In the Jan. 12 World Agricultural Supply and Demand Estimates, the U.S. Department of Agriculture raised its 2017 projected prices for all classes of milk, nonfat dry milk, dry whey, butter and cheese despite the expected largest increase in milk production since 2014.

Milk production in 2017 was forecast at 217.1 billion lbs, up 300 million lbs from the December projection and up 4.6 billion lbs, or 2.2%, from an estimated 212.5 billion lbs in 2016. If realized, the increase from 2016 would be the largest year-over-year increase since 4.8 billion lbs, or 2.4%, in 2014 from 2013. Output also would be a record, although it has been record high every year since 2009 when it took a rare annual decline from the prior year.

“The 2017 milk production forecast is raised from last month as improved returns support increases in both cow numbers and milk per cow,” the U.S.D.A. said. In its latest Milk Production report, the U.S.D.A. estimated the number of milk cows in the 23 largest producing states at 8,673,000 in November, up 33,000 head from November 2015, while milk per cow averaged 1,851 lbs in November, up 40 lbs from a year earlier. November milk output at 16,057 million lbs was up 2.6% from the prior November.

Despite the increase in production, the U.S.D.A. raised from December its projections of average prices of milk received by farmers. Class III milk (used to make hard cheese) was forecast to average $16.75 a cwt (midpoint of range), up 50c from December, Class IV milk (used for butter and dry products) $15.70 a cwt, up $1.05, and all milk (includes Class I used for fluid milk, Class II used for soft products as well as Classes III and IV) $18 a cwt, up 75c. The midpoints of forecast 2017 prices were up $1.80 to $1.93 a cwt, or 11% to 14%, from 2016 and were up 85c to $1.35 a cwt from 2015, but were down $5.59 to $6.39 a cwt, or about 25% to 30%, from record highs posted in 2014 when all milk averaged $24 a cwt.

Prices of the four products used to determine milk prices all were raised from December and from 2016 levels. Nonfat dry milk was forecast to average $1.02 a lb (midpoint of price range), up 4c from December and up 19c from 2016 but down 75c, or 42%, from 2014. Dry whey was forecast to average 43c a lb, up 3½c from December and up 14c from 2016 but down 22c, or 34%, from 2014. Butter prices were forecast to average $2.15 a lb this year, up 17½c from December, up 7c from 2016 and up just over 1c from 2014. Cheese prices were forecast to average $1.71½ a lb, up 2½c from December and up 11c from 2016 but down 44c, or 20%, from 2014.

Chart: Milk production versus price

“For 2017, butter, cheese, nonfat dry milk and whey prices are raised from last month on demand strength,” the U.S.D.A. said.

Recent strength in international dairy product prices, partly the result of stronger import activity by China, has been supportive to U.S. dairy product prices. The U.S.D.A. in its WASDE forecast U.S. imports of products unchanged from December, while exports for 2016 were raised on both fat (butter and cheese) and skim-solids (dry products) bases. For 2017, the U.S.D.A. slightly reduced from December its forecast for exports on a fat basis but raised exports on a skim-solids basis.

Still, U.S. dairy products “face significant challenges in the global marketplace,” the U.S.D.A. said in its December Dairy: World Markets and Trade report. “A key issue facing the U.S. dairy industry is the sharp strengthening of the U.S. dollar vis-à-vis the euro, which has been undermining the competitiveness of U.S. exporters. In addition, Russia maintains a ban on imports of dairy products from the United States.”