It was a surprise to see that USDA increased their estimate for milk production on the latest World Agricultural Supply and Demand report. They have been reducing their milk production estimate for a number on months in anticipation of reduced output as a result of lower milk prices. However, they raised production 100 million pounds on the most recent report. Milk production this year is still expected to reach 211.9 billion pounds, up 3.4 billion pounds from the 2015 setting another record for milk production. Bear in mind this is just an estimate and will be adjusted numerous times throughout the year. If this were to come to fruition, it would be a greater gain than what 2015 was over 2014 which was an increase of 2.4 billion pounds.
So the question asked is: ‘Why would milk output increase the second year after record milk prices when the estimated average All-milk price would be $8.32 lower than the average in 2014?’ There are many answers to this question with some depending on each individual operation. Individual dairy operations have differing costs of production with some profitable while others are not depending on level of milk prices. Marketing of some percentage of milk production can also have a significant impact on profitability. Those who have utilized futures, options or forward contracts could have protected upwards of $2.00 per cwt for a good portion of 2016 allowing them to maintain and improve milk production through different avenues without as much sacrifice as those who have not. Of course, I am referring to the present moment and current milk futures prices. These may change over the course of this year.
Likely one of the best answers to this question is because that is what we do. Dairy farmers are in the business to produce milk and will continue to do that in whatever ways it can be down. Just as higher milk prices spur a greater desire to increase milk output to take advantage of higher price, lower milk price spur greater milk production in order to make up for lower income. There is a line that is drawn at some point when milk prices are low and income falls below cost of production. Other measures are then implemented that may consist of changing to lower cost rations which may decrease milk production and/or increase culling to reduce herd size and reduce feed costs. This action may be delayed this year due to numerous sources indicating that many dairy farmers have prepaid various items for this year to reduce taxes last year. So even though milk prices are low, it will not hurt as much due to certain expenses already covered for a period of time this year. Next year may be a completely different story, but this may have a substantial impact on cow numbers and milk output this year.
So far there has been good support under cheese and butter prices albeit at lower prices than last year in the case of cheese. This has given rise to the idea that price lows may have been established and markets will be steady or higher from here. Some of this idea stems from traders looking over their shoulders to last year and price patterns. This has given rise to the confidence of butter and cheese manufacturers to maintain strong output. Increasing inventory is not a concern at the present time as seasonally it increases during this time of year. I remain concerned over the magnitude of the increase of butter inventory and the impact this will eventually have. With butter stocks jumping 15% in December, closing the year 46% higher than a year ago and exports for 2015 running 70% below 2014; there will be a time of reckoning if domestic demand does not improve from the current pace. USDA showed no concern over this as they increased their average estimate for 2016 butter price by 9.50 cents to the current average of $2.04 per pound. I hope they are right.
-January Milk Production report on February 19
-January Cold Storage report on February 23
-Annual Cold Storage report on February 23
-January Livestock Slaughter report on February 25
-January Agricultural Prices on February 29
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.
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