Forecasting Class III and Class IV Milk Prices

Despite the growing volume, trading in milk remains small in comparison to grain and livestock. Part of the reason for limited trading volume is that dairy futures trading is very new compared to grain and livestock trading. There is less experience with risk management strategies and a much smaller research base with respect to basis relationships and price forecasting. Dairy farmers are still "feeling their way." The purpose of this study is to provide a systematic, user-friendly method for forecasting Class III and Class IV prices. The user is allowed to vary regional milk production and stocks of manufactured dairy products to evaluate the sensitivity of point estimates. A sequential process is developed to predict Class III milk prices up to 12 months in advance using widely-published outlook data as predictor variables. The first stage involves deriving monthly U.S. milk supply forecasts using trend extrapolations for regional milk cow numbers and milk production per cow. Users may modify trend values based on personal expectations. In the second stage, the projected monthly U.S. milk supply is allocated to Class III and Class IV manufactured products (butter, cheddar cheese, nonfat dry milk, and dry whey). Underlying these forecasts is a set of econometric relationships that estimate production of the manufactured products based on total milk production and other variables.