Know Your Market
U.S. Dairy Herd Increasing, Concerns for Milk Prices Ahead
Jul 03, 2014
These market analysts warn of the historical relationship between increases in the dairy cow herd and subsequent declines in milk prices.
By Will Babler and Luke Strub, Atten Babler Commodities LLC
Record milk prices and attractive margins have enticed producers to decrease their dairy cow culling rates and maximize their potential milk output. The 2013-14 year to date (YTD) dairy cow slaughter is 8.6% lower than last year through May, with recent declines in the slaughter rate accelerating. May 2014’s U.S. dairy cow slaughter of 209,300 head was 15.5% behind the 2012-13 slaughter rate and 11.9% lower than April 2014 on a daily average basis. The May 2014 YOY slaughter decline of 15.5% was the largest monthly decline in nearly four years, and 2013-14 YTD dairy cow slaughter is on pace to be the largest annual YOY decline in nine years.
Increasing Dairy Cow Herd
Recent declines in dairy cow slaughter have led to an increase in the U.S. dairy cow herd. Dairy cow numbers have increased each of the past six months, with a total increase of 54,000 head throughout the period. The number of dairy cows on farms increased by 10,000 head in May 2014, to 9,252,000 total head, the highest figure since May 2012. Dairy cow herd and milk per cow figures were not published from Mar 2013–June 2013 due to government sequestration so a YOY analysis is not available; however, milk production increased 1.2% YOY from Mar 2014–May 2014.
The Effect of Herd Expansion on Prices
Previous run-ups in cow numbers, many times a result of high milk prices, have led to significant subsequent corrections in milk prices. From 1998-2013, the top three percent of month-over-month (MOM) increases in U.S. dairy cow numbers corresponded to an average decline in the U.S. all-milk price of 7.3% in the following month and 23.2% at the trough.
Current Production Environment
In the current environment, increases in the dairy cow herd have been crucial in keeping U.S. milk production afloat. Milk-per-cow yield has been hampered by poor forage quality and adverse weather conditions in the first half of the 2013-14 production season, leading to marginal production gains compared to other major exporting regions. The 2013-14 YTD milk-per-cow yield increase of 0.7% is less than half of the previous 10-year average milk-per-cow yield increase of 1.6%.
Milk per cow yield normalized in May 2014, increasing by an estimated 1.6% YOY as Midwestern producers rebounded from the effects of cold and wet weather. Increasing milk per cow yield, coupled with the increase in the domestic dairy herd, is expected to amplify increases in U.S. milk production in the following months. According to the June USDA World Agricultural Supply and Demand Estimate report, 2014 U.S. milk production is projected at 206.1 billion pounds, a 2.4% YOY increase. At the time of publication, 2014 YTD (Jan-Apr) milk production was up 1.0% YOY, implying milk production growth is expected to accelerate to a YOY growth rate of 3.1% for the rest of the year.
With near-record milk prices and attractive margins continuing, producers will look to continue the trend of decreased dairy cow culling in future months, expanding the domestic dairy cow herd. Dairy producers should be wary of the historical relationship between increases in the dairy cow herd and subsequent declines in milk prices, especially as regional milk-per-cow yields normalize and milk output strengthens.
Will Babler is a principal with Atten Babler Commodities LLC. The firm serves producers, processors and end users in the dairy industry by providing education, margin management programs and futures and options brokerage services. You can reach Atten Babler Commodities at 800-884-8290, firstname.lastname@example.org or www.attenbabler.com.
The information and comments contained herein are provided as general commentary of market conditions and are not and should not be interpreted as trading advice or recommendation. The information and comments contained herein are not and should not be interpreted to be predictive of any future market event or condition. Information contained herein is obtained from sources believed to be reliable, but cannot be guaranteed as to its accuracy or completeness.