US Dairy Outlook: Milk Production Increases

Favourable weather at the start of 2012 has attributed to increased milk production. Rolling annual milk production is up 2.34 per cent at the end of February at 198 billion pounds. Rolling herd average at the end of February is at 21,497, up from 21,335 at the end of 2011, writes Kristen Schulte from the Iowa State University.
calendar icon 8 May 2012
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Iowa State University Extension

Milk price is driven by simple economics of supply and demand. United States milk supply continues to increase over time with increased milk output per cow and an expanding cow herd. Demand outlook for dairy products in 2012 is not favourable due to increased global milk supply and minimal growth in national demand. Producer profit margin outlook is marginal for 2012 due to suppressed milk prices and feed commodity markets remaining strong.

Milk Supply

Favourable weather at the start of 2012 has attributed to increased milk production. Rolling annual milk production is up 2.34 per cent at the end of February at 198 billion pounds. Rolling herd average at the end of February is at 21,497, up from 21,335 at the end of 2011.

The total number of milk cows in the US is just under 9.25 million cows in February 2011, up 29,000 cows from the end of 2011. The US milk cow herd has maintained stable growth at or just less than one per cent so far in 2012. However, in the past year the industry has a large replacement heifer inventory and stable per centage of cows leaving the herd. These two factors along with increase in milk production could lead to further increase in total milk production and potentially an oversupply of milk into the market.

Iowa milk production continues to increase per cow on a rolling annual basis; production increased 675 pounds per cow when comparing annual production at the end of February. When looking at the increase of milk production per cow among the 23 dairy states, Iowa continues to be a leader behind Texas. The number of cows in Iowa has increased by two thousand head since December 2011 to 205,000.

Young milk cow herd, strong heifer inventory, and favorable weather conditions could continue to increase US milk production from 2011. However, feed availability and quality, favorable beef prices, and tightening margins could cause production and cow inventory growth to slow in the coming year.

Milk Product Demand

Export sales helped to drive dairy product demand in 2011. Mexico was a key player in the dairy export industry as they were the leading export market for US dairy products, purchasing over a billion dollars of milk powder, cheese, and ice cream among other products. Total exports equaled $4.82 billion in export product; total export products are equivalent to over 13 per cent of the milk solids at the farm level. In the early months of 2012, global dairy product prices have subsided 10-20 per cent from the peak price a year ago. A growing global supply, increasing stocks in storage, and existing insecurities in the global market have contributed to the declining product prices. The assistance through the Cooperatives Working Together (CWT) program will allow suppliers to be more competitive in pricing on the global market. Continued growth of demand in southeast Asia and developing countries through increased population entering the middle class and product development to meet the specified needs would allow for supply and demand to align at a competitive price.

Dairy Profitability

The US All Milk Price for March was $17.40 per hundredweight, down from $19.00 at the start of the year. Iowa producers saw an additional $0.20 on All Milk Price at $17.60 in March. Iowa producers typically see about a $2.00 positive basis between All Milk Price and Announced Milk Price, based on CME closing futures price. Figure 1 below displays the All Milk Price for producers in Iowa from 2009 forward on a monthly basis.


Figure 1 Historical Iowa All Milk Price (2009-2012)

Milk prices have continued to subside on the futures market with milk prices dipping into the high $15 range in the near months and in the $16 range at the end of 2012 and into 2013. Although milk prices may settle at levels close to 2010, continued strength in the feed commodity markets are creating tighter margins for producers in 2012. Producers in the Midwest or ones that produce their own feed may have an advantage due to decreased market risk on the feed input side.

Evaluating risk management strategies, herd inventory through cull cow and heifer retainment decisions, and growing or purchasing feed decisions are important in the coming months to maintain financial viability in 2012.

May 2012

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