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The Agriculture Department lowered its 2015 milk production forecast for the seventh time in a row in its latest World Agricultural Supply and Demand Estimates report issued Tuesday and offered its first look into 2016.

2015 production and marketings were reported at 208.6 billion pounds and 207.6 billion pounds, respectively, both are down 1.4 billion pounds from last month's report. If realized, 2015 production would be up 1.3 percent from 2014.

2016 production and marketings were projected at 213.6 billion and 212.6 billion pounds respectively. If realized, 2016 production and marketings would be up 5 billion pounds or about 2.4 percent from 2014.

Milk production for 2016 was forecast higher as improved forage availability and moderate feed costs are expected to support gains in milk per cow. Cow numbers were forecast slightly higher. Commercial exports on a fat and skim-solids basis were forecast higher with a resumption of normal trade patterns.

Imports were forecast lower as domestic production increases and demand from competing importers is higher. With stronger domestic demand and export, cheese, nonfat dry milk (NDM) and whey prices were forecast higher, but butter prices were forecast lower as strong NDM demand is expected to support relatively high levels of butter production.

Class III and Class IV milk prices were forecast higher. Look for the 2016 Class III price to average around $16.70 per cwt. and the Class IV around $16.15.

Forecast milk production for 2015 is lower than last month as drought in the West impacts milk per cow and growth in the cow herd is expected to be slower. Fat and skim-solids imports were raised on strong cheese demand. Fat basis exports were raised on better-than-expected March exports. Skim solids exports were higher based on higher NDM and lactose shipments. Cheese, NDM, and whey prices are forecast lower on weaker demand, but the butter price forecast was raised on strong demand.

The Class III price was lowered on weaker cheese and whey prices. Look for a 2015 average of about $16.30, down from the $16.45 expected last month and compares to $22.34 in 2014 and $17.99 in 2013.

The Class IV price is lower as the stronger butter price is more than offset by the reduced prices for NDM. The 2015 average is put at $14.65, down from the $14.75 projected a month ago and compares to $22.09 in 2014 and $19.05 in 2013.

Speaking of milk prices; the California Department of Food and Agriculture announced their June Class I milk prices at $17.47 per hundredweight for the north and $17.74 for the south, up 41 cents and 40 cents respectively from May but $7.63 below June 2014. They are the lowest June Class I prices since 2012.

The six month Class I average for the north is $17.45, down from $24.53 at this time a year ago and compares to $19.85 in 2013. The six month average for the south is $17.72, down from $24.80 a year ago and compares to $20.13 in 2013. The June Federal order Class I base price will be announced by USDA May 20.

Cash cheese prices remain strong but a crack appeared in the barrels this week. The Cheddar blocks have been resiliently strong, hovering at $1.61per pound for almost two weeks, then inched up a quarter-cent May 8, and closed May 15 at $1.62, up three-quarter cents on the week but 37 3/4-cents below a year ago when they fell almost a nickel and below $2 per pound. This week's block price marked a new high for 2015 and is the highest since December 22, 2014.

The Cheddar barrels marched to $1.6375 on Tuesday, highest barrel price since December 1, 2014, then retreated, recovered some, and closed Friday at $1.6225, up a quarter-cent on the week, 33 3/4-cents below a year ago, and a quarter-cent above the blocks, a spread that normally runs 3-5 cents below the blocks. Two cars of block traded hands on the week and eight of barrel. The lagging NDPSR-surveyed U.S. average block price inched up 0.8 cent, to $1.6128, while the barrels inched 0.1 cent lower, to $1.6655.

Midwest cheese production this week was very similar to last week, according to USDA's Dairy Market News (DMN). Milk flows to plants is in volumes sufficient for full schedules. Surplus milk is available, with pricing varied day by day. Early week pricing depending on timing and location reached $3.00 below Class while late last week available surplus milk was being shopped around at $5.00 below, with some price motivated cheese plants making purchases.

Barrel availability began the week tighter than blocks, but both are more readily available than in recent weeks.

