Market Watch Diary: Feed Costs Create Pinch

September 24, 2010 04:09 AM
 

 

Bonus Content

USDA's World Agricultural Supply and Demand Estimates

The business of milking cows is looking better heading into the fourth quarter of 2010; the All-Milk price is on track to approach $18 in the last months of the year.

Like the old industry adage says, money makes milk. In the first eight months of the year, dairy producers have added the equivalent of a 1,500-cow operation every week. Milk production in June to August was up 2.7% from the year before. With historically high prices ahead, the fourth-quarter output should grow by at least that much.

But 2011 could be a different story. As producers have learned over the last few years, profitability is a two-variable equation.

Those that didn’t get their 2011 feed hedged are now facing much higher prices. Corn futures rose more than 30% from mid-July to mid-September. When corn costs more than $5/bu. (at this writing, futures are well beyond that level), $18 milk isn’t enough to turn a profit.

 

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The rally on corn was jump-started by a severe summer drought in Russia, which led to a ban on wheat exports. Wheat futures took off and corn and soybeans followed.

In addition, diversion of corn for ethanol continues to increase. Use was up 22% this year, due in part to increased government mandates, and it is projected to climb another 4% next year. Ethanol is expected to consume nearly 36% of next year’s corn harvest, up from 14% only four years ago.

In its latest Crop Production report, USDA trimmed supply estimates for this year’s harvest. Ending stocks were forecast at 1.116 billion bushels, down 196 million from the August estimate. Stocks as a percentage of total use could be the lowest since 1995–96, the report says.

USDA projects corn to average $4/bu. to $4.80/bu. this marketing year, rivaling 2007–08 as the highest average ever. That will send milk-feed ratios south of $2 in 2011.

As a result, dairy producers may be collecting Milk Income Loss Contract payments from February on, says National Milk Producers Federation. Based on futures prices, NMPF says subsidies will be 42¢/cwt. to 72¢/cwt. next spring and summer.

Will domestic and international dairy demand be strong enough to sustain $18 milk next year? Milk
futures indicate that they won’t, which means dairy producers could find themselves in another profitability pinch in the year ahead.

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