Lower Feed Prices or Strong Global Demand: Which Will Dominate Dairy Prices?

Published on: 11:28AM Aug 05, 2013

Lower grain prices generally depress milk prices. Increasing world demand should support the dairy market. The outlook?

Market globalization and the rapid flow of information at our fingertips 24 hours a day has certainly changed everything. The traditional weather market for crops, which occurs in June and July, is behind us. However, traders have now managed to extend the weather market to virtually every month of the year, finding weather events in every part of the world an opportunity to trade. This certainly has heightened market volatility year around.

With current crop conditions historically good and running near the 10- and 20-year averages, there is not much to get excited about. There are areas of the country in which corn and soybean crops do not look very good, suffering from a range of effects from very dry weather to over abundance of moisture. Farmers in those areas are wondering why grain prices continue to weaken.

Feed prices may be more manageable this year, especially if USDA is correct in its estimate of corn ending stocks reaching 1.959 billion bushels and soybeans at 295 million bushels this year. There are estimates the December corn price could decline to near $4.00, with the soybean price near $10.00 when all is in the bin. This is welcomed by dairy farmers and livestock feeders around the country.

However, lower grain prices generally translate into lower milk prices. Looking back in history there has been a strong correlation of this. One thing we can look at is the milk/feed ratio, which does provide a measure of the price of 51 lb. of corn, 8 lb. of soybeans, and 41 lb. of hay compared to the All-Milk price. Over the past two years, we have experienced Class III milk prices ranging from a record high of $21.67 to a low of $15.23, while milk/feed ratio has ranged only from 1.91 to 1.34. So this shows very little divergence in price between feed and milk.

So where does that put us this year and next year with milk prices? Milk futures are already anticipating lower prices the rest of this year and next year. Since mid-June, new-crop corn prices have been in virtually a steady decline, and milk futures have not been immune to the weakness. In fact, 2014 milk futures have been hit the hardest in just the past two weeks as traders turned more bearish on prices with the anticipation of lower grain prices meaning lower milk prices.

World demand will be an important factor for milk prices. Domestic prices are comparable to world prices, which increases the interest from foreign buyers. This will provide support to dairy and widen the correlation between grain prices and milk prices. Increasing world demand is expected to continue for dairy and hopefully improve prices and income.

We will not be alone in the desire to provide the world market with quality dairy products. Farmers in other countries will rise to the challenge. Europe is planning to eliminate quotas in 2015, allowing for greater production potential. Other countries are encouraging their farmers to increase production. However, the past few years of tight margins from limited income may make this a tall order.

Upcoming reports:

- California Class I price on August 9
- World Agricultural Supply and Demand report on August 12
- Global Dairy Trade auction on August 20
- July Milk Production report on August 19
- July Cold Storage report on August 22
- July Livestock Slaughter on August 22

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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