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Dairy Talk

RSS By: Jim Dickrell, Dairy Today

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

Dairy Prices on Knife’s Edge

Oct 25, 2010

As U.S. producers continue to push more milk out the milk house door to maximize cash flow and recover equity, they’ll need every bit of their domestic and export markets to move product and floor prices.

 

The news the last few weeks hasn’t been great for milk prices, and cheese markets have been reflective of that skittishness.

Last week’s September milk production report didn’t help matters. September milk production was up a whopping 3.3% nationally (3.6% in the 23 major dairy states). And despite all the Cooperatives Working Together (CWT) efforts to send 34,000 cows to their maker years ahead of their time in August and September, U.S. cow numbers trail year-earlier levels by just 4,000 head and month-earlier numbers by just 2,000.
 
As troubling as all that is, the welcomed (and needed) higher milk prices this summer have also pushed retail prices up as well. Even though the Great Recession is over, Federal Reserve Chairman Ben Bernanke forgot to memo consumers: August fluid milk sales declined 2.3% with year-to-date fluid sales down 1.5%. Although fluid milk sales represent just 27.6% of total milk production, a decline of 1.5% means a loss of market for 800 million pounds of milk. That’s employment for 40,000 cows—or roughly 18% more cows than were taken out in the latest CWT round.
 
Then, if we needed more bad news, USDA estimates U.S. corn yields will decline 6.7 bu./acre this year, a 4% total yield reduction from previous estimates. This is still the third largest corn crop ever. But EPA’s recent announcement to allow 15% ethanol in gasoline for 2007 and later model cars sent Chicago corn trades limit up two days in a row. The end result: Corn prices are in the high $5 range, and toying with $6.
 
Yes, eventually, high feed prices will make higher milk prices. But as Robin Schmahl pointed out in his column last week, the correlation isn’t 1:1 nor is it immediate. The only reason higher corn prices mean higher milk prices is that higher feed costs will drive some cows into early unemployment. But as we learned in the debacle that was 2009, that can take a while.
 
So is there any reason to hope 2011 will be better? Actually, there is. Alan Levitt, our Market Watch Diary editor, says U.S. dairy exports have rebounded incredibly from 2009. He’ll lay out the numbers more completely in his November column, which mails Nov. 3. But here’s the CliffsNotes’ version:
 
In 2008, U.S. exports were roughly 11% of total milk production on a solids’ basis. In early 2009, exports crashed to almost half their volume, but still finished the year at 9.3% of total production. This year, through August, our exports are up about 40% and now account for an astounding 12.2% of total production.
 
“In other words, we’ve found a home for about 3% of our milk supply that we didn’t have last year. That’s critical in a year when milk production has been up 2.8% since June,” writes Levitt.
“Three percent of our milk supply is 5 to 6 billion pounds of new or renewed market that won’t be hanging over the domestic market.”
 
Yes, the dollar is weaker, off 9% compared to the euro since Labor Day. But the U.S. Dairy Export Council reports solid demand for dairy products in developing nations. The Kiwis are focused on exporting whole milk powder to China, which means they don’t have a whole bunch of other products to sell to other buyers. Since January, their skim milk powder production is off 14%, butterfat -17%, cheese -4%, and whey down a whopping 48%. That means more opportunity for us.
 
U.S. marketers are also getting more export savvy. One large U.S. cheese processor tells me it is finding sustainable, on-going demand for its barrel cheese. Not low-value powder but cheese, and in a barrel. It had to do some re-tooling to get it done, but now that it has, it has a steady Asian buyer.
 
(Note: Conventional U.S. barrels don’t pack neatly into ocean-going containers. As a result, there is wasted head room in the containers, making it more expensive to ship. By re-sizing the barrels, the containers can now be fully loaded. The Asian buyer was also used to buying block cheese. But that’s more expensive and more difficult to handle. So the American manufacturer worked with the buyer to retool his factory to handle the new barrels. It was a win-win for everyone.)
 
The message here is the U.S. is becoming dairy export competitive. As U.S. producers continue to push more milk out the milk house door to maximize cash flow and recover equity, they’ll need every bit of these markets to move product and floor prices. Without them, it’s 2009all over again.
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COMMENTS (1 Comments)

oaborndaleivanhoe
Jim - profitability of milk production calculated from milk, corn and soybean meal futures prices starts to get pretty low after October. I think it likely that CWT will announce another herd retirement if they have money to do so. However, herd retirements are figured in to dairy economics much as are subsidies for cash grain farmers. Perhaps its time for CWT to turn out the lights and allow market forces to work their magic. Once dairy cows are worth pnly $750 and Holstein bred heifers are worth only $900, we can begin to see more dairy going to the slaughter and feeder sales and fewer entering the milking string. Six years of CWT has given all of us plenty of time to learn to use milk marketing tools, and figure out how to produce milk at low cost.
7:22 AM Oct 26th
 

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