MarketView… U.S. Dairy Outlook Brief August –October 2010.
By Cameron Thraen, State Specialist, Dairy Markets and Policy, The Ohio State University Extension,
Agricultural, Environmental, and Development Economics, The Ohio State University
In this installment of The MarketView I will take stock of the current milk production situation in Ohio
and contrast this will the U.S. dairy situation. At the end of this piece I will explore how this translates
into the outlook for market price.
Milk Cows and cow productivity: Ohio
In the first two charts, Chart 1 and Chart 2, you will see the number of milk cows in Ohio (Chart 1) and
the yield per cow (Chart 2). Yields and production data are each adjusted to reflect a 30 day month.
Ohio milk cows,
(1000 head)
285
280
275
270
265
260
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May July
'08 '08 '08 '08 '08 '08 '09 '09 '09 '09 '09 '09 '10 '10 '10 '10
Chart 1
Cows in milk peaked in Ohio back in May through July period at 282 thousand head. Looking at Chart 1
you can see two adjustment periods. The first period, beginning with August 2008 and ending
December 2008. Milk cows moved down six thousand head. The second period occurred in late 2009.
In fact milk cows increased marginally from May to September 2009 before starting down in earnest.
This was due no doubt to the influence of the MILC payments and a short lived resurgence in milk price
during this period. This promoted an atmosphere of optimism that holding on just a bit longer might
pay off. Dairy cow herd expansion began in May 2010. The latest July numbers from the USDA put the
Ohio dairy herd at 270 thousand head.
Adjusted Ohio Milk Production
(Per Cow, per day)
58
56
54
52
50
48
46
44
42
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May July
'08 '08 '08 '08 '08 '08 '09 '09 '09 '09 '09 '09 '10 '10 '10 '10
Chart 2
Chart 2 shows the productivity on Ohio dairy farms. During the 2008 through April 2010 period, milk per
cow per day (p/c/d) has increased by 6 pounds (13%). During the financial calamity that was 2009,
productivity on Ohio dairy farms actually increased from low of 48 p/c/d to 53 p/c/d. The latest run
shows productivity increasing sharply over the January through April 2010 period. Milk output per cow
per day has increased from 50 to 56 p/c/d. This is a result of Ohio dairy producers culling low producing
cows from the state herd. Removing these low producers while shrinking the over herd raises the
average milk cow output. Difficult weather, heat and humidity is evident in the decline for June and July
2010.
Milk Cows and cow productivity: United States
In the second two charts, Chart 3 and Chart 4, you will find the number of milk cows, United States,
(Chart 3) and the U.S. yield per cow (Chart 4).
U.S. Milk Cows
(1000 head)
9,400
9,350
9,300
9,250
9,200
9,150
9,100
9,050
9,000
8,950
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May July
'08 '08 '08 '08 '08 '08 '09 '09 '09 '09 '09 '09 '10 '10 '10 '10
Chart 3
The national dairy herd peaked during the April 2008 through January 2009 period at just over 9.3
million head. With the collapse of the milk price in February 2009, dairy producers began a more
aggressive culling of low producing cows. The Cooperatives Working Together (CWT) program also
began an aggressive campaign to use its farmer paid funds to remove dairy cows. This culminated in the
dramatic slide in cow numbers nationally (see MarketView, BDN March edition for a detailed look at this
culling activity). From a peak of 9.334 million head, December 2008 to a low of 9.082 million head in
December 2009, the national dairy herd declined 2.7 percent. With better milk prices and lower input
prices, this slide ended in January 2010, and over the first four months of this year, the dairy producers
have added back 14,000 dairy cows. This trend continues into the July 2010.
Adjusted U.S. Milk Production
(Per Cow, per day)
62
60
58
56
54
52
50
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May July
'08 '08 '08 '08 '08 '08 '09 '09 '09 '09 '09 '09 '10 '10 '10 '10
Chart 4
The productivity pattern for the national dairy herd is very similar to that experienced in Ohio. The
latest numbers show milk productivity, measured by milk output per cow per day, as increasing rather
sharply from 55 to 60 p/c/d. and then declining as the heat and humidity impacted productivity. With
Annual Milk Production, Ohio and the United States
Charts 5 and 6 show the annual production levels for Ohio and the United States. Each monthly
production level shows the 12 month rolling average, or the total production for the past 12 months.
