Is There Enough Milk?

January 6, 2013 07:28 PM
Is There Enough Milk?

Tightening supplies, higher milk prices and lower feed costs could boost profits this year.

Could dairies see higher milk prices and lower feed costs in 2013?

Shrinking global milk supplies have the potential to drive dairy prices higher in 2013, industry analysts say. Better yet, the prospects 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.

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The big question now 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 higher, 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 with AgDairy LLC.

Hit hard by the drought’s high feed costs, U.S. dairies responded with unusually heavy cow culling. In September, they ended 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 a whopping 3.5% from year-earlier levels, a big drop for the nation’s No. 1 dairy producer. New Mexico fell 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 everywhere 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 in 2013 because demand continues to grow and milk expansion has slowed worldwide," says Alan Levitt, USDEC’s vice president of communications and marketing analysis. "The market absorbed Oceania’s [New Zealand and Australia] 2012 peak production flush, and prices didn’t go down."

Mark Stephenson, director of dairy policy analysis at the University of Wisconsin, agrees. "The world market took Oceania’s dairy products without a major depression in prices," he says. "That tells me the world is ready for dairy products."

In fact, export demand will remain strong for U.S. dairy products, particularly for powders, Levitt says. Exports of U.S. dairy products now account for nearly 14% of the nation’s milk production. World trade is expected to rise 10% this year, and the U.S. is maintaining its market share.

"Next year, the world will need our milk, and it will have to pay for it," Levitt says. "Expect higher prices."

In the U.S., dairy demand has held up well through 2012’s lackluster economy. Stephenson has looked at several key demand indicators, such as restaurant performance, and sees improvement that bodes well for consumption of dairy products. "Consumers are starting to spend again," he says.

Another bullish factor is the potential for increased corn production if the weather returns to more normal patterns in the Midwest. "That could pressure corn prices down to $5 per bushel," Schmahl says.

Based on late 2012 futures markets, Stephenson also projects soybean meal prices to decline about $70 per ton. Corn prices are likely to hold steady until next fall’s harvest, when increased production fills inventories. He expects to see corn prices then decline by $1 per bushel.

Levitt, on the other hand, doesn’t see a drop-off in feed prices. "In fact, I expect corn to make another run at $8 and maybe more," he says. "We have very low stocks to buffer volatility, and any shock to the system could cause prices to take off again."

Whichever direction feed prices take, milk prices seem poised to climb higher. "I’m optimistic that tight supplies in milk could push prices up about $1.50 per cwt. next year," Stephenson says. Like USDA, he foresees the All-Milk price reaching $20 per cwt. in 2013, compared with this year’s $18.50.

"Milk prices will head up and feed prices go down," Stephenson says. "Dairies’ margins will be vastly improved."

But that optimistic outlook is tempered by uncertainty over the weather, economy, government budget problems and the new farm bill.

"Two-thirds of the U.S. remains under drought conditions," Levitt says. "The drought is out of the headlines, but we’re not out of the woods yet."

Although abating feed prices are expected to ease profit pressure on U.S. dairy producers, USDA says the drop won’t be enough to spur an expansion in cow numbers. The nation’s cowherd is expected to shrink to 9.1 million cows in 2013, down 100,000 from this year.

Further, economic uncertainty could upset any bullishness in the dairy outlook. "What if Europe really does fall apart?" Stephenson asks. "Will that spill back on the U.S. and Asian economies too?"

While the milk supply situation is short, "economic uncertainty leaves buyers unwilling to hold big inventories," Levitt adds.

Schmahl also points out that conditions could remain tough for dairies through the spring. Grain prices will remain high, since the new-crop harvest is months away. High feed costs will persist, pressuring dairies and continuing the decline in cow numbers. While he thinks milk prices could reach $20 per cwt., he doesn’t expect to see a huge price rally in the coming months.

"But if consumer demand and the economy remain strong, exports will increase," Schmahl says. "And if the milk supply remains tight and we see a better crop, 2013 could improve profitability for dairies."

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