Market Watch Diary Rocky outlook

May 15, 2009 07:00 PM
Alan Levitt
When key players in the industry gathered outside Denver last month for the biennial National Dairy Leaders Conference, the beleaguered condition of the dairy economy was first and foremost on everyone's mind.

It's no secret that 2009 is shaping up to be a brutal year. Lender Dan James of Mountain Plains Farm Credit Services in Greeley, Colo., estimates that red ink for some producers in the West could amount to $100/cow/month in the first half of the year. That's a six-month loss of $1.2 million for an operation with 2,000 head.

Unfortunately, no one left the high altitude with the feeling that improvement is just over the next rise. Terry Barr, chief economist with the National Council of Farmer Cooperatives, made sure of that when he kicked off the two-day program with a rundown of the depth and breadth of the economic malaise. Consumers are "retrenching,” he says, and the recovery will be neither quick nor easy.

Dairy producers are retrenching too. In the first quarter of the year, U.S. cow numbers dropped 47,000 head. Of that total, 18,000 head were removed from California and another 10,000 head from Idaho and Washington.

Culling slowed in April as producers waited out the next Cooperatives Working Together (CWT) herd retire-ment round. But expect slaughter to pick up again in May and June. The industry is expecting a sizeable buyout this time. And with or without CWT, ongoing losses on the farm will force herd contraction to continue.

The second half of the year is a real wild card.

Given the industry's recent volatile history, it's a good bet that dairy producers will overshoot in their efforts to balance supply with demand. In its April 16 "Livestock, Dairy and Poultry Outlook” report, USDA projected that cow numbers in the fourth quarter would be down 295,000 head from fourth quarter 2008—a massive decline. If this scenario comes to pass, that many fewer cows would leave a gaping shortfall in milk supplies.

We've seen this type of overcor-rection before, in 2003–04. After heavy culling throughout 2003, milk prices nearly doubled in a matter of months in early 2004 to encourage expansion again.

But, as Barr notes, this isn't 2004. Today we're dealing with a global recession that's affecting every facet of the economy. With economic challenges still hanging over us, even a huge supply contraction may not translate into the type of high prices we've seen in the last five years.

Bonus content:

2009 National Dairy Leaders Conference presentations

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