Soaring feed expenses put a big dent in the year’s strong milk prices. Volatility lies ahead.
Compared to the past two years, many U.S. dairy producers saw an improved and even profitable turnaround in 2011. Milk prices rose to near-record levels and exports resumed their strong pace.
High input costs, however, put a big dent in the profits that $20-$25 milk would typically bring.
Total operating costs for U.S. dairies rose every month from January through November 2011, reaching $17.06 per cwt. for October, according to USDA’s Economic Research Service (ERS). Feed costs alone accounted for the largest operational expense, climbing in October to the year’s highest level at $14.41 per cwt.
Those costs mean 2011 likely will rival – or even surpass – 2008’s high-water mark. Total feed costs in 2008 averaged $12.54 per cwt., ERS figures show. That compares to USDA’s feed-cost average of $11.83 per cwt. for 2011’s first 10 months. In 2010, total feed costs for U.S. dairies averaged $11.17 per cwt.
Dunn calculates this year’s feed increase at 8.5% higher than in 2008. "One big difference this year, compared to previous years, is that corn prices have stayed high since January," says Dunn. "The average corn price for the first 11 months of this year is $6.04 per bu."
Corn, a diet staple for dairy cows, rose to more
than $300 per ton this year for many dairies. In the Texas High Plains, dairy producer Larry Hancock is paying up to $315 per ton for alfalfa hay, $410 per ton for cottonseed and $260 per ton for ground corn.
"One of the challenges we have had to deal with is feeding the cows," says Hancock, whose dairy milks 4,200 cows. "Due to the growth in our area and severe drought the last few years, feed is in short supply. We have had to add acreage, learn to farm ourselves and buy feed from as far away as Montana."
Along with the Texas drought, several key dairy regions face increased feed challenges from weather problems. Hurricane Irene, tropical storms and flooding in several Northeast states downgraded the quality of home-grown feed. "Farmers will be running out of feed this spring and scrambling for supplies," says Dunn.
Like other dairy producers, Slegers is apprehensive about high feed costs in the coming year. California dairies must inventory hay for the winter months when it’s not harvested. With alfalfa hay costing more than $300 a ton, many producers have had no choice but to lock in the forage at those high levels.
"If milk prices go down, we’re looking at red numbers," Slegers says.
In fact, milk prices are projected to decline in the coming months, as rising per-cow output increases overall milk production. USDA forecasts the 2012 All-Milk price at $18.10-$18.90 per cwt., down from $20.05-$20.15 per cwt. in 2011.
Robert Matlick, a partner in the Frazer, LLP accounting firm, anticipates milk prices at $17-$17.25 per cwt. for 2012. He also pegs dairies’ cost of production at $16.50-$18.50, depending on debt levels, management styles and other factors.
"From a numbers standpoint, a lot of producers are looking hard at getting more production out of the cow," says Matlick, whose firm has numerous dairy clients across the U.S. "They learned in 2009 that cutting costs is not the right thing to do to improve margins.
"We’re very cautious about 2012," he adds. "Milk prices and feed costs remain volatile, and there’s a lot of uncertainty in the global market."
A year ago, Matlick’s firm budgeted the 2011 milk price at $15.50 per cwt. "It went to $19.00 [and higher] instead," he says. "That’s volatility."
With exports now an important part of the U.S. dairy industry’s business, many are watching closely
to see whether the world’s economies move forward into recovery or slip back into recession. USDA believes dairy exports will likely decline next year as increased global milk production boosts competition for U.S. exporters. In addition, Europe’s debt crisis, China’s slowdown and the MF Global bankruptcy have cast a shadow over the entire commodities futures market complex.
"If the economy stalls, exports will shrink and we’ll have a dairy surplus," Matlick says.
Efforts to reform U.S. dairy policy will continue to add to industry uncertainty in 2012. On a positive note, USDA expects prices for corn, soybean meal and alfalfa hay to decline in the coming year.
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