U.S. milk production continues above year ago levels. January output in the top 23 states amounted to 14 billion pounds, according to the USDA’s preliminary estimate, up 5.4 percent from a year ago. Cow numbers totaled 8.19 million, up 11,000 from December and 103,000 above a year ago. Output per cow averaged 1,711 pounds, up 68 pounds from a year ago.

California was up 5.1 percent, thanks to 33,000 more cows and 55 pounds more per cow. New Mexico had the biggest gain, up 15.8 percent, on 23,000 more cows and output per cow up 135 pounds. Texas followed with a 14.1 percent gain. Output per cow was up 190 pounds and cow numbers were up 7,000. The biggest decrease was in Florida, down 3.3 percent. Oregon was next, down 2.7 percent. 2005 annual production was pegged at 177 billion pounds, up 3.5 percent from 2004. 2005 cow numbers totaled 9.04 million, up 3.2 percent from 2004. The average number of cows was revised up 2,000 head for 2004, and up 7,000 for 2005. Production per cow averaged 19,576 pounds in 2005, up 609 pounds from 2004. The average annual rate of milk production per cow increased 19.1 percent from 1996, according to the USDA.

The USDA’s latest Livestock Slaughter data reports 202,000 dairy cows were culled in January, up from 2,000 from December but 15,000 below January 2005. Cash dairy markets remain under pressure. Block cheese closed the week of February 20 at $1.1275 per pound, down 3.75 cents on the week, 45.25 cents below a year ago, and almost a penny below support. Barrel closed at $1.1050, down 4 cents on the week, and 40.75 cents below a year ago. Seven cars of block traded hands and one of barrel. The NASS U.S. average block price fell to $1.2497 down 2.7 cents. Barrel averaged $1.2217, down 1.6 cents.

Butter closed Friday at $1.1575, down 1.25 cents on the week, and 42.75 cents below a year ago. Ten cars sold. NASS butter averaged $1.2242, down 2 cents.

The outlook remains dim for 2006 dairy prices with milk production as strong as it is and cheese prices at their lowest level in three years. When asked if there was a silver lining, Mary Ledman of Dairy Direct in Chicago, said that there might be if you were a milk buyer and it translated into lower consumer prices. That would hopefully produce a boost in demand. She reported that she purchased butter recently in Chicago at $1.38 a pound and said she couldn’t remember the last time it was that low.

Ledman believes dairy producers were waiting for the Milk Production report but said they were probably surprised at the magnitude of the increase. “Producers haven’t had a good reason to cull a cow in a long time,” Ledman said, but “The silver lining for producers is that the cattle market is still very strong.”

Producers have been preparing for this downturn, according to Ledman, and they hope the downturn results in lower heifer and cow prices for their next expansion. When asked how low the block cheese price would fall, Ledman stated that, while the world price is close to $1.25 per pound, but the real question in her mind is, “Are we producing a product for the world market.”

She predicts prices will hover near support in First Quarter because “we’re going to have a lot of milk compared to a year ago but things can turn around by midyear.”

She doesn’t see them climbing back to $1.40 but they should be in that $1.30 range because last April, May, and June, milk production per cow was up 4-5 percent versus the prior year and she says it will be difficult to be 2 percent above that this year. Ledman predicts a slowdown in the rate of gain in milk production by mid-year and she expects the market to absorb that.

USDA’s preliminary Cold Storage report shows January butter stocks at 114.6 million pounds, up 56 million pounds from December, and 37.4 million or 48 percent above those a year ago.

American type cheese totaled 526.2 million pounds, down 10.7 million pounds from December, but 42 million above a year ago. The December inventory was revised up 19.4 million pounds from last month’s estimate. Total cheese stocks in January amounted to 743.7 million pounds, down 14.4 million from December but 29.9 million above a year ago. December’s inventory was revised up 27.1 million pounds.

National Milk has asked the USDA to rethink its approach to dealing with Federal Order make allowances and whether they should negatively impact producer revenue across all four classes of milk. At a hearing last month, testimony was given by various organizations supporting higher make allowances for Class III and IV products, which would also have the effect of lowering producer milk prices, according to NMPF’s Chris Galen.

NMPF has proposed allowing higher allowances, Galen said in his weekly Thursday DairyLine report, but also proposes decoupling the price impact from Classes I and II, in an effort to reduce the negative impact on farm milk prices.

A USDA judge at the hearing ruled against NMPF’s request, but the Federation continues to lobby the USDA to either reopen the hearing process, or conduct another hearing immediately to deal with the issue. Some NMPF co-op members have petitioned the USDA for an emergency hearing to address the impact.

Galen said that about 50 percent of producer revenue is derived from Class I and II milk so NMPF’s proposal would blunt by half, the negative impact on producer prices if USDA elects to implement the Federation’s proposal.

Meanwhile, sentiment has certainly changed in the Class III futures market but there’s still opportunity for producer risk management, according to Downes-O’Neill dairy broker, Ron O’Brien. Speaking in Wednesday’s broadcast, O’Brien said that, even if cheese and butter prices fall to support, the dry whey market has kept a “flotation device” in the Class III market.

Every penny movement in whey is equivalent to about 6 cents on the Class III price, he said, and, with whey prices still above 35 cents a pound, O’Brien says there’s buying support in the upper $10 range.

“There’s still a bit of premium in the second half of 2006,” O’Brien said, “And with what we call a dead cat bounce, if we see a move of 20-40 cents above this market, I’d probably recommend selling premium in the second half as well.”

Uncertainty as to where the bottom is causes buyers to step aside, he said, and that’s what has happened. O’Brien said you’ll likely see hand-to-mouth and inventory buying just above $1.10, which could give support to the futures market. He warned that, with milk production running 5 percent above a year ago, we’ll probably see some market clearing levels over the next month or two.

Uncle Sam has not purchased block cheese under the price support program since May 9, 2003, or barrel since May 2, 2003. You may recall that there was reluctance by manufacturers to sell to the government at that time because of the costs involved. Sources tell DairyLine that it takes a longer time for a plant to be paid, the package requirements are different, and there’s a cost involved in getting a grader to come to the plant so cheese prices have to slip a few cents below support in order to make it profitable enough to sell to the government.

O’Brien said cheese manufacturers would rather bring it to the Chicago Mercantile Exchange to sell it and you end up with a Class III price under $9.00. He adds the caveat however that demand is strong for whey and the supply has been short the past year or two.