The big news in the USDA's February Outlook is that the January 1, 2005 inventories confirm that there are lots of dairy replacement heifers available to come into the herd this year and that the ten year beef cycle is turning so the beef supply will start growing again in the next couple of years.

Dairy Replacement Heifer Inventory Increases Three Percent
Dairy replacement heifers (500 pounds or more) totaled 4.1 million on January 1, up 3 percent from a year earlier. The number of replacement heifers per 100 cows stood at a record 45.9. Heifers expected to calve in 2005 were also up 3 percent. Even without availability of Canadian heifers, replacement of more than 31 percent of the cow herd should be possible in 2005.

Beef Cycle Turns
After 8 years of herd liquidation, kicked off by record corn prices in 1995/96 and sustained by persistent drought in many areas through 2003, the expansion phase of the cattle cycle has begun. The cattle inventory rose 1 percent, nearly 1 million head, from a year earlier. The total cow inventory rose half a percent, with beef cows up less than 1 percent and dairy cows up fractionally. Sharp declines in cow slaughter were largely responsible for the
increase in cow numbers over the past year. With another year of modest
cow slaughter and increased numbers of replacement heifers calving, this year’s calf crop is expected to rise, beginning a period of cyclically rising feeder cattle supplies.

According to the February Dairy Outlook published by Bob Cropp at the University of Wisconsin,

"Dairy producers need to seriously consider taking advantage of these relatively strong
milk prices on some of their future milk production via contracting, hedging or buying
PUT options. They need to consider the probability that milk prices could revert back to
higher prices or whether they could fall. It appears that no one is anticipating a sharp
decline in milk prices nor down to levels well below $12.00 between now and September. Milk production is expected to grow 1% plus for the next few months and commercial disappearance also growing 1% plus. There are some factors that could lower prices as we move through the year including the following:

1) January dairy replacements were 4,133,000 head, 2.8% higher than a year ago.
The number of replacements per 100 milk cows was 45.9, 2.6% higher than a year ago and the highest ratio since 1980. But, lifting a ban of replacements from Canada doesn’t appear likely anytime soon.

2) Feed prices remain relatively cheap and the milk-feed-price ratio was 3.63 in January compared to 2.70 a year ago.

3) BST will be in full allocation and FDA has approved the feeding of rumensin for dairy cows. But the economy continues to grow with anticipated favorable sales of cheese. As
mentioned, the herd retirement of CWT will be completed shortly and the Dairy Export Assistance program of CWT, which kicks in when CME 40-pound cheddar cheese nears $1.40 per pound and butter $1.30 per pound, are favorable factors for good milk prices. So in summary, it appears that 2005 is shaping up to be another good year for dairy farmers."

 

2005 Milk Futures on the Chicago Mercantile Exchange
2/28/2005	Feb	Mar	Apr	May	Jun	July	Aug	Sept	Oct	Nov	Dec
Class III	14.70	15.03	15.74	15.35	14.95	15.00	15.08	15.10	14.10	13.45	13.22
Class IV	13.00	13.10	13.20	13.20	13.20	13.70	13.70	13.70	13.50	13.50	13.20
Butter Futures		1.58		1.61		1.61		1.66	1.65		1.535
est. MILC pmt.											0.14
Source: Estimated MILC Payment from http://cpdmp.cornell.edu/

Current USDA Milk Price Forecasts
2/15/05	1st Q 2005	2nd Q 2005	3rd Q 2005	4th Q 2005
Class III Price	13.40 to 14.40	12.30 to 13.30	12.30 to 13.30	12.65 to 13.65
Class IV Price	12.55 to 12.95	11.95 to 12.65	11.85 to 12.85	12.00 to 13.10
Source: USDA, ERS, Livestock, Dairy & Poultry Outlook

Historical Missouri milk prices may be found at: http://agebb.missouri.edu/dairy/mkt/index.htm

Hedging Opportunity Chart for next 12 Months http://www.uwex.edu/ces/milkmarketing/