DAIRY OUTLOOK September 21, 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-8. 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. ----------------------------------------------------------------------------- NOTE: Use a monotype font (e.g. Courier) to display or print this report. Other fonts may not format the text and tables correctly. ----------------------------------------------------------------------------- Wholesale dairy prices received a boost this summer when heat stress shrank year-over-year milk production increases. Cheese prices may peak early this fall, if milk output rebounds and demand remains lackluster as expected. Farm milk prices are projected to be slightly above a year earlier for the rest of 1995 but will decrease about 3 percent for the year. In 1996, milkfat markets are expected to remain very tight, but commercial use of skim solids may not keep up with a 2- to 3-percent rise in milk production. Farm milk prices are projected to average slightly lower next year. Milk Production To Reaccelerate Milk production this autumn is projected to resume large increases from a year earlier, after only modest increases in the spring and summer. Cooler weather should aid recovery from the weather problems that have plagued milk per cow in 1995. The effects of heat stress, that slowed summer growth in milk per cow, are not expected to carry over into autumn, but delayed effects still are possible after such an extreme period. The depressing impact of cool and wet weather during late winter-early spring on western milk per cow continued into midsummer. Meanwhile, milk cow numbers are expected to continue nearly stable. For all of 1995, milk production is projected to rise about 2 percent. Milk output in 1996 is projected to increase 2 to 3 percent. Milk cow numbers are expected to average just slightly below 1995, while milk per cow grows about 3 percent. Erosion of returns by projected higher feed costs and lower milk prices probably will not affect milk cow numbers much in 1996. Recent milk and feed price changes probably have not significantly altered the longrun prospects that have increased the number of new or expanding farms. Similarly, the expected slippage in returns is not likely to push the number of exiting farms to the levels of the early 1990's. Concentrate ration values are projected to average 6 to 12 percent higher in 1996 due to the effects of this years reduced crops. Alfalfa hay prices have averaged lower thus far this season, $85 per ton in August, $5 below a year earlier. Western prices were strong, however, despite prospects for larger late-season output because of ample water. Western supplies of lower quality alfalfa hay are large, but supplies of high-quality alfalfa are expected to be tight for the expanded needs of western dairy farms. The projected milk-feed price ratio for 1996 would be the lowest in two decades and would not favor strong growth in concentrate feeding. Restrained increases in concentrate feeding and tight supplies of top quality hay may limit milk per cow. Stress from weather conditions and feed problems this spring and summer may have caused some producers to limit their use of bovine somatotropin (bST). If weather problems abate in autumn as expected, the number of injected cows could rise substantially. However, the share of cows injected by the end of 1996 is not projected to be much higher than at the end of this year, following large year-to-year rises earlier in 1996. Producers probably are entering a period of scrutiny of the experience with bST to determine which cows respond profitably under what conditions. Cheese Prices May Falter Large August rises left September cheese prices above a year earlier, but these prices may not be sustainable. The jumps were triggered by continued growth in sales while milk production was limited by heat stress. If milk production rebounds as expected this autumn, the seasonal price peak might come quite early. Cheese prices are expected to decline gradually during late autumn and winter. Wholesale butter prices, already the highest since early 1992, may not have peaked. The holiday demand is expected to be strong and pipeline stocks probably were depleted during summer. The export market will undergird the domestic market this autumn, but is not expected to have a near term impact on prices. Butter prices will decline after holiday needs are met in December. However, export demand is projected to hold butter prices well above a year earlier during the first half of 1996. Nonfat dry milk prices are not expected to rise much seasonally. Large stocks, strong output, and the smaller Dairy Export Incentive Program (DEIP) will tend to mute seasonal price strength. Winter prices probably will stay near the support purchase price, at least in the West. Farm Milk Prices To Rise Manufacturing milk values will rise in the near term, reflecting recent advances in cheese prices and seasonal factors. Manufacturing values may erode in late 1995, but large declines are