Price Recovery Sure But Slow
Dec 21, 2009
By Robin Schmahl
A very difficult year is drawing to a close. Milk prices have been below the cost of production all year for most farmers, with only year-end prices moving nearer breakeven for dairy farms. Yes, it is always sad to see another year moving to the past, but the anticipation is for a better year ahead.
National unemployment rates still remain high, and it does not appear this will change anytime soon. Unemployment effects will continue to trickle down through all areas of the economy as consumer buying power and disposable income is significantly lower.
How this will translate into dairy product demand is yet to be seen. Both domestic and international demand was lower this year had a great impact on prices. Butter exports for the first 10 months of the year totaled 40.8 million pounds, a decrease of 78.0% according to the Foreign Agricultural Service. Exports of cheese and curds covering the same period of time fell by 59.8 million pounds or 23.9%. Nonfat dry milk exports for first ten months posted a 40.0% decline.
The good news is that export interest in beginning to increase. Interest has developed for butter, causing some butter manufacturers to churn 82% butter and build inventory for potential exports. October nonfat dry milk exports in October were 48.0% higher than September and 18.8% higher than the same month last year. International prices are strong lending support to domestic prices.
USDA estimates the national dairy herd will decrease 2.5% in 2010 to average just below 9.0 million head. However, estimated milk production per cow in expected to increase 1.84% above 2009 with an average production of 20,950 pounds. Class III price is forecast to average $15.15-$15.95/cwt. Class IV price is forecast to average $14.60-$15.50/cwt. while the all-milk price should average $16.35-$17.15 cwt., according the recent “Livestock, Dairy, and Poultry” report.
Cooperatives Working Together is taking the credit for increasing milk prices in 2009 by $1.54/cwt., according to an independent economic analysis study. Through the reduction of cow numbers and export assistance, we can say milk prices did not fall as far as they could have, according to this study.
Because the country is not in a controlled environment -- with many other factors being a part of what drives the milk price during the year -- this price may not be accurate. Lest we think this solely added to our mailbox milk check, consider that farmers in the program contributed to make this happen. Low milk prices were the largest contributing factor to the higher milk prices we are now seeing. Cow numbers fell as culling became aggressive and a matter of necessity.
In August, milk production in the country finally moved lower than the previous year, further tightening milk supply. Some states, mainly in the Midwest, continue to increase production over a year ago. Western states have been hit hard with the low milk prices, sending year-over-year production significantly below a year ago.
Now that milk prices are improving, some farms are facing liquidation. Banks are assessing their ability to repay loans and are moving to remove bad debt. It is sad to see dairy farms weathering the storm of a year of low prices only to be forced to liquidate once price begin to improve.
The fact is that the market does not care who stays in business. It moves product and price according to supply and demand. I know there are those who feel the market is manipulated, and that co-ops and private milk plants are out to get them. However, supply and demand drives the market and a small increase in either direction moves the market significantly.
The latest Livestock Slaughter report and the November milk production report are showing effects of improved milk prices with lower slaughter numbers. Dairy cattle slaughter in October fell below the previous year for the first time since April. Cow numbers on the November milk production report were 7,000 head lower following a streak of large declines. Improving milk prices will generally result in less culling as farmers first hold on to cows and add new replacements to the herd as heifers freshen.
The wide block/ barrel cheese spread is a real cause for concern as well as the weakening butter price. Block cheese price remains strong, but for how long? I do not anticipate price to fall drastically, but a retracement in price is likely.
Remember, keep abreast of the market situation and take steps to protect feed prices and milk prices when the opportunity arises. Focus on risk management -- and not greed -- in the coming year.
Upcoming reports to watch for are:
- November Cold Storage report on Dec. 22
- November Livestock Slaughter report on Dec. 24
- Commercial disappearance on Dec. 29,
- December Agricultural Prices report on Dec. 30
- December class prices on December on Dec. 31
- California 4a/b prices on Dec. 31
--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 Web site 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 may not be suitable for everyone. Those acting on this information are responsible for their own actions.
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