Know Your Market
Dairy’s Six-Legged Milking Stool
Jul 06, 2012
A look at the additional factors that influence feed prices today.
By Ron Mortensen, Dairy Gross Margin, LLC
In the old days (5 years ago!), when we talked about the price of feed, we talked about the three-legged milking stool. Corn and soybean meal prices were basically determined by three things: feed demand, exports and weather.
Today feed prices are being influenced by six things – yes, a six-legged milking stool. The legs are exports, feed demand, weather, ethanol production (including the price of gasoline), China and the value of the dollar. Let’s talk about each issue.
A cheap dollar helps dairy exports around the world but it also helps others looking for feed see U.S. grain as cheap.
China’s demand for soybeans has become almost overwhelming. Now China takes nearly two-thirds of all the soybean exports in the world. Plus, they purchased a sizeable quantity of U.S. corn (when prices were much lower).
Ethanol production has grown exponentially the last few years. This year is different as we have not seen any new plants. In fact, lower gasoline prices and slack demand from the driving consumer has slowed ethanol demand. In the last few months, we have seen a few plants close, or go to 65% production. Some have gone to “hot idle” (just keep the vats warm so they can bring it back online quickly). Also, this year the big export demand for ethanol to Brazil has slowed.
Why is important to understand the ethanol slowdown? When an ethanol plant slows down, it can come back online very fast. It is not like killing a sow or a cow, which reduces feed demand for a year. Long term, ethanol use should be capped until the U.S. consumer drives his or her car more miles or when E-15 becomes more readily available.
The weather – well, it was the fifth warmest June in history. Dry conditions have impacted production in southern Illinois and a large part of Indiana. (See map which shows percent of normal rainfall for June 5 to July 5.)
For feed demand, the USDA did provide some data in the grain stocks report on June 29. It showed corn stocks at 3.148 billion bushels. This was close to expectations and implies feed use during the third quarter of the marketing year was close to last year’s number. There is less corn available for feed for the fourth quarter, so presumably there will be more wheat feeding.
The stocks report showed lighter stocks (on a proportional basis) in Illinois, Minnesota and Nebraska compared to last year. There are implications of tighter basis levels for Illinois and surrounding states because of the sizable processor demand centered in Decatur, Ill. These tight basis levels could continue if the Eastern Corn Belt crop size keeps shrinking.
For exports, the U.S. may be saying, “Thank goodness Brazil grew a huge corn crop.” While price has recently reduced the pace of U.S. exports, there is a large, cheaper crop available from Brazil. This will be a welcome supply for buyers seeking a source of supply in the face of the potentially smaller U.S. crop
Over on the soybean side of things, reduced production in Argentina and Brazil is having a big long tail. Reduced supplies down south means increased demand up here for both whole bean exports and crush. Many think soybeans and meal will be tight until February of 2013 as the U.S. will need to supply the world. This makes the current US. crop in the field very important. It will take very large South American production to make the soybean market more comfortable with supplies.
Ron Mortensen is a founder of Dairy Gross Margin, LLC, which was formed in 2006 to sell Livestock Gross Margin Insurance to dairy producers. Mortensen’s firm is now licensed in 23 states. He is also president of Advantage Agricultural Strategies, Ltd., which he founded in 1985, to provide individual risk management advice for farmers and agribusiness using futures, options and cash trading strategies. Contact him at 515-570-5265 or email@example.com.