Milk Production Remains Stronger than Expected

Published on: 11:00AM Nov 26, 2012

With high grain prices, heavier culling and many dairy closures, many farmers firmly believe milk production has fallen further than USDA reports.

Hopes for strong milk prices and greater income over feed costs have been taken away for the time being. Declining grain prices improved the outlook for lower feed prices and thereby greater profitability. However, milk prices declined along with grain prices. There is a lag time for prices, with the November Class III price estimated to be near $20.80, down nearly 20 cents from the high set in October. December futures indicate a further decline of $1.50 if underlying cash prices remain at current levels.

The steep decline of underlying cheese and butter prices was a surprise to the industry. Prices were anticipated to decline slightly after holiday orders were filled. The decline of over 28 cents for cheese and 33 cents for butter over the past three weeks was a hard pill to swallow. Buyers are confident supply will be sufficient for demand and see no need to be aggressive.

Milk production was anticipated to decline by a greater amount by this time due to heavy culling and herd liquidation. More cows did go to slaughter, but production per cow was enough to offset the decline in cow numbers. USDA indicated on the October “Milk Production” report that milk production nationwide declined just 0.1% from a year ago. There was anticipation production would be down drastically by this time.

October dairy cattle slaughter jumped 17.3% from a year ago to a total of 285,000 head. This is the most dairy cattle slaughter in one month since January 1997. Despite this decline, there are only 25,000 less cows in the nation’s herd, according to USDA’s production report. This shows heifers are plentiful and have been coming into the herd, improving genetics and milk production. Production per cow increased 2 lb. in October, minimizing the effects of heavy culling.

High grain prices did not curtail milk production as much as had been anticipated. High culling has not had the anticipated impact either. This may be a factor as the next year unfolds, but for right now, supply is readily available for demand. If grain prices and milk prices remained in close relation with each other, continued aggressive culling will eventually curtail supply and tighten the market.

There has been a fair amount of disbelief over the October milk production report. Many farmers firmly believe milk production has fallen further than USDA reports. They know of neighbors or friends that have culled heavily or gone out of business. They have read about the high rate of foreclosures that have taken place across the country. However, no matter what we think, hear, read or expect, the reports are what we use to give an indication of what is taking place across the country. Not only that, but buyers and sellers are taking care of business as they see fit, keeping product moving and keeping plant inventory minimal.

So, the market has not yet changed the pattern. Improved profitability has been put on hold for the foreseeable future. This year has been filled with volatility, and it is not yet over. Use this volatility to your advantage through marketing.

Upcoming reports:

- November Federal Order class prices on Nov. 28
- Agricultural prices report on Nov. 30
- October Dairy Products report on Nov. 3
- Global Dairy Trade auction on Dec. 4
- World Agricultural Supply and Demand report on Dec. 11
- Dairy export report on Dec. 11

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.