Lower feed costs, higher milk prices and intense competition for dairy markets lie ahead, market analyst says.
The 2013 dairy and feed outlook is a case of the good, the bad, and the ugly, a feed and dairy market analyst said last week at World Ag Expo in Tulare, Calif.
Joel Karlin, commodity manager and market analyst for Western Milling in Goshen, Calif., said the prospect of much lower feed prices and record-high milk prices should provide some relief to dairy producers this year, although California dairies face particular challenges.
On the negative side, he added, there’s still too much milk for the level of demand, and the U.S will face intense competition from other global dairy producers.
Here’s how Karlin broke down his dairy-feed forecast during a dairy seminar at the annual farm show:
• USDA is forecasting a drop in 2012 U.S. milk production, which has not happened since 2001. That may help keep the milk supply better balanced with demand.
• Other key milk-producing regions, including Oceania and the European Union (EU), also are expected to reduce output.
• U.S. fats and skim solid exports will maintain strong growth as dairy demand in such key countries as China continues to boom.
• Hopes of a stronger U.S. and global economy may help resuscitate dairy demand, especially in away-from-home establishments.
• Hopes of good U.S. corn and soybean production after three consecutive, poor growing seasons may be compromised by the persistence of the mega-drought that torched crops last year.
• Even with the end of the ethanol boom, 5.5 billion bushels of corn will still be used while feed demand in developing countries continues to grow.
• The U.S. dairy industry still has no consensus on a national milk supply program, with a one-year extension in the farm bill and regional differences of opinion.
• Even with an aggressive rate of culling, cow numbers remain strong, with a large cohort of replacement heifers and an unwillingness of many to exit industry.
• Dairy production outweighs demand. Milk consumption is down and product utilization also is falling.
• There is intense competition for export business from Australia, New Zealand, and the EU, with Ukraine and Brazil waiting in the wings
• "There is no excuse for dairy producers’ complete disregard of price risk management tools," Karlin said. Studies do show contracted prices are often lower than the average but variability is much lower. No industry is guaranteed to attain at least the cost of production.
In focusing on the feed markets, Karlin said the year will see "an interesting transition from tight old-crop stocks to [a situation] that could feature much more ample supplies by fall."
If greater feed crops materialize, "dairy producers may get significant relief in feed costs the second half of the year," said Karlin.
"Weather will be key, especially with the mega-drought even more widespread and intense than seen last summer," he said. "A common refrain on possible corn prices is anywhere from $4-$9 per bushel."
Feed demand in all sectors has been pared back over the past few years and may be slow to return. "The combination of big crops -- due to large plantings and some semblance of normal weather -- and depressed demand could result in much larger ending stocks and far lower prices than many imagine," Karlin said.
Karlin listed these bullish factors for feed markets:
• The ongoing U.S. drought means there are no subsoil moisture reserves, which is bad for corn;
• It will take more than one year of good output to rebuild depleted grain and oilseed stocks;
• World demand for feed, especially in developing nations, continues to increase;
• Yields are not keeping up with demand, with limited scope to increase planted acreage;
• Easy money policies being pursued by world central bankers are adding to liquidity.
He also sees these bearish factors for feed markets:
• We’ll see record U.S. soybean plantings and the highest corn acreage since 1936;
• Can weather be bad for three years in a row?
• Ethanol production has topped out, based on economics and close to mandated levels;
• Demand will be slow to return, after a drop in animal numbers and losing key export markets;
• Production is set to increase in other regions of the world as farmers are certainly incentivized;
• Prices could take a tumble if weather cooperates and demand is slow to return.
Karlin offered these take-home points:
• Milk prices already are being forecasted at record highs, with $20 per cwt. a barrier after all these years;
• High prices are predicated on output declines in key producing countries. Will this happen?
• Record cull values and the need to generate cash should keep slaughter rates high. But will entry of heifers into the herd slow?
• The move to new highs by the stock market may reflect increased optimism about fate of the U.S. and global economy. If so, that could lead to rising consumer confidence, spending, restaurant traffic, and the consumption of dairy products
• Dairy producers may see significant relief in feed costs. Will this translate into more concentrate inclusion and increased milk per cow numbers?
• The U.S. needs to manufacture dairy products that consumers want, both here and abroad.
• U.S. dairy export potential is huge as Australia and New Zealand production gains are constrained by limits on their pasture-based dairy systems.
• California dairy producers face particular challenges with high forage costs, milk pricing disparity, increasing attractiveness of perennial crops on farmland.