August 2017 milk production grew 2 percent compared to the same month a year earlier, as favorable weather in the Northeast and Midwest strengthened milk output per cow. USDA also revised July 2017 milk output and cow numbers up slightly.
USDA: August recap
Reviewing the USDA estimates for August 2017 compared to August 2016:
• U.S. milk production: 18.05 billion pounds, up 2 percent
• U.S. cow numbers: 9.405 million, up 71,000 head
• U.S. average milk per cow per month: 1,919 pounds, up 24 pounds
• 23-state milk production: 17.11 billion pounds, up 2.1 percent
• 23-state cow numbers: 8.732 million, up 66,000 head
• 23-state average milk per cow per month: 1,948 pounds, up 26 pounds
Cow numbers revised
Nationally, milk cow numbers were unchanged from the previous month, but USDA revised July 2017 estimates up by 2,000 head. Based on August 2017 USDA preliminary estimates, U.S. dairy cow numbers were still 71,000 head more than August 2016 (Table 1).
Compared to a year earlier, largest growth was in Texas (+30,000 head), New Mexico (+14,000 head) and Colorado (+8,000 head). California cow numbers were down 13,000 head, while Pennsylvania and Minnesota showed declines of 4,000 head.
Milk per cow
With the exception of Florida, monthly milk output per cow posted gains in most states east of the Rockies, but weakened in the Pacific Northwest (Table 2). Minnesota (+85 pounds), Virginia (+80 pounds) and Illinois and Pennsylvania (both +60 pounds) led all states. Florida, Idaho, New Mexico, Oregon and Washington saw monthly output per cow shrink from a year ago.
The impact of Hurricane Irma on Florida was not reflected in the August estimates. As storm recovery continued, cows were being milked, but in some cases the milk was being dumped due to lack of refrigeration.
USDA outlook
USDA has backtracked a bit after five consecutive previous monthly reports forecasting milk production cuts in 2017. Based on the September World Ag Supply and Demand Estimates (WASDE) report, anticipated milk production in 2017 was raised to 216 billion pounds. If realized, 2017 production would be up about 1.7 percent from 2016’s total of 212.4 billion pounds.
Looking ahead to 2018, the USDA forecast production at 220.1 billion pounds, which would be up about 1.9 percent from 2017’s estimate.
Price outlook
Trying to get a handle on milk prices and margins for long-term planning remains elusive.
Besides February, the months of September, October and November traditionally are the three lowest months for total milk production and milk output per cow. In addition, more milk is used for fluid to fill the school pipeline.
Despite entering that three-month period of lower overall milk production, the outlook for prices in the final quarter of 2017 and into 2018 had weakened substantially through early September. Declining product prices pulled both Class III and Class IV futures prices lower. Previous projections of Class III prices reaching the high $17s per hundredweight (cwt) were no longer in the picture.
Bob Cropp, dairy economics professor emeritus at the University of Wisconsin-Madison, held out hope for a late cheese rally.
”A rally can happen,” Cropp said, reflecting on cheese prices late last year which saw cheddar blocks move from $1.50 per pound in October to $1.92 per pound in November, pushing Class II prices from $14.50 to $17.40 per cwt in December. It will take a rally in the cheese market, and that’s a possibility.”
Apparently, he was on to something. Between Sept. 20 and the close of trading on Sept. 25, Chicago Mercantile Exchange (CME) cheddar barrels gained 18.75 cents, to $1.6725 per pound; cheddar blocks gained 7.75 cents, to $1.67 per pound, in part powered by a USDA stocks report showing a drawdown in butter and cheese inventories.
For the same trading period, CME Class III futures price rose between 56-96 cents per cwt for October 2017-February 2018 contracts.
If the upward trend is sustainable remains to be seen. Even with the rebound, the October 2017-June 2018 Class III average is still just $16.06 per cwt as of the close of trading on Sept. 27. Based on the current outlook, 2018 milk prices could come in no better than even with 2017, Cropp said.
