Milk Production Contracts Slowly as Rising Output per Cow Partly Offsets Herd Contraction; A Price Recovery is Forecast in 2010

The August Milk Production report showed U.S. milk production estimates virtually unchanged from August a year ago, despite 145,000 fewer cows in the national
herd. For the year to date, milk production has risen every month compared with the corresponding month a year ago, while the dairy herd has shown a decline for
every month in 2009 since March. Continued low prices for milk and dairy products have not brought a decline in production, which would bring milk supplies
into line with demand. Lower prices for feed ingredients, especially corn and alfalfa hay, have provided an incentive for producers to feed for milk production
despite culling.

The calculated milk-feed price ratio has climbed from first-quarter lows near 1.5, but still has not exceeded 2.0 and is unlikely to reach 2.5 this year or next. A milk-feed price ratio near 2.5 or better is thought to signal expansion. Consequently, 2009 production is projected at 188.4 billion pounds, down less than 1 percent from 2008. Production in 2010 is forecast to decline another 1 percent from 2009 to 186.7 billion pounds as the herd size is expected to decline 2.8 percent next year compared with this year.

Despite increased cheese exports to Mexico, the overall export picture is not optimistic. Dry milk exports have shown month-over-month increases since February lows but still lag year-ago levels. Export prospects in 2010 are not expected to improve much, rising to 3.8 billion pounds milk equivalent on a fats basis and 21.2 billion on a skims/solids basis.

Imports are expected to climb this year. Imports are projected to reach 4.2 billion pounds of milk equivalent on a fats basis and 3.8 billion pounds on a skims/solids
basis. Imports are forecast to fall in 2010 compared with 2009, totaling 4.1 billion pounds on a fats basis, but to increase to 3.9 billion pounds on a skims/solids basis.

For the second quarter of 2009, commercial disappearance of cheese was ahead of the second quarter of 2008, while domestic commercial use of butter, nonfat dry
milk (NDM) and whey trailed year-earlier levels. Stocks on a milk equivalent basis remain ample. For 2010, commercial disappearance on a fats basis will likely
be virtually unchanged from 2009 totals. However, a decline in domestic commercial use from 201.9 to 200.1 billion pounds is expected on a skims/solids basis. Recovery in prices is unlikely until 2010 when the decline in milk production, forecast for both this year and next, impact the market. Even then, the price rebound will be mild. Cheese prices are expected to average $1.235-1.255 this year, unchanged from last month’s projection. Prices for butter, NDM, and whey are expected to be $1.165-$1.205 per pound, 85-87 cents per pound, and 23.5-25.5 cents per pound, respectively. For 2010, cheese prices are forecast at $1.510-$1.610 per pound, butter at $1.420-$1.550 per pound, NDM at 93.5 cents to $1.005 per pound, and whey at 28-31 cents per pound.