The dairy industry has always been a challenging industry and this year farmers will really be put to the test. This generation of dairy farmers has never seen a year like the one they are currently facing. The projected milk prices for the first half of the year is very likely above anyone's cost of production. We have experienced lower prices before, but nothing to this extent when compared to input costs.
We know that milk prices will not remain this low forever, but I fear the duration may be longer than we would like to see. The main reason is that it is not only a domestic supply/demand balance issue, but rather a global supply/demand problem.
The problem is not that dairy farmers are producing too much milk. The problem is that demand has slowed enough to cause excess milk supply and lower prices. Prices have fallen in an attempt to make it affordable for consumers to continue to purchase dairy products on a reduced budget. This is not only the case for dairy products, but durable goods and other food stuffs as well. The food service industry has slowed and restaurant owners are being creative in order to keep customers coming through their doors. These are some frightening times.
The low milk prices have brought the Milk Income Loss Contract back into use. The last time there was an MILC payment was in February 2007. The February 2009Advanced Class I price was $10.72, giving us a MILC payment of $1.3365 per cwt. This will not be enough to move farms into profitability, but will at least ease the pain. This may not be the actual payment as the feed cost adjuster will also need to be calculated. February's Agricultural Prices report on February 27 will give an idea as to what this adjustment might be. However, the final calculation will not take place until the revision is made on the March 30 report. The calculation can then be finalized with the February payment being made in April. So, do not count on getting this payment in early March.
Cheese price have bounced twice from the lows of $1.04 and after spending most of the month of January below the government support prices of $1.13 for blocks and $1.10 for barrels, prices have now moved back above support. Cheese buyers became more willing to purchase cheese at the low prices believing downside price risk is limited. There have been 120 loads of block cheese traded during the month of January and 30 loads of barrels. Some of this was for Super Bowl orders and some of this was to put a little bit of cushion in storage just in case the price begins to increase.
There continues to be a lot of talk about a herd buyout aimed at eliminating more than 300,000 cows. There was some discussion about requesting some monetary aid from the government through the economic stimulus package to supplement the money available from the CWT program. However, the government indicated that there would be no money made available though this program.
CWT is not expecting to obtain any outside aid, but has been negotiating for a bank loan to add with the money already on hand in order to implement a large buyout. If this is accomplished, I would presume that the CWT program will not be able to do anything more for a couple of years by either another herd reduction or export subsidies. Obviously, the loan would need to be paid back as quickly as possible. One can only hope that a large buyout would have the desired impact. However, if domestic dairy product prices increase significantly without world prices moving higher it will likely result in a higher rate of imports. This is what history has shown.
Upcoming reports to watch for are the December Dairy Products report an February 4; the World Supply and Demand report on February 10; and the California Class I price on February 10.
--Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their Web site at www.agdairy.com.
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