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January 2007

Michigan Milk Market Update

Christopher Wolf
Dept. of Agricultural Economics

Currently, milk production is greater than a year ago with large gains in California, Idaho and Texas. The number of milk cows increased in October and November following a three month decline prior to those months. Cheese production through October 2006 was up 3.7% year-to-date over 2005. Stocks of all cheese were up 6.5% over a year earlier. Butter stocks at the end of October were 38.6% higher than a year earlier. These kind of statistics usually spell a relatively low milk price outlook yet at the end of 2006 both the Class III futures and USDA outlook were for 2007 milk prices above historical averages. What is driving these high milk prices? Two factors: corn prices and world dairy markets.

Domestically the drive to build ethanol plants spurred by the recent high oil prices and national policy has led to a potentially very large demand for corn starting this next year. If all the planned plants are built, it is even possible that Iowa could become a corn deficit state. The result is a corn price that is priced at $4 per bushel for March. The result of this high corn price is an expectation for a dramatic increase in corn acreage this next year which can have the trickle down effect of increasing the prices of crops that compete for land base. Land rents also will increase. These increases in the largest production cost are driving milk prices higher.Internationally, the US dollar is weak and world supply-demand is tight. This has led to nonfat dry milk and dry whey prices which encourage US exports. The dry whey prices are especially helping the Class III price of milk.

Will the market forecasts be correct with a Class III milk price of $13-14/cwt or higher in 2007? The answer depends on the feed cost and how quickly milk production responds. Currently, the country has an abundance of replacement heifers ready to enter production.

Dairy policy continues to boil over. The recent decision to only slightly increase the make allowance for cheese has left some cheese manufacturers—including manufacturing cooperatives—upset about what they see as too little, and some bargaining cooperatives upset about the subsequent decline in the farm pay price. In fact, by the time you read this it is even possible that we will have fewer Federal Milk Marketing Orders as cooperatives express their unhappiness with the make allowance decision by voting an Order or two down.

The 2007 Farm Bill looms and dairy policy will be an important part of the discussion. Once again the Milk Income Loss Contract will be an important topic as legislators from the Northeast and Wisconsin push for its continuance.

 

 

 

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