By Robin Schmahl
There has been and still is controversy over the duration of low milk prices. Obviously, many in the industry are concerned over milk prices that will be significantly below the cost of production. Changes are being made in all areas of the individual farms to lessen the impact of the lower milk prices. The Milk Income Loss Contract payments will begin in the month of February aiding the bottom line to some extent. However, the duration of this downturn in price is the real concern.
The low milk prices should affect production quickly as cows will be culled to cut back on expenses and provide some immediate income. However, this will decrease the amount of milk in the tank resulting in less income on the milk check. There will be cows and heifers available for purchase to fill the empty stalls, but will it be cost effective to do this? This is a time when pencils will be pushed, all aspects of the farm will be scrutinized, hope will reign, and in some cases decisions will be made to exit the dairy business.
The downturn in prices was bound to come as history will always repeats itself and higher prices will always result in more milk production, eventually tipping the balance to an oversupply relative to demand. We have seen the movement to rBST-free milk and have experienced the CWT herd reduction programs which were anticipated to keep the milk prices high.
These two items, as well as others, were anticipated to limit production enough to insure continued high milk price. However producers will always respond to higher prices with more milk production. The high grain prices in 2008 had limited impact on production. Some feed was forward contracted while others made adjustments resulting in 4.0 billion more pounds of milk produced in 2008 from the addition of 113,000 head of cows according to the USDA. Milk production in 2008 increased 2.2 percent over 2007.
It sadly appears that low milk prices may be with us for some time. Overall dairy exports for November were $219.5 million, a decrease of 37 percent from last year and 37 percent from the first 8 months of the year. The bright spot is that overall exports for the year are running 32 percent higher than the previous year. The first three quarters of 2008 showed great export demand, but unfortunately this is coming to an end. Cheese exports continue to decline with November exports totaling 8,498 tons, down 11 percent from last year. Butterfat exports in November were 3,923 tons, down 43 percent from a year ago. This is less than half of the monthly volumes exported in the January-October period. Exports of nonfat dry milk/skim milk powder in November were 16,025 tons, down 44 percent from a year ago and the lowest amount in over a year. The recent trend does not bode well for the early part of this year. We cannot expect milk price to turn around until the economies of the world improve, people feel confident about their jobs, and people go back to work.
The February California Class I prices are giving an indication of what will be seen in the federal orders. The price was announced at $11.27 in the North and $11.55 in the South. This was a decrease of $6.15 and $6.14 respectively and the lowest prices since 1979.
The USDA lowered their estimate for milk production for 2009 from 191.4 billion pounds to 190.4 billion pounds. This would still be an increase of 900.0 million pounds from 2008 and the smallest increase since 2004. The all-milk price is estimated to range from $11.80-$12.60 versus the previous estimate of $14.95-$15.75. The Class III average was lowered $3.90 per cwt to the range of $10.60-$11.40 with the Class IV decreased 75 cents to $10.00-$10.90 per cwt.
There is no question 2009 will be very challenging. The current milk futures do not offer much in the way of opportunity for price protection. The focus should remain on feed protection. The market has experienced two bearish supply and demand reports, but prices continued to remain in an overall uptrend. Corn is about 80 cents per bushel higher, soybeans are $2.40 per bushel higher, and soybean meal is $80.00 per ton higher than a little over a month ago. Do not be complacent and remain satisfied with purchasing your feed hand-to-mouth as some suggest. Initiate a strategy to protect against higher feed prices.
Upcoming reports to watch for are the December Cold Storage report on January 22; the December Livestock Slaughter report on January 23; the February advanced Class I price on January 23; the January federal order Class prices on January 30; the January Agriculture Prices report on January 30; and the California Class 4a/4b prices.
--Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their Web site at www.agdairy.com.
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