.8 131.9 132.5 Manufactured products 132.9 133.1 132.8 133.8 Dairy product output: Mil. lb Butter 120.3 125.7 119.3 NA American cheese 240.2 263.2 258.9 NA Other-than-American cheese 288.2 330.7 305.0 NA Frozen products 1/, Mil. gal. 85.5 109.1 105.1 NA All products (mf basis 2/) 7,532 8,577 8,283 NA Nonfat dry milk 98.3 110.4 116.5 NA Beginning stocks: Mil. lb Commercial butter 25.5 25.8 23.4 26.5 Commercial American cheese 325.3 328.9 330.6 333.5 Other cheese 131.5 127.0 135.3 132.7 Manufacturers nonfat dry milk 114.8 94.0 97.5 127.1 All commercial (mf. basis) 4,780 4,806 4,860 4,976 All commercial (ss. basis) 6,086 5,862 6,030 6,410 All Government (mf. basis) 1,458 1,405 1,166 1,226 All Government (ss. basis) 320 341 339 333 Commercial disappearance: Mil. lb Butter 117 116 NA NA American cheese 243 263 NA NA Other-than-American cheese 314 347 NA NA Nonfat dry milk 70 57 NA NA All products (mf. basis) 12,207 13,347 NA NA USDA net removals: Mil. lb Butter 3.3 12.6 11.6 10.6 Cheese 0.4 0.6 0.6 0.4 Nonfat dry milk 49.0 49.7 48.4 46.7 All products (mf basis 2/) 127 329 297 271 All products (ss basis 2/) 617 625 600 574 Imports (milkfat basis 2/) 314 233 NA NA International prices: $/metric ton Butter 1,850 2,033 2,000 2,175 Nonfat dry milk 1,957 2,139 2,129 2,135 1/ Hard ice cream, ice milk, and sherb 2/ Milk equivalent. NA = Not Available. Milk used and marketed by farmers, 1988-94 Item 1991 1992 1993 1994 5/ Billion pounds Used on farms where produced Fed to calves 1/ 1.5 1.4 1.4 1.4 As fluid milk or cream 2/ 0.5 0.5 0.4 0.4 Total on-farm use 3/ 2.0 1.9 1.8 1.8 Milk marketed by farmers: Sold to plant and dealers: Fluid grade 134.6 137.6 140.4 143.2 Manufacturing grade 10.1 10.4 7.4 7.5 Sold directly to consumers 4/ 1.0 1.0 1.0 1.1 Total milk marketed 3/ 145.7 149.0 148.8 151.9 Total milk production 1/ 3/ 147.7 150.9 150.6 153.6 1/ Excludes milk sucked by calves. 2/ Includes farm-churned butter. 3/ May not add due to rounding. 4/ By producers who sell only milk from heifers. Also includes milk produced by institutional herds. 5/ Preliminary. Commercial disappearance: Total milk, milkfat basis, 1990-96 1/ Item 1993 1994 2/ 1995 F 1996 F Billion pounds Production 150.6 153.6 158.2 161.3 Farm use 1.8 1.8 1.7 1.6 Marketings 148.7 151.9 156.5 159.7 Beginning commercial stocks 4.7 4.6 4.3 4.8 Imports 2.8 2.9 3.2 3.2 Total supply 156.2 159.3 163.9 167.7 Ending commercial stocks 4.6 4.3 4.8 5.0 Net removals 6.7 4.8 2.1 0.5 Commercial dissappearance 145.0 150.2 157.0 162.2 Percent change 3/ 2.6 3.6 4.5 3.0 $/cwt $12.3- $12.0- All milk price $12.84 $13.01 $12.7 $13.0 1/ Totals may not add because of rounding. 2/ Preliminary. 3/ From a year earlier, using unrounded data. On a daily average basis where applicable. F= Forecast. U.S. Milk production and related data 1994 1995 --------------------- ---- Unit 2nd 3rd 4th 1st Milk cows Thou. 9,530 9,539 9,524 9,516 Milk per cow Lb. 4,188 4,007 3,983 4,095 Milk production Mil. lb. 39,916 38,217 37,933 38,971 Concentrate ration Dol./cwt. 8.16 7.98 7.76 7.61 Milk-feed price ratio Dol./cwt. 1.58 1.57 1.67 1.66 END-END-END