No doubt, 2015 milk prices are headed lower, but the world dairy market is much healthier today than it was six years ago.
U.S. dairy producers continue to expand their herds despite numerous signs that milk prices will soon be headed much lower. According to USDA’s most recent Milk Production report, the U.S. dairy herd, which stood at 9.3 million cows at the end of December, is now nearly back to levels not seen in six years.
“The U.S. milking herd is now larger than it has been at any time since early 2009,” says Sarina Sharp, agricultural economist with the Daily Dairy Report. “After a very prosperous year in 2014, U.S. dairy producers are likely to struggle in 2015 with much lower margins. They could face months of red ink.”
Producers were still receiving healthy milk checks at the end of last year, which spurred U.S. dairy producers to add 22,000 cows in December, the largest month-to-month increase since 2008. December’s expansion came on the heels of an 11,000-cow month-to-month addition in November.
“Clearly, the momentum favors more expansion, but farm-level economics tell a different story,” says Sharp. “The outlook for slim margins is unlikely to halt the construction of facilities already in progress, but it will surely impact cull rates and the desire to add more cows.”
In January 2009, immediately following the global financial crisis, there were 9.31 million dairy cows in the United States. “Milk was abundant and feed costs were sky high,” says Sharp. “That year U.S. dairy producers suffered one of their worst years ever. By the end of 2009, through a combination of forced liquidations and aggressive culling, the dairy herd had contracted by 230,000 head.”
Just like in 2009, U.S. exports have slowed in recent months. China has pulled back on its purchases due to rising stocks and weaker economic growth, the Russian ban on dairy products has created stiffer competition among the world’s major exporting regions, and U.S. exports have become less competitive in world markets due to a plunging euro.
“As was the case in 2009, U.S. dairy product exports are likely to decline dramatically in 2015, resulting in burdensome domestic stocks,” says Sharp. “Low prices will likely prevail until production slows and excesses are depleted. But 2015 is unlikely to be as painful for producers as 2009 was for a number of reasons.”
The biggest difference between 2009 and 2015 is feed costs. Feed costs are much lower now than they were in 2009, so producers might be able to better withstand lower milk prices, Sharp notes.
“Dairy producers have also had an opportunity to sell this year’s milk at prices well above the cost of production, and the new Margin Protection Program could help stanch the worst of the bleeding for those who did not hedge,” says Sharp.
Another thing that sets this year apart from 2009 is that milk production growth is already slowing in Europe, and world dairy product inventories seem manageable. Lower world milk and dairy product prices in 2015 could also help spur demand from Europe and Oceania as world economies strengthen later in the year.
“Overall global demand for dairy products has also risen considerably since 2009, and while there are concerns about the global economy, the situation today is less shaky than it was six years ago,” says Sharp. “Today the nation’s agricultural lenders are also probably less inclined to extend credit to struggling operations. This could encourage some producers to exit the business—especially given current high beef prices—and that could result in a faster contraction and less widespread losses in the long run.”
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