Market Signals Slow to Hit Farms

November 7, 2014 04:00 AM
 
Market Signals Slow to Hit Farms

Higher replacement costs and lower prices will likely be buffered by the lowest feed prices in years, suggesting milk production will remain buoyant for some time.

Around the globe, signs have surfaced that it’s time for dairy producers to stop producing so much milk, but these market signals have been slow to hit farms. In the United States, the milk-feed price ratio in October hit a seven-year high, mostly due to plunging feed prices, and producers in Mexico are also still making large quantities of milk.

“U.S. corn and soybean prices are at four-year lows, and feed costs are expected to remain low for some time,” says Mary Ledman, dairy economist with the Daily Dairy Report and president of Keough Ledman Associates Inc., Libertyville, Ill. “This will help bolster dairy producer margins against the falling milk prices projected in dairy futures markets.”

October’s All-Milk price estimate of $25.30/cwt. fell 40 cents below September’s price but was still $4.40 higher than the October 2013 price. “October’s higher All–Milk price and lower feed costs have resulted in the highest milk-feed price ratio since October 2007,” says Ledman. The October milk-feed ratio improved 10 points compared to the prior month to 3.07, which means 1 lb. of milk can buy 3.07 lbs. of dairy feed containing 51 percent corn, 41 percent alfalfa, and 8 percent soybeans. 

All three of the feed components used in USDA’s milk-feed price ratio released in October’s Agricultural Prices report were lower than the prior month. The corn price dropped 20 cents to $3.28/bu., soybeans fell a sharp $1.26 to $9.64/bu., and the alfalfa declined $3/ton to $194/ton.  

Granted in some of the nation’s key dairy states, actual feed costs exceed the averages reported by USDA, and actual milk prices are lower than reported prices, says Ledman. For example, she notes that California’s All-Milk price average of $22.40 was $2.90 less than the national average, while alfalfa prices averaged $36 more than the national average at $230/ton. Wisconsin’s All-Milk price, meanwhile, averaged $26.20, or 90 cents more than the national average and its alfalfa price of $157 was and $37/ton lower than the national average and $73 lower than California’s price.

With profit margins at the highest levels in seven years, the cost of a milk replacement cow has also been steadily rising, notes Ledman. The average price paid for a dairy replacement heifer is now 50 percent more than last year. USDA estimates that the October 2014 dairy replacement price was $2,120 in October, up $150 per head from July and $710 more than a year ago.

“Higher replacement cow prices will eventually work to slow herd expansion, but that will take time,” says Ledman.

More milk south of the border    

“High global dairy product prices earlier this year have not only driven U.S., EU, and Oceania dairy farmers to produce more milk, but dairy producers in other countries around the world have also received the message loud and clear to make more milk,” says Sara Dorland, analyst with the Daily Dairy Report and managing partner of in Ceres Dairy Risk Management, LLC, Seattle.  

For example, in Mexico, a country that typically imports 30 percent of its milk needs, mostly from United States, milk production has been on the rise. In September, Mexico produced 2.07 billion pounds of milk, up 0.5 percent from a year ago. For the January through September period, Mexico’s milk production was 1.8% more than the comparable period a year ago.

“Even though Mexico’s dairy imports are expected to be mostly unchanged in 2015, the forecast for 2015 consumption in Mexico is rosy,” says Dorland. “Mexico’s stronger milk production will likely fill the gap created by higher consumption, but strong milk output in Mexico could be mixed for U.S. NDM exports next year.” While gains in overall output in Mexico could mean fewer cheese, butter, and fluid milk exports to that country, lower U.S. nonfat dry milk prices could drive more powder exports to Mexico, she says.

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