not expected until after yearend. Average milk prices during the rest of 1995 are projected to be slightly above a year earlier, but the 1995 average price of all milk is expected to drop about 3 percent below 1994. A slight further decline is projected for 1996. In both years, growth in skim solids sales is not expected to match expansion in milk production, outweighing the increases in milkfat values. Retail Dairy Prices Flat Retail dairy prices probably will edge higher in coming months but are not expected to be much above a year earlier. During January-August, retail prices were fairly stable and within 1 percent of the similarly steady 1994 prices. Despite some slightly larger increases during the rest of 1995, retail dairy prices will rise less than 1 percent for the year. Retail dairy prices are projected to rise 1 to 2 percent in 1996. The effects of a moderate rise in the farm-retail price spread are expected to be trimmed by lower farm prices. Dairy prices would again rise less than the CPI or All Food index. Manufacturing Supplies Larger Supplies of milk for manufacturing are expected to grow sharply from a year earlier this autumn. Fluid milk sales are not expected to draw off much of the increased production. Cheese probably will continue to return a higher value to milk than butter-nonfat dry milk, but production shifts between cheese and other products may be modest. In June-July, manufacturing supplies were only fractionally larger than a year earlier. Output of cheese and nonfat dry milk was slightly larger, butter production was about steady, and output of most other products declined. Rises in cheese prices since then have created more incentive to move milk into cheese production. Dairy Stocks Mixed Strong domestic sales and export market uncertainty probably will result in larger desired milkfat stocks than a year earlier, particularly for butter. However, the expected tight markets probably will make stocks vulnerable to unexpected drawdowns until this winter. Milkfat stocks will tend to run above the low 1994 levels during the rest of 1995, but may not maintain desired amounts. Stocks of skim solids probably will run below a year earlier. Cheesemakers likely will have more ample supplies of milk available, and the smaller DEIP will reduce the need for dry milk stocks. August 1 commercial stocks of milkfat were slightly above a year earlier because of a doubling of butter holdings. Meanwhile, skim solids inventories were down, mostly due to less other-than-American cheese. Stocks probably were close to desired levels, except for nonfat dry milk. Nonfat dry milk holdings likely were excessive in light of sluggish domestic use and smaller DEIP sales. These high stocks contributed to the August purchases of nonfat dry milk under the price support program. Non-warehouse stocks of milkfat are thought to have been high at the start of summer. These holdings probably have been reduced to normal or less, compared with swollen levels a year ago. Pipeline holdings will not provide as large a cushion for peak holiday butter demand as a year earlier. Dairy Demand Sluggish The general economy and consumer incomes are projected to continue to grow during the rest of 1995 and 1996, but not rapidly enough to trigger strong demand for dairy products. With generally moderate retail dairy prices, these conditions should produce modest gains in sales of most dairy products. However, expansion in commercial use of skim solids may not quite keep pace with larger milk production. Growth in commercial use of milkfat will be more rapid, if international butter prices stay strong as expected. Higher butter prices are expected to slow--but not stop--expansion in domestic sales. Whatever is not taken by domestic sales probably will be absorbed by commercial butter exports. Commercial use of skim solids is projected to increase 2 to 3 percent in 1996, slightly faster than 1995's 2 percent. The rise in fat sales is projected to be similar to this years 4 percent. Commercial use of individual dairy products during June-July followed most of the patterns established earlier in the year. Total cheese sales rose moderately, with American varieties about unchanged. Fluid milk sales continued near a year earlier, with whole milk sales down about 1 percent and sales of lowfat and skim items up about 1 percent. Meanwhile, use of cottage cheese and frozen desserts continues to decrease. These patterns are all consistent with somewhat sluggish dairy product demand. Sales of butter and nonfat dry milk have been, and will continue to be, dominated by factors other than domestic consumer demand. June-July commercial use of butter was close to a year earlier, because supplies were not available for export. Commercial disappearance of nonfat dry milk rose sharply in June-July after large drops earlier in 1995. This variation probably was due to changes in use of nonfat dry milk to produce other dairy products. Price Support Activity Light Government purchases were light this summer. Small