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What Is Happening with Dairy Cow Numbers?

Aug 17, 2012

The latest data seem to indicate a change of thinking among Midwest and California dairy producers.

By Will Babler, Principal
AttenBabler Risk Management LLC

With high feed costs, negative margins and feed supply reduced by heat and drought, a significant decline in U.S. cow numbers is expected.

U.S. dairy cow number trends are key to fundamentally analyzing the milk market for expected supply and price direction. As cow numbers cycle, we assume the reciprocal impact on milk price (see chart below). It is good to know what is happening to dairy cow numbers.
Babler chart 1   8 17 12

In the current cycle, cow numbers climbed from 9.082 million in December 2009 to a peak of 9.271 million in May 2012. Class III milk declined from $21.67 in August 2011 to $15.23 in May 2012. The historical dynamic associated with declining milk price is a reduction in cow numbers. Combining the milk price decline with sharply higher grain and protein costs, drought conditions and historically very negative margins for many producers, the expectation would be a major decline in cow numbers to be taking place now.

In the past we have seen the following cow number declines:
• 172,000 head decline June 2002 to January 2004
• 28,000 head decline June 2006 to September 2006
• 246,000 head decline June 2008 to January 2010

Currently cow numbers have declined 44,000 head since April. To match USDA estimates, cow numbers need to decline an additional 117,000 head to 9.10 million by early 2013. This would equal a total decline of 161,000 head from peak to trough. Is this type of decline occurring? What is happening to cow numbers today?
 babler chart 8 17 12b

babler chart 8 17 12c

Dairy cow slaughter has been steadily above the prior five-year average and was seasonally sharply higher in July. This largely accounts for the 44,000-head decline in milk cow numbers thus far. It is reasonable to assume that Western slaughter would be up due to the spike in feed costs and the regions negative margins. Drought, heat and uncertainty with feed supply would be expected to impact Midwest producers.

The data supports both of these hypotheses, but what is interesting is variation between the Midwest and West coast slaughter data. The Midwest is accounting for the bulk of recent rise in cow slaughter, indicating that the drought conditions have trumped the poor margins of Western producers in terms of slaughter numbers. In addition, production caps and quotas have steadily been eliminated in California after the squeeze last spring. It is possible that given the improved outlook in profitability, California producers are looking to at least maintain herd sizes heading into the fourth quarter in hopes of capturing higher prices and improved margins.

Looking at daily cow slaughter data that doesn’t separate by cow type (dairy or beef), or capture every cow slaughter like weekly data does, indicates the sharp liquidation in July has reversed course in August. This data can be volatile but, given the jump in milk prices and forward margins, it may also indicate that fewer cows are being sent to market. If so, maybe Midwest producers aren’t as concerned about the drought’s impact on feeding capacity after getting a better assessment of silage and forage potential.

babler chart 8 17 12d

Dairymen nationwide have had the proverbial “book thrown at them” with uncertain feed supply, higher costs, historically negative production margins, balance sheet pressure and uncertain farm policy. In light of all of these unfavorable conditions, dairy cow liquidation has been historically mild thus far. Therefore, it seems likely that either forward profits or milk cow number forecasts will need to change in the months ahead, given the existing data and market signals.

Risk in purchasing options is the option premium paid plus commissions and fees. Selling futures and/or options leaves you vulnerable to unlimited risk. Transaction cost used throughout this report includes both commissions and fees. Atten Babler Commodities LLC uses sources that they believe to be reliable, but they cannot warrant the accuracy of any of the data included in this report. Past performance is not indicative of future results. Unless otherwise stated the information contained herein is meant for educational purposes only and is not a solicitation to buy futures or options.

Will Babler is a principal at Atten Babler Commodities LLC. Contact him at (815) 777-1129 or Wbabler@attenbabler.com. Learn more about Atten Babler Risk Management

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