There is discussion of barrel supply tightness "softening on the edges", meaning that non-contract cheese is becoming more available to purchase from plants, with less need to rely on the CME as a backup. Some buyers report that blocks are more available on a spot basis than previously. Manufacturers also seem to be adding to their own inventories, a change from recent patterns where many manufacturers had light inventories due to sales demand. Sales remain strong, but many manufacturers are now producing enough cheese beyond sales commitments to gradually increase manufacturer inventory levels.

Cash butter ended five weeks of gain, climbing Wednesday to its highest level since October 16, 2014 only to give back 5 1/4-cents on Thursday and another 3 1/2 on Friday, and close at $1.9725 per pound, down 1 1/4-cents on the week and 18 3/4-cents below a year ago. Seven cars were sold this week at the CME. NDPSR butter averaged $1.8176, up 1.3 cents.

The question was asked if butter would revisit last year's record high $3.06. "No," says the May 1 Dairy and Food Market Analyst. Editors Jerry Dryer and Matt Gould reason that "Lower exports and increased imports will continue to more-than-cover the butterfat production shortfall and most of the butterfat demand increase. Together, limited exports and larger imports should add enough butterfat supply to prevent a $3.00lb-type of price run (or $2.50lb for that matter). Nevertheless, some in the industry are still calling for the price run."

Gould also reported in Friday's DairyLine that First Quarter 2015 dairy product demand "went crazy." Foodservice sales were up substantially, he said, and the lower prices for both butter and cheese were passed on to consumers at retail so consumption was up across the board. But, growth has not been sustained at those high levels in May, Gould warned. "It's strong," he said, "But not as strong as it was. On the demand side, we're starting to see weakness."

Looking to the supply side, Gould cited the fact that world dairy product prices are substantially below U.S. levels so "We have a target on our back, with boats pointed in this direction loaded with butterfat, either in the form of butter or anhydrous milkfat, which is 99.9 percent butterfat, plus cheese." "We have imports rising and we have demand, still very strong, but not at the extraordinary numbers we saw in the First Quarter."

When asked about milk prices, Gould said he doesn't see a lot of upside from where we are. He said that "a lot of people have been wondering how we can stay this high for so long when the rest of the world has been so far below us."

Looking at the next three to six months, he sees prices "steady to weaker as the dynamics play out where we do have strong demand here at home but, due to imports, we're going to see some weakness."

When asked about China, he stated that China's skim milk powder purchases continue at "reasonable levels" but are fairly slow on whole milk powder as milk production has been up in the region. "I'm not overly excited about China," he concluded.

DMN says Central butter output remains active. Manufacturers still want to make and store butter for future needs. Some are able to while others are concerned about future supplies. The pricing at the CME has several buyers and sellers befuddled. Some feel the market should be going down instead of up. Cream supplies are plentiful although the supply is lower than last week.

Availability of cream continues to be a driving factor for butter production in the West.

Some manufacturers report enough cream to support production schedules. In these cases, there is a desire to sell excess cream rather than build butter stocks. Other manufacturers are struggling to get enough cream and seek supplies from across the region. Increasing competition from ice cream manufacturing has limited the ability of these butter manufacturers to get cream.

Cash Grade A nonfat dry milk closed the week at 89 3/4-cents per pound, down 6 cents on the week and 88 1/2-cents below a year ago. Two cars were sold via the CME this week. NDPSR powder averaged 94.14 cents per pound, down 0.9 cent, while dry whey averaged 43.55 cents per pound, down 3 cents and the lowest level in four years.

Cooperatives Working Together (CWT) accepted 11 requests for export assistance this week from Dairy Farmers of America, Maryland & Virginia Milk Producers, Northwest Dairy Association (Darigold) and Tillamook County Creamery Association, to sell 745,956 pounds of Cheddar, and Monterey Jack cheese, 1.764 million pounds of butter and 9.480 million pounds of whole milk powder to customers in Asia, the Middle East, and Central and South America.

Lee Mielke is a graduate of Brown Institute in Minneapolis, MN. He's formerly the voice of the radio show "DairyLine," and his column appears in agricultural papers across the U.S. Contact him at lkmielke@juno.com.

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