OU 291February 12, 1996

1996 DAIRY OUTLOOK

H.M. Harris, Jr., Extension Ag Economist
February 12, 1996

Milk prices at year-end rebounded by almost $2.00 from their low in May of 1995. But high prices for concentrate feed and top quality forage continue to squeeze producer's pocketbooks. As a result, national milk production is running at about year-earlier levels.

Low cull cow prices have discouraged heavy culling, so most of the impact of the high feed prices has been on feeding levels resulting in very modest increases in milk per cow. Another result has been fairly strong production levels in states where typical production units raise a large proportion of their feed needs. Minnesota, New York, Pennsylvania, Vermont and Wisconsin all registered production gains in November. But states like California, Florida and Texas, where most feed is purchased, registered declines. In New Mexico, production was up "only" 4 percent -- on 15 percent more cows and a 145 pound decline in production per cow. High feed prices also appear to have lowered incentives to use BST.

M-W/Basic Formula Price (3.5% B.F.)
199419951996
January12.4111.35 12.75
February12.4111.79 12.65
March12.7711.89 12.50
April12.9911.16 12.40
May11.5111.12 12.20
June11.2511.42 11.80
July11.4111.23 11.90
August11.7311.55 12.00
September12.0412.08 12.25
October12.2912.61 12.30
November11.8612.87 11.90
December11.3812.91 11.75
Average12.0011.83 12.20

I don't anticipate any big surge in production until well into the spring. If lower feed prices in the summer and fall materialize, growth in production will resume, probably no more than a two percent rise for the year, but certainly enough to pressure milk prices in the fall.

On the demand side, butter prices should rebound, cheese prices should decline slowly, and NDM prices are expected to be weak. Smaller allowable DEIP exports are the main factor in the weak powder market.

Policy uncertainty hangs heavily over the 1996 outlook. The latest House version
of dairy "reform:"

  • eliminates the 10 cents assessment
  • discontinues price supports for butter and NDM
  • continues price support for cheese at $10.35, declining by 10 cents/year for 5 years
  • creates a resource loan for butter and powder
  • fully funds DEIP at GATT permitted levels
  • applies California standards nationwide
  • repeals Sec. 102 and establishs a national make allowance
  • creates a Class IV price category for butter and powder
  • freezes Class I prices at a minimum of $12.87 for 2 years
  • pools 80 cents of Class I revenue nationwide
  • pools half of the difference between Class IV and support nationally
  • gives USDA expedited authority to reduce Federal orders from 33 to 8-13.
  • kills all programs if all federal order reforms aren't done by December 31, 1997.

    Many hold high hopes for this package, but it is already beginning to draw fire from the press and consumer groups. My most likely scenario is for continuation of the current program. Based on that assumption, the basic formula price should decline slowly through the spring and summer, but remain well above 1995 levels. But the seasonal fall peak will barely materialize. Prices for the year should average 20-50 cents above 1995, but could be $1.00 or so lower at year-end.

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    copyright 1996 by Department of Agricultural and Applied Economics, Clemson University.