Will Lower Corn Price Mean Lower Milk Price?

Published on: 11:59AM Sep 16, 2013

USDA’s projection for a big corn crop and the potential for lower corn prices was music to the ears of dairy producers. But increased milk production will need increased demand or lower prices will ensue.

High feed prices have been difficult to deal with over the past year, but that should change. USDA surprised most everyone by raising both corn production and ending stocks this year, renewing projections for corn futures to fall to $4.00 per bushel or below. This is a hard pill to swallow for grain producers as sights were set on high prices again this year. Early wet weather and delayed planting was thought to have a significant impact on production. It has been a race against time to accumulate sufficient growing degree days before a killing frost. Current weather forecasts do not indicate a frost in much of the country before the end of September.

Unusually hot weather in August along with dry weather earned the term "flash drought" and was thought to have hampered corn ear fill. The hot weather was good for accumulating heat units, but potential production was reduced as cobs did not fill out properly in some cases. Test weights are expected to be lighter this year. Yet even with some problems ending stocks will more than double.

USDA’s projection and the potential for lower corn price was music to the ears of dairy and livestock producers. Hopes were renewed for greater profitability this year. The August milk/feed ratio did improve, but not yet enough to get too excited about.

Projections for milk and dairy product prices were increased on the latest USDSA World Agricultural Supply and Demand report. This was also good news, but one that may not come to fruition. Milk prices generally follow corn price and lower corn price may translate into lower milk prices.

Demand for dairy products is increasing, but higher demand is being met with fresh product as well as inventory. Recent aggressive buying in the spot market seems to have been the result of increasing prices bringing buyers of the sideline creating greater competition for available product. Once buyers are satisfied with their supplies the market may again drift lower. Class III milk futures are anticipating this and have lower prices already factored in. Futures during the first half of 2014 range from $16.35 to $16.85 while contracts during the second half are just above $17.00. Current Class III futures show an average price of $16.84 next year while USDA projects and average price of $17.55.

Recent replacement heifer demand indicates the desire to increase milk production. Reasonable heifer prices and declining corn prices is increasing the desire to fill stalls left vacant from heavy culling earlier in the year. USDA supports this intention with the projection of milk production next year to reach 204.5 billion pounds.

What this means to price is anyone’s guess. Increased milk production will need increased demand or lower prices will ensue. U.S. dairy prices are in line with world prices opening the door for greater export business. Hopefully, we can gain greater market share with high quality dairy products.

Upcoming reports:

- Federal Order Class I price on September 16
- Global Dairy Trade auction on September 18
- Livestock, Dairy, and Poultry report on September 18
- August Milk Production report on September 19
- August Livestock Slaughter on September 19
- August Cold Storage report on September 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.

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