The Year of the Cow

March 13, 2014 08:54 AM

Record high milk prices, soaring dairy exports and moderating feed costs all point to some good economic times ahead.

The Chinese Zodiac proclaims 2014 as the "Year of the Horse." But in today’s global market economy, 2014—and maybe 2015 and 2016—will be the year of the dairy cow, says Dan Basse, an agricultural economist and president of AgResources.

"This is your time. We have record high milk prices and dairy exports are now soaring," he says. Couple that with much lower grain prices and moderating forage costs, and dairy farmers can celebrate some very good margins this year and into the next several.

Basse spoke at the Professional Dairy Producers of Wisconsin Business Conference here in Madison this week. Some 1,500 farmers and industry folks from 21 states attended the two-day event.

He believes income over feed cost margins will stay elevated over the next two to three years. There are a number of reasons why:

First off is world milk demand. "World fluid milk consumption continues to rise," he says. And countries such as China and Mexico continue to import dairy products. He notes that China gross domestic product has gone from $2,000 in 2006 to $7,000 this year. That means Chinese consumers have more money to spend. And they’re spending on more and better foods such as dairy products.

In addition, Basse says the bio-fuel bloom has matured, which means there won’t be a lot of additional demand for ethanol. He notes that gasoline consumption has also peaked and is in decline in the United States, so even the demand for 10% ethanol blends will decrease.

As a result, Basse is predicting corn prices to average $4.45/bu this year, $3.65/bu in 2015 and possibly dropping to $3/bu by 2016. That’s the result of less demand in the United States and continued growth from Brazil, Argentina and even Ukraine. These lower corn prices could also mean farmland prices dropping 25 to 30% over the next few years. "How do you pay $500/a land rents with $4 or less corn? It doesn’t work," he says.

Longer term, Basse does see a number of challenges for dairy production. The world likely will respond to these currently high milk prices, particularly in Europe as dairy quotas end in April 2015. India is also increasing its milk production, and other areas of the world could as well.

China’s economic growth is also slowing, from 14% annual growth several years ago to 7% this year. China is no longer the world’s source of low-cost labor, with India, Vietnam and even Mexico. As a result, China might not have the resources to continue to increase its imports as rapidly as in the past, which would put a damper on milk powder sales.

The other dairy challenge is right here at home. Fluid milk consumption continues to fall. "Two years ago, American already drank more beer per capita than fluid milk, and that’s not a good thing," Basse says.

Nevertheless, Basse sees several good years ahead for dairy farmers. "The economic winds are strongly at your back well into 2015. Enjoy them," Basse says.



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