Dairy Expansion Slows Worldwide

Published on: 12:09PM Nov 12, 2012

Driven by higher feed, energy and land prices, farmers’ costs will limit growth from the U.S. to New Zealand.

High feed prices will have a significant impact on global dairy expansion, according to the Farm Comparison Network (IFCN), a global research group. We have a tendency to look out our back doors to determine how bad or good things are. However, the dairy industry is worldwide, and what happens in the U.S. can impact other countries.

The reverse is also true. The U.S. market is competing on the world scene. When domestic prices are higher than world prices, it generally brings in more imports. The IFCN estimates farmers’ costs will increase around 5% this year. This may be conservative, as the report did not take into consideration the drought experienced in the U.S. this year.

This is expected to nearly stop farm expansion over the next year. Feed prices as well as energy costs and increasing land prices are not expected to decline for the foreseeable future. The IFCN also ranked the top milk-producing countries with India maintaining the No. 1 spot, followed by the USA, Pakistan, China and then Brazil. New Zealand was ranked No. 9, with Australia at No. 18.

Concern remains over feed supply in the U.S., but this concern is not quite as strong as it has been. The latest World Agricultural Supply and Demand report increased grain production slightly, providing a bit more cushion of supply. Although still very tight, USDA increased corn production to 10.725 billion bushels by boosting yield to 122.3 bushels per acre – not bad considering the severe drought many areas experienced this summer. Ending stocks of 647 million bushels are still tight but marked an increase of 28 million bushels.

Soybeans showed increases in both production and ending stocks as well. Yield was pegged at 39.3 bushels per acre, with total production at 2.97 billion bushels. Ending stocks are pegged at 140 million bushels, up 10 million from last month. Although this does not leave much wiggle room, it was bearish to grain prices, pushing futures lower.

This does allow for an opportunity to hedge some feed for the upcoming year. If call options had been purchased earlier, it may be time to roll them down to a lower strike price. You will need to look as the feasibility of this relative to the cost of rolling them down. Although the market looks weak, there is a lot of marketing year left and something could trigger commercial buyer interest, which could push prices substantially higher.

Despite weakening grain prices, farm profitability certainly was not helped by the steep decline of cheese prices recently. When it looked like things may be getting a bit better with an improving milk/feed ratio, the proverbial rug was pulled out again. This may be temporary to some degree, but price recovery will have greater difficulty due to time of year.

Most holiday orders for cheese have been filled and shipped. Fill-in buying and regular business need to carry the baton and support prices. Milk production has been slow in improving this fall and continues to run behind a year ago. This may have a greater impact sometime next year. However, manufacturers of dairy products are minimizing plant inventories, keeping production and supply close to demand. Buyers are not concerned over tightening supply through the end of the year and have stepped back, purchasing only what is needed and at their price. USDA does not anticipate production improvement or much change in prices next year.

My current recommendations for hedging milk are to purchase fence positions in the first quarter of next year if you have not already done so from previous recommendations. Look to initiate the purchase of $18.75 puts options and the sale of $20.25 call options for 50 cents or better. My intent was to sell futures at $20.00, but this does not seem likely given the current market. This will at least establish a floor while leaving the ability to take some upside if it develops.

Upcoming reports:

- October milk production report on Nov. 19
- Global Dairy Trade auction on Nov. 20
- October Cold Storage on Nov. 21
- December Federal Order Class I price - Nov. 21
- October Livestock Slaughter report on Nov. 23

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.