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Market Watch Diary: Will Supply Swamp Demand?

January 6, 2013
By: Jerry Dryer, Dairy Today Contributer
 
 

JerryDryer blueOMG! As my granddaughter explains: "Grandpa, OMG stands for ‘Oh my gosh!’ It’s the electronic way to say you can’t believe something happened."

I can’t believe milk production was up 1% in November. Seven thousand additional cows joined the milking herd. Production per cow was up 21 lb. or 1.2%. How could that have hapned?


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Beef prices were very high for months on end. Slaughter cow numbers were growing at a record pace. Milk cow numbers started declining in May. By September, the milk herd was smaller than it had been a year earlier.

Meanwhile, milk prices were too low. Feed prices were too high. Output per cow slipped below the year-ago level beginning in August.

Milk supplies would shrink and the milk price would go up, we thought. End of story.

Instead, production was up 1% in November and it was probably up just as much during December. We’ll know in a few days.

What happened? How did the original story line get upended? Will this rewrite have a happy ending?

p34 Market Watch Diary Will supply swamp demand
All-Milk prices of $21.50 in Octo-ber and $22.10 in November were not the only reasons for a reversal in the milk supply trend in November and December. In addition, a "perfect storm" occurred:

1. Unusually mild weather;
2. More than half of the milking herd under four years of age;
3. Excellent nutrition management in the face of short feed supplies;
4. Comfortable cows.

I’m not a weather forecaster, but today, the $22 All-Milk price is a distant memory. The mild weather during the first quarter of 2012 generated a 4% increase in milk production. Mother Nature will have a tough time replicating weather like that, and you’ll have a tough time replicating a production increase like that.

For many milk producers, feed supplies will be running short. For almost all milk producers, supplies of high-quality feed will be very short. Feed prices will moderate; ditto for milk prices.

Economic reality is also setting in among producers in milk production regions around the world. Output is already below one year ago in Europe and the screw is turn-ing in most of the Southern Hemisphere countries. Output increases have dramatically slowed in New Zealand and Australia. Milk production is lower in South America.

Milk production was up 4% in the U.S., up 1.7% in Europe and up by double digits in New Zealand during the first half of 2012. The world’s consumers are still working through some of this supply, but milk prices were not overwhelmed this year. In the past, this much additional milk would have crushed the market.

The story of strong worldwide demand and modest reductions in the milk supply will have a happy ending. Most signs point toward higher, firmer milk prices in 2013.
 

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FEATURED IN: Dairy Today - January 2013

 
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