purchases of nonfat dry milk were made during July-September, as DEIP exports were not sufficient to clear the surplus. Additional powder purchases are expected this autumn and winter, but little or no butter or cheese is projected to be bought. Substantial product quantities continue to be removed from domestic markets under the DEIP, but most of them were under the January-June DEIP. Except for the Asia allocation, contracts under the interim July- September DEIP have been small. Net price support removals in 1995 are projected to total about 2 billion pounds, milk equivalent, milkfat basis, less than half those of 1994. However, skim solids removals are expected to be equivalent to about 6 billion pounds of milk, up from less than 4 billion pounds a year earlier. Even without the emergence of commercial butter exports, milkfat removals in 1995 probably would have been smaller than skim solids removals. Surpluses in 1996 are projected to be mixed. If international butter prices stay strong (as expected), milkfat removals could fall to negligible levels. However, removals of skim solids are projected to edge higher, as sales fail to keep pace with production increases. Exports under DEIP must fall because of GATT limits. Even the allowable DEIP quantities of nonfat dry milk might be difficult to reach if import demand in Mexico and Algeria (the largest DEIP importers) continues weak. Second-half Exports To Shrink Second-half exports under DEIP will be smaller than a year earlier, following large shipments during the first half. The volumes shipped to fill contracts under the January-June DEIP are declining quickly, and contracts under the smaller July-September interim DEIP have covered less product and have had extended delivery periods. Second-half DEIP exports might be down by as much as half for nonfat dry milk and even more for other products. Despite the second-half declines, 1995 DEIP exports will be a record (except for cheese) that will not be broken. Program provisions and international market conditions produced extraordinary shipments during the first half of 1995. Under GATT, subsidized exports are limited and will never again come close to the 1995 levels. Official trade data do not indicate that total butter exports during the first half were any larger than the DEIP total. However, some commercial exports certainly occurred. Based on available butter supplies, perceived growth in commercial use, and market reactions, commercial butter exports probably were substantial-- but considerably less than government purchases a year earlier. Commercial butter exports for the second half of 1995 probably will be small. Tight domestic markets, prior commitments, and prices verging on non-competitive will keep exports small. However, commercial exports are expected to be large next winter when supplies jump seasonally. As long as international prices remain more attractive than the support price, most of the U.S. seasonal surplus will be exported. Imports have run close to a year earlier thus far in 1995 and likely will continue to do so during the rest of the year. Import access was expanded in 1995 for many ingredient products, particularly milkfat products, to comply with GATT requirements. However, this years price relationships have made the U.S. an unattractive market for milkfat, a situation unlikely to change quickly. Cheese imports also are expected to continue near year-earlier levels. Although the U.S. will always be an attractive market for high quality specialty cheeses, this market is not as attractive as in the past for the now GATT-limited amounts of commodity cheese. International Markets Tight Brisk import demand has kept international dairy markets tight, even after a year of high prices. Although parts of the Russian economy are very weak, groups with money have been quite willing to purchase imported butter and other foodstuffs. Along with stronger demand from the Arab countries, Russian imports have quickly absorbed available international supplies. Demand for nonfat dry milk has remained strong in Asia and many of the smaller markets. Thus far, this has offset potential weakness in Mexican and Algerian imports. Demand is expected to stay fairly strong this autumn and winter. World production of milk and dairy products is projected to be large in 1995. However, strong domestic demand in major exporting countries is limiting the increase in supplies on the international market. World stocks of butter and nonfat dry milk are projected to decline even further in 1995, to levels that are down more than half from 1990-91. If the new season in Oceania gets off to a strong start, butter prices may soften when U.S. export supplies jump seasonally at yearend. However, nothing on the horizon would indicate a sharp price break, and prices are projected to stay relatively high well into 1996. Nonfat dry milk prices also are expected to stay fairly strong. Supplies will be limited until at least next spring. Unless a major importer deserts the