By CAROL RYAN DUMAS
USDA's April report pegged U.S. milk production at 17.27 billion pounds, up 0.2. percent over a year ago despite a drought that was expected to curb production.
"The drought was supposed to complicate everything and reduce production. It didn't happen," said Jerry Dryer, chief market analyst for Rice Dairy, a Chicago brokerage house.
Dairymen seem to keep increasing production, despite drought, tight forage supplies and high feed costs, he said.
"They just keep making more milk," he said.
Production was down in some western states, but production in the Midwest took up the slack, and production in the West is recovering.
Milk prices have been pretty good, with Class III over $18 per hundredweight and Class IV over $19 per hundredweight. The downside is feed prices are higher than usual, he said.
Good milk prices are likely due to good demand for dairy products. Food service and retail sales have been very good, with food services sale in April posting the best month ever seen, he said.
Exports of dairy products haven't matched the torrid pace seen earlier but they're still good and expected to get better. Milk production is down in most of the rest of the world, and while U.S. inventories of dairy products are huge, the EU and Oceana have very little inventory, Dryer said.
That will have international customers coming to the U.S. for product, and exports should be strong in the third quarter, he said.
Right now, however, U.S. inventories are overwhelming. Demand has been good, but such large inventories in the past would have had cheese and butter trading at $1.20 to $1.30 a pound. Cheese is currently trading at about $1.70 a pound, and butter is trading at about $1.50 a pound. And milk prices are above the five-year average, he said.
"We're operating in a different world," he said.
Robin Schmahl, commodity broker and owner of AgDairy LLC, Elkhart Lake, Wis., said he expects things to stay sideways and choppy in the cash markets in the near term and doesn't see anything to spur substantial purchases by end-users.
There's been pretty good movement in inventories of dairy products but if milk production remains steady and more product is added to inventories, there'll need to be good demand to support prices, he said.
Even though manufacturers have been steadily shipping overseas, they still have large stocks, and that could mean lower milk prices later in the year. Especially if USDA's projection of 2 billion bushels of carry-out corn proves true.
High corn stocks could lower corn prices to $4 a bushel. Lower feed costs are not going to curb milk production and would instead lead to lower milk prices, he said.
Class III milk is trading at about $18.50 per hundredweight, which is not a bad price and not likely to move much. If USDA's May Class III price in federal orders is $18.50, it'll be the highest Class III price since September of last year.
Class III futures are trading in the $18 range through November, and prices have been in the high $16 to $18.50 range since September. But they could go lower with a good corn crop and building corn stocks, he said.
"It doesn't seem like the (corn) market is going to be too tight," he said.
World demand for dairy products has been good, with buyers coming into the market to buy cheese despite a bump up in prices. Powder and whey supplies are tightening, but that's not going to have a large impact this year, he said.
Overall, he thinks world demand is going to be steady, he said.