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Milk output fell in August as dairies cut herds
Bloomberg News
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Published: 9/19/2009 12:03 AM

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U.S. milk output declined 0.3 percent last month after farmers sold less-efficient dairy cows to stem losses.

Production fell to 15.715 billion pounds (7.13 kilograms), from 15.757 billion in August 2008, the U.S. Department of Agriculture said today in a monthly report. The dairy herd totaled 9.16 million head, down 1.8 percent from 9.331 million a year earlier, the USDA said. Per-cow production was 1,716 pounds for the month, up from 1,689 pounds a year earlier.

"We have less cows but are still getting more milk per cow," said Dave Kurzawski, a risk-management consultant and broker for Downes-O'Neill LLC in Chicago. "Demand is starting to improve and that is beginning to get supply and demand more balanced."

Class III milk futures on the Chicago Mercantile Exchange have plummeted 44 percent from a record $22.45 per 100 pounds in June 2007 as slow global growth and rising U.S. unemployment eroded demand. Today, the October contract rose 39 cents to $12.55, the highest closing price for a most- active contract this year.

U.S. production will fall 0.8 percent to 188.4 billion pounds this year from last year, the USDA said in a Sept. 11 report. Output will decline to 186.7 billion pounds in 2010 the first back-to-back decreases since 1969, according to department data.

The USDA estimated commercial milk consumption will rise 1.5 percent to 187 billion pounds in 2009 compared with 184.3 billion a year ago. Exports are forecast to plunge 54 percent to 4 billion pounds compared with a record 8.7 billion a year ago, the USDA said.

Cow numbers will fall 1.3 percent to 9.192 million head from a year ago, department economists said in a Sept. 17 report. Milk per-cow may rise 0.5 percent to 20,493 pounds from a year ago, according to the report.

Average cash prices this year will drop 34 percent to $12.15 for 100 pounds, the government estimated last week. The National Milk Producers Federation is compensating dairies for the slaughter of at least 187,000 cows this year to prop up prices by curbing supply.

Dairy farmers are culling herds partly because the cost of feeding the animals has been greater than the proceeds from the milk they produce. While U.S. cash-corn prices have averaged $3.31 a bushel this year, down 37 percent from last year, the all-milk price received by farmers was $11.80 per 100 pounds in August, down 53 percent from a year earlier, USDA data show.

"Lower prices for feed ingredients, especially corn and alfalfa hay, have provided an incentive for producers to feed for milk production," even as the cow herd is reduced, the USDA said this week.

Dean Foods Co., the biggest U.S. milk processor, said Aug. 5 that second-quarter profit rose 31 percent because of lower costs for raw milk and energy. Sales fell 14 percent to $2.68 billion as the company passed some of the lower dairy costs to customers.

Class I fluid milk prices, an indicator of raw milk prices, averaged $13.36 per 100 pounds during the quarter, 35 percent lower than a year earlier, according to the U.S. Department of Agriculture.

Whole milk at the supermarket averaged $2.979 a gallon (3.8 liters) in August, down 23 percent from a year earlier and the 9th straight monthly decline, the Bureau of Labor Statistics said this week. That's the lowest since April 2004. Retail prices reached a record $3.96 in July 2008.

"It is reasonable to expect a positive consumer response to lower prices," Downes-O'Neill's Kurzawski said. "We are also starting to see a slight improvement in export demand."