Looking at Chart 5, we can see that milk production in Ohio showed only a slight deviation from its trend
during 2009. Milk production capacity is now slightly above 5.2 billion annually. Looking at the 12
month rolling average for the United States, Chart 6, we can see that very significant trend in U.S.
productive capacity for 2008 came to halt in 2009, dropping back for most of the year, and then
declining over the last four month of 2009. With stronger milk prices in the early months of 2010,
increasing cow numbers and milk productivity, milk production capacity is on the upswing, but still
below the 2008 peak.
Ohio Annual Production
(billion pounds)
5.25
5.2
5.15
5.1
5.05
5
4.95
4.9
4.85
4.8
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May July
'08 '08 '08 '08 '08 '08 '09 '09 '09 '09 '09 '09 '10 '10 '10 '10
Chart 5
U.S. Annual Production
(billion pounds)
191
190
189
188
187
186
185
184
183
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May July
'08 '08 '08 '08 '08 '08 '09 '09 '09 '09 '09 '09 '10 '10 '10 '10
Chart 6
Ohio share of U.S. milk production
The final chart in the overview of Ohio and U.S. milk productive capacity is Chart 7. This chart shows the
Ohio share of total milk production over the past two plus years. The message is clear. Ohio is
increasing its share of milk production relative to the rest of the United States. This share has increased
from a low of 2.67% in early 2008 to 2.74% as of July 2010.
Ohio Share of US Production
2.76%
2.74%
2.72%
2.70%
2.68%
2.66%
2.64%
2.62%
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May July
'08 '08 '08 '08 '08 '08 '09 '09 '09 '09 '09 '09 '10 '10 '10 '10
Chart 7
Milk production capacity and the Class 3 price
Chart 8
Chart 8 shows the relationship between the rate of change in the U.S. capacity to produce and market
milk and the Class 3 milk price. I have used this chart in past Marketview articles to reinforce the point
that rates of growth in our milk production capacity which exceeds 2% per year is accompanied by Class
3 milk price below $15 dollars per hundredweight. The only exception to this occurred at the peak of
the world speculative housing bubble, 2007 and early 2008. This was an anomalous time period, when
all commodity markets including dairy commodity markets were off the chart on the demand side.
Looking at Chart 8, and setting aside this anomalous 2007-2008 period, high milk prices are created by
negative annualized growth rates, as with 2004, or with annualized grow rates sustained below 2% per
year, as with July 2006 through June 2007. We are currently increasing U.S. milk production in excess of
what commercial demand will take and still yield Class 3 price above $15 per hundredweight.
Current market price outlook
Chart 9
The current Chicago Mercantile Exchange (CME) Class 3 milk futures price is shown in Chart 9 along with
the median Class 3 price and the upper and lower quartile bounds. As of August 18, 2010, the August
2010 futures price is $15.10. The median price for August 2000-2009 is $13.70. The CME Class 3 price
pattern shows prices above the long-term median price through October 2010 and then increasing
significantly above the long-term median for the months of November 2010 through July 2011. Why the
dramatic increase in the latter part of the coming 12 months? The answer is one of two views. Either
there will be a renewed culling beginning in earnest at the end of the summer due to continued financial
pressure on the nation’s dairy farms, including the impact of the latest Cooperatives Working Together
CWT cow purchase program, or the market is anticipating a resurgence in domestic and more
importantly international demand toward the end of 2010 and into 2011. Or possibly a combination of
these two events. What will take place? I do not know. What I think you can take from this edition of
the MarketNews, is that the growing milk production capacity in the United States suggests that milk
prices will remain below the $15.00 mark over the summer. If a resurgence of international demand
does come about toward the end of 2010, the Class 3 price may be in the upper $14 dollar range. As a
planning price, for those shipping milk in Ohio and the Mideast Federal Milk Marketing Order, I would
suggest using a Class 3 price of $14.80 and add another $1.00 to get a blend price of $15.80.
This would be good time to learn more about the use of futures and options to protect your milk price
should a pricing opportunity arise in the coming weeks or months. Also consider learning more about
the Livestock Gross Margin Insurance product available to dairy producers. A number of important
changes to the LGM-Dairy program will go into effect in September or October. These changes will
make the insurance product less expensive and easier to purchase. Each of these provides a
management tool to which can assist in you in protecting your milk price in 2010 and 2011. You can find
out more about this by visiting my website: http://aede.osu.edu/programs/ohiodairy. Look for the links
to Livestock Gross Margin Insurance or Price Risk Management.