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AgDairy Market Update

RSS By: Robin Schmahl, Dairy Today

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wis. He provides dairy market insight.

Troubling Signs Ahead as Milk Output Continues to Grow

Feb 15, 2013

Dairies will continue to push milk production, despite high feed prices, which may result in a very low milk/feed ratio.

February has provided some hope for milk prices with cheese and butter prices increasing since the beginning of the month.

The magnitude of the price strength was a bit unexpected. Fundamentals have not been much different from January, but, nevertheless, prices have improved. This has kept Class III milk from falling below $17.00, where it was earlier projected.

Price strength does not seem to have stemmed from reduced milk production or tighter supply, but more from the fact that buyers left the sideline. As prices were weakening, buyers held back waiting for lower prices, and were only purchasing hand-to-mouth. Once prices seemed to have set a bottom and began rising, buyers came in to purchase more aggressively in the attempt to beat higher prices.

This generally pushes prices higher as buyers try to outbid each other. Sometimes this unfolds very aggressively, primarily in a tight market. It has been unfolding slowly this year but, nevertheless, taking place. Extra cheese is being purchased to rebuild aging programs with some purchased for anticipated demand.

Milk production and available supply were stronger throughout 2012 than had been expected. High feed prices sent many cows to slaughter, but they were quickly replaced in the nation’s dairy herd. USDA raised its expectation for milk production this year to 201.0 billion pounds, a new record. Even with this production expectation, USDA left expected milk prices almost steady on the latest World Agricultural Supply and Demand report.

This rise in production would be a significantly slower increase than the past few years, but still an increase. The numbers of dairy cows in the nation’s herd is forecast to decline 0.7% this year, totaling 9,170,000 head. Production per cow is estimated to rise 1.0% to 21,920 pounds. USDA thinks dairy farmers will continue to push milk production, despite high feed prices, which may result in a very low milk/feed ratio.

If the current expected averages for the All-Milk price, corn price, soybean price and the recent alfalfa hay price come to fruition this year, the average milk/feed ratio would be 1.40, a record-low ratio. This is certainly not a profitable outlook. I am not making a prediction of this, but just putting current prices and projections in perspective. I do not believe the ratio will be this low.

If, however, it does fall to that level, a second round of heavy culling will be triggered. Increased culling this time may have a greater effect on cow numbers as farmers may not be as willing to fill those stalls with a replacement, especially if dry weather continues and impacts yields. Dairy farmers may not be as willing to hold on and pay the high feed price. If milk supply tightens, resulting in significantly higher milk prices and improving profitability, then this will not be the case, as farmers will respond and keep production strong. This is the cycle that always has been and always will be.

Upcoming reports:

- Global Dairy Trade auction on Feb. 19
- January Milk Production report on Feb. 20
- January Livestock Slaughter report on Feb. 21
- Advanced Federal Order Class I price on Feb. 21
- January Cold Storage report on Feb. 22
- February Federal Order class prices on Feb. 27
- Agricultural Prices report on Feb. 28
- Dairy Products report on March 4

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 website at www.agdairy.com.

The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. There is risk of loss in trading and my not be suitable for everyone. Those acting on this information are responsible for their own actions. 

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