Keep an eye on margins
Like watching for rain clouds before cutting hay, dairy farmers should keep an eye on dairy markets as the decision deadline approaches for 2018 participation in the Margin Protection Program for Dairy (MPP-Dairy) approaches.
Fluctuating milk prices, market conditions and outlooks are changing almost daily. Although hitting MPP-Dairy indemnity payment trigger levels in 2018 still seems unlikely, the chances of seeing payments at the highest insurable level are greater than a couple of months ago.
Dairy margins weakened over the second half of August and continued to deteriorate in the first half of September, according to bimonthly reports from Commodity & Ingredient Hedging LLC.
But with the recent uptick in Class III futures prices, the margin freefall seems to have halted. As of Sept. 25, the Program on Dairy Markets and Policy projected monthly MPP-Dairy margin to be near $10 per cwt in August, declining in September, but rebounding in October through December. Forecasted margins start declining in the new year, falling below $9 per cwt by June. All margin forecasts are based on MPP-Dairy formulas.
With the MPP-Dairy enrollment period for calendar year 2018 closing on Dec. 15, 2017, dairy farmers have the option of selecting a margin coverage level, or opting out of the program altogether.
To opt out, a producer should not sign up during the annual registration period. The decision would be for 2018 only and is not retroactive. By opting out, a producer would not receive any MPP-Dairy benefits if payments are triggered for 2018.
Opting out of MPP-Dairy for 2018 saves the dairy farmer the $100 administration fee, and makes dairy farmers eligible to participate in the Livestock Gross Margin for Dairy (LGM-Dairy) program, a separate margin insurance program administered through the USDA’s Risk Management Agency. That program has budget caps that could limit participation, however. Watch for an article on LGM-Dairy in Issue 19 of Progressive Dairyman.
Margin protection options
Alan Zepp, risk management program manager at Pennsylvania's Center for Dairy Excellence (CDE), reviewed MPP-Dairy, the LGM-Dairy program and puts and options on the Chicago Mercantile Exchange (CME) futures market during his monthly “Protecting Your Profits” conference call on Sept. 27.
Zepp summarized various risk management options as of Sept. 26:
• For producers using the futures market individually or through their co-op, the December 2017 Class III futures price settled at $16.32 per cwt. Purchasing a $16.25 per cwt at-the-money put cost 39 cents per cwt; a $15.25 per put (similar to a $1 deductible LGM-Dairy policy) cost 11 cents per cwt.
• The next sales period for LGM-Dairy margin insurance coverage is Sept. 29-30. The LGM-Dairy insurable margin for the 10-month period (November 2017 through July 2018) averaged $7.93 per cwt. Cost for that coverage was estimated at 47 cents per cwt. A $1 deductible policy cost 10 cents per cwt.
Looking at market fundamentals, Zepp said the latest USDA milk production report showed U.S. milk cow numbers may have plateaued, and 2017 cow slaughter is running about 9 percent ahead of the level seen in 2016. While there was a drawdown in butter stocks, cheese and milk powder stocks remain historically large.
The Class III futures milk price averages $16.09 per cwt for the next 12 months.
The value of the U.S. dollar against foreign currencies has stabilized, and U.S. dairy product prices remain competitive with global prices. The current Chicago Mercantile Exchange (CME) cash cheddar price of $1.61 per pound was less than the latest Global Dairy Trade (GDT) auction price of $1.83 per pound and the German price of $1.89 per pound. CME butter was trading about $2.45 per pound, below the GDT average of $2.73 per pound, and the European Union price of $3.75 per pound. Finally, the CME nonfat dry milk powder was trading in a range of 82 cents per pound, comapred to the GDT average of 87 cents per pound, and 77 cents per pound in Germany.
One final note, Zepp said a USDA Risk Management Agency computer glitch during August’s LGM-Dairy sales period prevented any sales, even though the insurable margin of $9.02 per cwt was the highest of the year. A clause in the LGM-Dairy program means the sales period did not have to be reopened or extended due to the computer problem. 
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Dave Natzke
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