United States-Dairy crisis.

UNITED STATES-Dairy Herd Set For Slight Contraction In 2009

Demand for dairy products weakened in fourth-quarter 2008 as production inched ahead. In 2008, cow numbers rose 1.2 percent while yield per cow rose by less than 1-percent. Last year was the first in many years that milk production rose primarily on increased herd size rather that yield per cow. In 2009, milk production is forecast to retreat to 189.1 billion pounds. Herd size is forecast to decline slightly to an average of 9..17 million cows with increased dairy cow slaughter later in the year. At present, the forecast assumes no additional herd buyouts through CWT (Cooperatives Working Together). Hence, the contraction is expected to be sharpest in the second half of the year as poor returns early in 2009 force a sharper response from producers. Output per cow is expected to continue to rise, but by less than 1-percent. The assumption is that liquidation would remove lower producing cows, raising the average yield of the remaining herd. Complicating this assumption is that the number of replacement heifers, while slightly lower than last year, remains relatively high. The milk-feed price ratio could decline further in 2009 as falling milk prices trump any declines in feed prices.

For products, the central problem is that domestic demand is not sufficient to absorb the available supplies. As a result, prices have declined sharply and are expected to remain well below 2008 levels throughout the year. U.S. commercial dairy exports softened in fourth-quarter 2008, and total milk equivalent exports on a fats equivalent basis are forecast to reach only 5.1 billion pounds in 2009. The same forecast on a skims solids basis is for 19.0 billion pounds of milk equivalent to be exported. Such totals are a sizable retrenchment from 2008’s exports of 8.7 billion pounds (fats basis) and 26.0 billion pounds (skims/solids basis). While global recession has reduced demand, slow sales may be compounded by the recent decision by the European Union to subsidize exports of nonfat dry milk (NDM), whole milk powder (WMP), cheese, and butterfat.

Total domestic commercial use in 2009, on a fats basis, is forecast at 185.6 billion pounds, less than a 1-percent increase from that of 2008. Dairy production expanded over 4 percent on a milk equivalent basis in December, and butter production was 10 percent higher, but total cheese production increased by only 1 percent. NDM production was substantially higher in December, year-over-year. Lactose and whey protein concentrate production partially compensated for the 6.5- percent decline in dry whey production for human consumption. Increased availability of milk and weak demand are leading to inventory building in some products, notably cheese and NDM. The increase in dairy products production will keep prices low but are also expected to prompt sales, even in a weak economy. Lower production in 2009 should ultimately ease the supply-demand imbalance, and prices could firm later in the year.

Butter is moving to the Commodity Credit Corporation. The Government has been purchasing NDM since last fall. Removals are expected to be heaviest in the first half of the year, dropping off as reduced production firms prices in the second half. Cheese prices are forecast much lower in 2009 at $1.180-$1.250 per pound. Likewise, butter prices will be lower in 2009, averaging $1.080-$1.180 per pound. Prices for dry products will also decline this year but not as drastically because prices for those products slid considerably in 2008. NDM prices are forecast at 80- 86 cents per pound and whey at 16-19 cents per pound in 2009. Based on product price forecasts, milk prices will plunge in 2009 from those of 2008. The Class IV price is expected to be $9.35-$10.15 per cwt, and the Class III price is projected at $9.70-$10.40 per cwt. The all milk price is expected to be $10.95-$11.65 per cwt in 2009.

Source: Livestock, Dairy and Poultry Outlook, USDA