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After skyrocketing to record-shattering highs, milk prices are retreating after product prices moved sharply lower. What's next?

"There's butter everywhere." That's how one knowledgeable source summed up the situation during the first week of August as 63 loads changed hands at the Chicago Mercantile Exchange. Another 28 uncovered offers helped push the cash price 24.75 cents lower to settle at $1.4425.

Some think that's the bottom; others tell me butter could move to $1.40 before a modest seasonal increase arrives.

Cheese prices ticked up again during the first week of the month, but block cheese gave back a penny of the gain it registered earlier in the week. There seem to be a few extra loads of cheese looking for a home and no one appears willing to step up and support the market. There could be some short-term softness before a seasonal, but modest climb gets underway. If the block-barrel price spread gets too narrow, that could also trigger a little support.

Milk moved to the churn during June as cheese makers faced high milk prices and falling cheese prices. But during July, there was a role reversal which continued into this month.

Total cheese production was up just 0.6 percent during June after being up nearly 5 percent through the first five months of the year. Butter output, on the other hand, climbed 15 percent above year-ago levels during June after trailing year-earlier levels almost that much during January through May.

Production of consumables - yogurt and cottage cheese - was up during June as was the production of specialty cheeses. Mozzarella cheese production was below year-earlier levels for the second month in a row; but still up about 5 percent through the first half of the year.

The milk-feed ratio continued above 3.00 for the fourth consecutive month during July. At 3.05, the July ratio was down slightly from June. The all-milk price fell from a revised $18.20 in June to $16.20 during July, but feed prices also moved lower. The corn price fell 37 cents to $2.42; soybeans were down 84 cents to $8.21 and alfalfa hay dropped $3.60 to $98.40.

Feed prices have remained under pressure as excellent crop conditions prevailed in key growing areas; however, forage quality is an issue of concern in some regions.

Although it is not as reliable now, a milk-feed ratio greater than 3.00 has historically predicted an expansion in milk production. However, replacement cow prices have moved sharply higher as producers in the West have gone into expansion mode.

During the past three months, producers in the top 20 states have added 24,000 cows; 15,000 head in California and another 9,000 head in Idaho. Cow prices have increased between $150 and $200 per head in the two states. Gains in some of the 18 states offset lower cow numbers in others.

Bottomline: A significant expansion is underway in the West. During the past 12 months: Milk cow numbers have been flat in Arizona, but were up 41,000 head in California; up 15,000 in Idaho; up 13,000 in New Mexico and flat in Texas. Cow numbers were down in the remainder of the top 20 states.

Western producers hold the trump card when it comes to production per cow suggesting that an expansion in US production is well underway. There's one caveat: Many of the cows joining herds in the West have arrived from other parts of the country.

It looks like milk supply and demand will be relatively good balance for the next few months; however, typical seasonal demand for cheese and butter will likely boost commodity prices above current levels.