Dairy Could See Profit Boost

January 9, 2013 01:24 PM
 
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Tightening supplies, higher prices and lower feed costs could boost dairy profits

Shrinking global milk supplies have the potential to drive dairy prices higher in 2013, industry analysts say. Better yet, the prospect of a return to normal weather and a larger U.S. corn crop could send feed prices lower, providing relief to tens of thousands of U.S. dairy and livestock producers.

The big question is whether there’s enough milk to meet the world’s needs after a year of drought, soaring feed costs and shrinking milk output. Despite 2012’s high milk prices of $18.50 per cwt. and more, U.S. and other global dairy producers substantially reduced production.

"In the U.S. and globally, there is a shortfall of milk relative to demand," says Robin Schmahl, hedge and marketing specialist at AgDairy LLC. Hit hard by the drought and high feed costs, dairies responded with heavy cow culling. September saw the end of 31 consecutive months of year-over-year increases in milk output. Among the nation’s top 10 milk production states in October, California cut output by 3.5% from year-earlier levels, a big drop for the nation’s No. 1 dairy producer. New Mexico fell by 5.9% and Texas by 5%.

The milk slowdown both in the U.S. and abroad leads many to anticipate short supplies in 2013. Low dairy farm margins will constrain expansion, and it could take months for herds to rebuild and milk production to ramp up. USDA expects 2013 U.S. milk production to remain at 199.7 billion pounds, equal to this year’s output.

The U.S. Dairy Export Council (USDEC) believes global signs point to continued demand for dairy products. "That means the market will be undersupplied because demand continues to grow and milk expansion has slowed worldwide," says Alan Levitt, USDEC’s vice president of communications and marketing analysis. "The world will need our milk, and it will have to pay for it. Expect higher prices."

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