USDA reconvened its public hearing September 14 on proposals to increase make allowances for dairy processors in Federal Order price formulas. The increases could result in lower milk prices for farmers, according to Dairy Profit Weekly editor Dave Natzke. But tight cheese margins are also having a negative impact on producer prices in the Midwest, according to Natzke.

Make allowances have been getting most of the public attention, Natzke said in his Friday DairyLine report, but shrinking Midwest milk price premiums could also reduce dairy farmers’ pay prices.

Speaking at a northeast Wisconsin ag lenders conference recently, Alto Dairy Co-op CEO, Rich Scheuerman, and Land O’ Lakes dairy risk management specialist, Steve Watrin, said the Midwest has historically seen some of the highest mailbox prices in the nation. However, with tight margins and increased competition from California and the West for cheese markets, Midwest manufacturers can no longer afford high premiums.

USDA estimates show Wisconsin dairy farmers earned a mailbox price of about $15.35 per hundredweight in 2005, according to Natzke, $1.47 more than California and $2.12 more than New Mexico. Much of that higher price was in premiums for quality and volume, Natzke reported, as well as subsidized hauling costs as the larger number of manufacturers in the Midwest compete for milk.

Milk prices make up most of the cost of manufacturing cheese and, with lower milk prices, California can produce and ship commodity cheeses to distant markets for about nine cents a pound less than Wisconsin manufacturers.

Scheuerman said the timing of the make allowance debate and lower premiums is poor, given current low milk prices, however, lower premiums will be necessary in the Midwest even after milk prices go back up if Midwest cheese manufacturers are to stay competitive with the West.

August milk production in the 23 major producing states totaled 13.9 billion pounds, virtually unchanged from July, according to USDA’s preliminary data. Revisions added 6 million pounds to last month’s July estimate, up 1.5 percent from July 2005. Many expected revisions to lower the original estimate.

Production per cow averaged 1,680 pounds, up 9 pounds from August 2005. Milk cow numbers totaled 8.25 million head, down 9,000 from July, but 88,000 head more than August 2005.

The CME’s Daily Dairy Report points out that cow numbers in the 50 states were down 10,000 from July and down 22,000 from June, “The first indication of contraction at the farm in three years and could be a bullish factor in the months ahead if the trend continues.”

The USDA’s latest Livestock Slaughter report issued Friday shows that 217,000 dairy cows were culled in August, up 42,000 from July, and 27,000 more than August 2005. Just under 1.5 million head have been taken out of the dairy business in the first eight months of 2006, up 44,000 from a year ago.

California milk production recovered nicely from the July heat, up 4.1 percent from August 2005, thanks to 9,000 more cows, and 65 pounds more per cow. Wisconsin was down 0.9 percent despite having 8,000 more cows but output per cow was down 25 pounds.

The biggest increase occurred in Colorado, up 7.7 percent, thanks to 9,000 more cows and a 65-pound gain per cow. Missouri posted the biggest loss, down 9.3 percent.

The cash dairy markets started the week of Sept. 18 with a nice gain, then relapsed, but ended higher on the week. Block cheese closed Friday at $1.33 per pound, up 5.75 cents on the week. Barrel closed at $1.34, up 6.75 cents on the week. Eight cars of block traded hands on the week and three of barrel. The NASS U.S. average block price hit $1.2882, up 2.4 cents. Barrel averaged $1.3040, up 0.1 cent.

Butter closed Friday at $1.32, up a penny on the week, but 38.25 cents below a year ago. Eleven cars were sold. NASS butter averaged $1.2944, down 1.2 cents.

Market analyst Mary Ledman, principal of Dairy Direct in Chicago, said in DairyLine that the market is reflecting the seasonal increase in demand that she believes will continue through year-end. We recorded our discussion prior to the release of the milk production data but, since the last report, Ledman said the cheese market had moved above the current level, then dropped below $1.25, but has been inching its way back toward the $1.30 level.

Cheese commercial disappearance in the first six months of 2006 was up 6 percent from a year ago. That’s very strong, she said, and even with escalating prices, she doesn’t see them going over $1.40 or to a level that would cause consumers to back away. She said it’s hard to determine what it means for the Class III milk price because it depends on the whey price but she predicts dairy product demand will remain strong through year-end and into first quarter 2007.

August butter stocks totaled 184.5 million pounds, according to the USDA’s latest Cold Storage report, down 43.9 million pounds from July, but 35.6 million above those in August 2005.

American type cheese stocks totaled 577.3 million pounds, down 26.3 million pounds from July, and 4.7 million below a year ago. July American stocks were revised up 4.5 million pounds. The total cheese inventory, at 851.1 million pounds, was down 41.5 million pounds from July, but was 38.2 million above a year ago. July’s total cheese count was revised up 5.2 million pounds from last month’s estimate.

The October Federal order Class I base milk price was announced Friday at $12.42 per hundredweight, up $1.57 from September, but $1.85 below a year ago, and triggers a 43-cent MILC payment.

The NASS butter price averaged $1.2989 per pound, up 12.5 cents from September. Cheese averaged $1.3063, up 14.3 cents. Nonfat dry milk averaged 85.42 cents, up from 84.63 cents, and dry whey averaged 31.62 cents, up from 29.25 cents in September.

The futures market anticipated a bearish Milk Production report, according to Downes-O’Neill dairy broker Ron O’Brien. Speaking in Wednesday’s DairyLine broadcast, O’Brien said the market had sold off the past week or so and cash cheese dropped from the mid $1.30 per pound level in the last two weeks.

On the bright side, O’Brien pointed to the 9,000 cow drop from July and the 79 million pounds or a half-cent drop in milk production from July, but he admitted that production is 1.5 percent above last year’s level throughout the U.S.

That won’t be enough to bring an urgency on the buy side for futures buyers or cheese buyers, he warned, so prices may remain steady for the next couple weeks or so, but “We are actually anticipating cheese, powder, whey, and butter prices to remain solid the remainder of this year.”

As to risk management strategy, O’Brien said that, “With most dairy supplies well over five year averages, we recommend producers lock in 20-25 percent of their production at the five year Class III average of about $12.85-$12.90 for 2007.”

He added that there are many reasons why prices could be significantly higher than the five year average but “The Class III market currently sits at $12.82 and about a quarter of our production we’d be looking to lock up with straight futures or forward contracting another 20-25 percent of coverage in “option fences.”

For more information, call Ron at 1-800-231-3089.

This farm news was published in the Sept. 27, 2006 issue of Farm World, serving Indiana, Ohio, Illinois, Kentucky, Michigan and Tennessee.