Concerns over hot weather and its impact on milk production come at a time when dairy demand is increasing.
Now that the June milk production is behind us, the industry is already looking ahead to the July report and what impact the weather has had on production. U.S. milk output in June was up a surprising 1.5% from last year, exceeding projections. During the first half of the year, only two months showed lower milk production compared to the previous year, which is incredible considering the high prices paid for feed and the resulting heavy culling.
Now that USDA has reduced the information on the monthly production reports to only milk production, we have no idea of cow numbers in comparison to previous months and previous years. This makes milk production more difficult to estimate from month to month.
Of the top 23 states, there were only two states showing milk production declines in June compared to June 2012. These were Missouri, -4.2% and California, -0.8%. Even states that have been in severe drought continued to post production gains. Milk production for the second quarter was 0.9% higher than the same period last year.
Reports have been circulating as to the impact hot weather has had this month. Some estimates were indicating milk production declines of as much as 15% in California during the hot spell and varying estimates coming from other areas of the country recently. The perception is that this has significantly impacted the milk production curve and will be difficult for cows to recover from.
This heightened concern over tight milk supply at a time when demand is increasing. In about a month, schools will be reopening again for the year, requiring increased volume of fluid milk for students. Rather than just assuming overall milk production has fallen enough to tighten supply creating shortages, one has to look back at July milk production from last year. Milk production increased 0.7% compared to July 2011. Weather last summer was hot and dry in many areas during the month of July, yet production was able to improve. June milk production in 2012 increased 0.9% over 2011. We need to remember that we are always comparing the same months from year to year.
So the question that needs to be asked is: Were cows and milk production affected greater this year than last year? The market seems to think so as cash cheese buyers stepped in to purchase supply more aggressively this past week. Caution needs to be exercised as perceptions many times can push markets either higher or lower than fundamentals can support. A case in point was the increase in prices based on the concerns over drought in New Zealand and Australia earlier this year.
Current fundamentals can support cheese prices at present levels, but can they support prices much higher considering our current supply? The potential for lower corn prices due to projections for a large crop and large ending stocks could translate over into strong milk production. But crops are not yet in the bin and there are five months yet before the end of the year. A lot can happen during that time.
Obviously, the growth of cheese and butter inventory will have an impact on the extent of price potential with the greater impact being overall demand. Demand should increase steadily over the next few months as schools reopen and retailers and packing firms look ahead to the holidays.
One can never predict where prices will end up, but an educated assessment needs to be made, and then steps taken in order protect profitable prices when they are available. Marketing strategies can be implements that allow for a variation in price as well as the potential for capturing a higher price if the market provides.
- June Cold Storage report on July 22
- June Livestock Slaughter on July 25
- Agricultural Prices report on July 31
- July Federal Order Class price on July 31
- Dairy Products report on August 1
- Global Dairy Trade auction on August 6
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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