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June 2009 Archive for Dairy Talk

RSS By: Jim Dickrell, Dairy Today

Jim Dickrell is the editor of Dairy Today and is based in Monticello, Minn.

Dairy Prices Might Not Recover Until 2010

Jun 23, 2009

By Jim Dickrell

I have to stop going to ag outlook conferences—or at least leave the room when dairy economists talk. It’s just too darn depressing.

I spent a couple of days in Chicago last week attending FCStone’s Market Outlook Conference. The only immediate good news out of the meetings was that dairy prices are probably at their bottom.

I say probably because there was even some disagreement over that. Two of the economists, Bill Brooks, with FCStone/Downes-O’Neill, and Ken Bailey, formerly with Penn State and now also with FCStone/Downes-O’Neill, do their analysis based on supply and demand fundamentals. They both say we're at the bottom.

But Peter Ullrich, a Harvard-educated technical analyst, says the market is probably at the bottom but it’s too soon to know for sure. “We are developing a little bit of positive momentum, but not enough yet to determine a trend,” he says. “We’re very close to a turn in the trend.”

The real disagreement was over when prices would return to profitability. Here, Ullrich was the most positive. He believes dairy markets are set to come roaring back, perhaps reaching $18 or even $20 by November or December.

Bailey and Brooks are far less optimistic. Seven years ago, when the Class III prices rose above $10 for just one month between July 2002 and June 2003, it took 11 months before cow numbers started to liquidate. “And then it took another 10 to 11 months to take out just 129,000 head,” Bailey says.

He also says most dairy importing countries around the globe have negative gross domestic product growth (GDP) this year, making it extremely difficult for them to purchase dairy products. There likely will be a slight recovery in GDP growth in 2010, but Bailey doesn’t see economies fully recovering until 2011.  “The slow GDP growth is offsetting falling dairy prices,” says Bailey. “So we may not see a bump up in global prices until next year.”

Here at home, Brooks says income over feed cost (IOFC) projections remain bleak for U.S. producers. “Anecdotally, IOFC needs to be about $8/cwt to breakeven, and it’s been below $8 since December,” he says. “It could be later this year, or even 2010, before we reach breakeven.”

For milk supplies to tighten enough to raise prices, Brooks says the national herd size needs to decline to 8.8 or 8.9 million cows. “We probably need to go a little further than 9 million,” he says.

Last week’s May milk production report says there are still 9,275 dairy cows in the country. That estimate likely still includes the 100,000 Cooperatives Working Together that are going to market this month.

Even so, taking the national herd to 8.8 or 8.9 million cows means we still have to cull another 275,000 to 375,000 cows after the CWT round before prices improve substantially.

Jim Webster, a Washington insider since the Nixon years and editor of the Webster Washington Letter, says a legislative fix is not on the horizon. Congress and USDA have little interest in raising milk prices to the current cost of production by taking more milk off the market. USDA will spend more than $1 billion this year and more than $500 million next year in Commodity Credit Corporation dairy surplus purchases and Milk Income Loss Contract payments.

There’s also little support for supply management schemes, he says. “Sen. Patrick Leahy (D., Vt.) is the most likely candidate to champion dairy farmers, but [as chairman of the Senate Judiciary Committee] he is pre-occupied with confirming a Supreme Court justice,” says Webster.

The National Milk Producers Federation Strategic Planning Task Force is set to meet this week.  One can only hope its members will be able to do some very creative, out-of-the-box thinking. Simply tweaking CWT won’t get it done.

—Jim Dickrell is editor of Dairy Today. You can reach him via e-mail at jdickrell@farmjournal.com.

This column is part of the Dairy Today eUpdate newsletter, which is delivered to subscribers biweekly and includes dairy industry analysis, dairy nutrition information as well as the latest dairy headline news. Click here to subscribe.

 

Is CWT Part of the Dairy Price Problem?

Jun 08, 2009

By Jim Dickrell

Rather than being part of the solution, the Cooperatives Working Together herd buyout program might be part of the problem.

Tom Elam, a PhD economist and president of FarmEcon, LLC, voiced some unpleasant truths in a series of dairy producer meetings sponsored by Elanco last week in Iowa, Wisconsin and Minnesota. Elam notes every livestock sector in the United States is faced with unprecedentedly high feed costs and sharply lower exports.

“All other livestock segments have already made major adjustments and reductions in meat supplies,” Elam says. “But the dairy industry is not making any adjustments.”

Elam estimates the U.S. dairy herd must fall 300,000 cows for supply to come back in balance with demand. Through April, USDA estimates cow numbers have fallen just 30,000 head from January, meaning we’re just 10% of the way to recovery.
 

Another 100,000 head will be culled through the seventh CWT round in the next month or so. But even then, we’ll be barely half way to the 9 million head level we need to be.

Elam walked through the same slow slog of CWT implementation that I complained about in this column a month ago. First, dairy producers wishing to bid in the CWT had to wait months for the sign-up announcement. Then they had a month to bid, and waited another week or two or three to see if their bids were accepted. Meanwhile, other producers were waiting to see how many cows were accepted into the program.

In the meantime, everybody stopped culling. USDA’s April slaughter report shows 23,000 fewer cows were slaughtered than in March, and amazingly, 4,000 head fewer than a year ago when milk prices were $6 to $8 higher.

And when everybody stopped culling, as much or more milk is coming to market. Every processor I talked to last week at the Minnesota Dairy Leaders Roundtable and at the Elanco meeting was reporting milk intakes that were equal to or greater than this winter. In the Southeast, milk tankers are waiting 15 to 18 hours in line simply to unload, USDA reports.

What’s happening is every producer is waiting for his neighbors to blink first. And prices aren’t improving. The June Class I price came in at $10.08/cwt. The May Class III price was announced last week at $9.84; the May Class IV at $10.14.

At the Elanco meetings, Elam couldn’t predict when milk prices will rebound to profitability. The best he could do: “We could see fourth quarter all-milk prices at $14/cwt,” he says. “But 300,000 cows (including the 100,000 CWT leaving this month) will have to go away by the end of the year.”

So the question is two-fold: Who will blink? And when will they blink? One producer I sat with at lunch last Thursday made this prediction: “Things won’t turn around until everyone is convinced things won’t ever get any better.”

My advice: If you can’t survive the next six months at your current mailbox price, don’t let what equity you have left erode further. The sooner you make that decision, the better off you and the rest of the industry will be.

—Jim Dickrell is editor of Dairy Today. You can reach him via e-mail at jdickrell@farmjournal.com.

This column is part of the Dairy Today eUpdate newsletter, which is delivered to subscribers biweekly and includes dairy industry analysis, dairy nutrition information as well as the latest dairy headline news. Click here to subscribe.

 

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