Higher Grain Prices Are Not Slowing Milk Production

Published on: 11:58AM May 02, 2011

Dairy producers are staying in business amid this spring’s delayed corn planting, higher cow numbers and strong milk prices.


Dairy markets have not been overly exciting over the past few weeks. Closer months have virtually been sideways while later months have slowly increased. Class III contracts in 2012 have made new contract highs recently.


A fair amount of underlying strength can be attributed to grain prices. Delayed planting is having an impact on prices. There is concern that all projected corn acres may not be planted or some of what is planted may have reduced yields. Of course, this is still too early to tell as the whole growing season makes the crop, not just planting date. Last year, planting was early, with over half the crop in by now. As of last week, corn planting progress was only 9%. One thing to keep in mind is that history has shown that between 30-40% of the crop can be planted in a week if weather conditions are good.


Theoretically, slow corn planting or not enough time to plant all intended acres can and will result in more soybean acres. This would potentially increase supply and thereby decrease prices. So, even though corn prices could be high, soybean prices could be lower, keeping the lid on some feed purchases.


So far, higher feed prices have not had much impact on milk production. The March Milk Production report indicated production was up 2.2% in all 50 states, putting first-quarter production up 2.2%. This compares to first-quarter production in 2010, which was down 0.1%. The first three months of 2010 showed production down 0.8% in January, down 0.1% in February, and up 0.6% in March from 2009. This year showed January production up 2.3%, February production up 2.1%, and March up 2.2% compared to 2010.  


Further comparison for the same months shows another interesting scenario. Comparing cow numbers for January 2009 to 2010 showed a decline of 226,000 for January, 199,000 fewer for February, and 193,000 for March. However, comparing January 2010 to January 2011 shows an increase of 68,000 head. February climbed by 66,000 head, and March was up 76,000 head. All of this despite significantly higher grain prices.


Of course, one big difference is milk prices. Class III price for January 2010 was $13.85 per cwt., February was $12.90 and March was $12.92. Class III price for January 2011 was $13.48, February was $17.00, and March was $19.40. It seems higher milk prices spur a greater desire to hold and add more cows, even though feed prices escalate.


High cull cow prices were still not enough to retract the cow herd. Plenty of replacements are available. The March slaughter report showed the largest amount of dairy cattle culled during a month since January 2009. For the same month, cow numbers increased 17,000 head from the previous year. All in all, it appears what is happening is trading dollars for dollars. But farmers are staying in business.


My recommendation is to continue to look at establishing fence positions for the second half of this year. Purchase puts and sell calls for a $2.00 price spread for about 40-45 cents. This would put a ceiling price at $19.50-$20.00 for Class III. Add your basis on top of that, and an increasing price would put you in a good position. If prices were to decline, a good floor is established. Resist the tendency to do nothing because it looks like prices will remain high or go higher. We have all heard that before.


Upcoming reports:


-          Fonterra auction on May 3

-          California Class I on May 10

-          World Agricultural Supply and Demand report on May 11

-          Fluid milk sales on May 13

-          Fonterra auction on May 17

-          April Milk Production on May 18


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 website at www.agdairy.com.


The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. There is risk of loss in trading and my not be suitable for everyone. Those acting on this information are responsible for their own actions.