market, powder markets probably will stay balanced. U.S. dairy situation at a glance flb Unit 1992 1993 1994 Milk production: Production (22 States) Mil. lb. 127,439 126,956 132,240 Milk cow (22 States) Thou. 8,110 8,017 8,096 Milk per cow (22 States) Lb. 15,715 15,834 16,333 Production (U.S. est.) Mil. lb. 150,886 150,582 153,626 Milk prices: All milk Dol./cwt 13.09 12.80 12.97 Milk eligible for fluid use Dol./cwt 13.16 12.86 13.03 Manufacturing grade milk Dol./cwt 11.87 11.76 11.83 Minnesota-Wisconsin (3.5% fa Dol./cwt 11.88 11.80 12.00 Slaughter Cow, Wisc: Dol./cwt 49.69 50.14 45.05 Wholesale prices: Grade A butter Ct/lb 82.54 74.36 67.37 American cheese, WI assembly pt. 40-pound blocks Ct/lb 131.91 131.52 131.45 Barrels Ct/lb 125.12 126.12 NA Nonfat dry milk, Central Sta Ct/lb 107.13 112.03 107.93 Retail prices (BLS): Consumer Price Index 1982-84=100 140.3 144.5 148.2 All food 1982-84=100 137.9 140.9 144.3 Dairy products 1982-84=100 128.5 129.4 131.7 Fluid milk and cream 1982-84=100 127.1 128.7 132.2 Manufactured products 1982-84=100 130.5 130.6 131.9 Dairy product output: Butter Mil. lb 1,365.2 1,315.2 1295.9 American cheese Mil. lb 2,936.6 2,957.3 2977.0 Other-than-American cheese Mil. lb 3,551.7 3,570.9 3753.1 Frozen products 1/ Mil. gal. 1,195.8 1,198.3 1244.8 All products (milkfat basis Mil. lb 94,037 93,508 94,551 Nonfat dry milk Mil. lb 872.1 954.5 1215.6 Beginning stocks: Commercial butter Mil. lb 39.0 24.5 14.6 Commercial American cheese Mil. lb 295.6 333.1 356.6 Other cheese Mil. lb 97.5 120.9 107.0 Manufacturers' nonfat dry mi Mil. lb 64.5 77.4 79.9 All commercial (milkfat basi Mil. lb 4,698 4,839 5,018 All commercial (skim solids Mil. lb 5,058 5,636 5,974 All Government (milkfat basi Mil. lb 11,379 9,526 5,020 All Government (skim solids Mil. lb 2,081 265 161 Commercial disappearance: Butter Mil. lb 944 1,041 1,097 American cheese Mil. lb 2,903 2,945 3,034 Other-than-American cheese Mil. lb 3,795 3,884 4,048 Nonfat dry milk Mil. lb 721 649 902 All products (milkfat basis Mil. lb 141,407 144,663 150,561 USDA net removals: Butter Mil. lb 439.5 288.8 204.3 Cheese Mil. lb 14.4 8.3 6.9 Nonfat dry milk Mil. lb 136.7 304.3 291.3 All products (milkfat basis Mil. lb 9,932,567 6,649,823 4,804,224 All products (skim solids ba Mil. lb 2,071,336 3,954,370 3,802,950 Imports (milkfat basis 2/) Mil. lb 2,522 2,806 2,871 International market prices: Butter $/metric to 1,498 1,343 1,404 Nonfat dry milk $/metric to 1,685 1,545 1,660 1/ Hard ice cream, ice milk, and sherbert 2/ Milk equivalent. NA = Not Available. U.S. dairy situation at a glance Apr-95 May-95 Jun-95 Jul-95 Aug-95 Milk production Production - 22 States, Mil. 11,477 11,936 11,461 11,412 11,134 Milk cow number - 22 States, 8,097 8,093 8,104 8,106 8,108 Milk per cow - 22 States, Lb 1,417 1,475 1,414 1,408 1,373 Production - U.S., Mil. lb 13,325 13,857 13,306 13,196 12,874 Milk prices: Dol./cwt All milk 12.40 12.40 12.10 12.10 12.30 Milk for fluid use 12.40 12.40 12.20 12.10 12.30 Manuf. grade milk 11.20 11.00 11.10 11.00 11.20 Minn-Wisc (3.5% fat) 11.16 11.12 11.42 11.23 11.55 Slaughter Cow, Wisc: 39.94 38.95 42.00 37.88 38.17 Wholesale prices: cents/lb Grade A butter 66.50 66.50 66.93 74.50 79.50 Amer. cheese, Wisc. assembly 40-pound blocks 122.81 122.06 126.94 126.70 132.22 Barrels NA 118.42 119.10 122.82 125.27 Nonfat dry milk, C. States, 107.56 106.84 106.75 106.69 106.69 Retail prices (BLS): 1982-84=10 Consumer Price Index 151.9 152.2 152.5 152.5 152.9 All food 148.4 148.3 147.9 148.1 148.4 Dairy products 132.1 132.8 132.2 132.9 132.8 Fluid milk and cream 131.9 132.5 132.1 131.9 132.1 Manufactured products 132.8 133.8 132.9 134.4 134.2 Dairy product output: Mil. lb Butter 119.3 116.5 99.5 82.9 NA American cheese 258.9 273.3 264.4 259.4 NA Other-than-American cheese 305.0 324.2 323.1 301.4 NA Frozen products 1/, Mil. gal. 105.2 112.7 125.5 81.7 NA All products (mf basis 2/) 8,284 8,637 8,394 7,839 NA Nonfat dry milk 116.5 130.0 122.3 102.1 NA Beginning stocks: Mil. lb Commercial butter 23.4 29.3 39.1 43.0 44.3 Commercial American cheese 330.6 334.7 343.9 339.7 352.8 Other cheese 135.3 131.0 121.6 126.0 120.6 Manufacturers nonfat dry milk 97.5 127.1 129.0 141.9 140.2 All commercial (mf. basis) 4,858 5,032 5,275 5,351 5,460 All commercial (ss. basis) 6,039 6,416 6,450 6,592 6,648 All Government (mf. basis) 1,166 1,119 942 800 528 All Government (ss. basis) 341 332 312 267 260 Commercial disappearance: Mi Butter 102 95 90 NA NA American cheese 255 267 270 NA NA Other-than-American cheese 331 358 345 NA NA Nonfat dry milk 39 80 83 NA NA All products (mf. basis) 13,068 13,573 13,332 NA NA USDA net removals: Mil. lb Butter 11.6 11.7 6.2 3.7 2.2 Cheese 0.6 0.4 0.4 0.4 0.4 Nonfat dry milk 48.4 47.9 26.0 26.2 29.9 All products (mf basis 2/) 296,842 294,091 160,834 104,715 69,662 All products (ss basis 2/) 607,631 597,695 331,225 331,331 370,922 Imports (milkfat basis 2/) 190 232 214 NA NA International prices: $/metric Butter 2,000 2,175 2,232 2,363 2,438 Nonfat dry milk 2,129 2,135 2,150 2,183 2,163 END-END-END