Strong Milk Price May Not Reflect Profitability
Jun 10, 2013
What’s behind dairy producers’ struggle with the extended period of low milk-to-feed ratios?
Dairy farmers have been struggling with low milk/feed ratios for a long time. In fact, the last time the ratio was above 2.0 was in March 2011. The ratio has been above 2.0 just 18 months out of the past 63 months. A level of 3.0 has historically been used as a profitability level wherein expansions will take place.
Interestingly, during this extended period of low milk/feed ratios, we have experienced record high milk prices. There have been periods of low milk prices in the past that have actually yielded the best milk/feed ratios due to correspondingly low feed prices. The idea of high milk prices does not necessarily mean more profitability. So then the question arises as to why higher prices push greater milk production and increasing cow numbers. According to the numbers, it does not seem to make sense. However, part of it has to do with psychology and some of it has to do with each individual operation.
Farmers always desire to produce more when prices are higher. It does not matter if it is corn, soybeans, wheat, cattle, hogs, etc. Those bigger paychecks always make one feel good. I realize that can only go on for so long, until income does not cover input for a period of time.
Those who raise quite a bit or all of their feed have been in a better position during this extended period of low ratios. Margins improve when a person is not at the mercy of the market. Quality feed can be harvested and stored for feed rather than having to pay for that quality. I do want to add that it is not always the case that those who purchase their feed are at the mercy of the market. Those who utilize the futures and options market to hedge feed purchases can achieve the same or similar results of those who raise their own feed.
Many farmers have had a real taste of this over the past year as drought conditions forced those who generally have their own feed into purchasing it. This really put a crimp on the income of many dairy producers. There were high hopes this year would be better and in some areas it is. Other areas have really been struggling with significant winterkill in alfalfa and the delayed planting of corn. In some areas, it looks like corn may not even be able to be planted. The impact of this is yet to be seen, but dairy farmers are resourceful and have always been able to find a way to squeeze the milk out of the cows efficiently.
This efficiency keeps cheese production strong. The latest USDA "Dairy Products" report showed total cheese production for the month of April at 3.2% above a year ago, with 928.2 million pounds produced. Of that total, American types increased 2.4% and Italian types rose 2.9%. Current strong production as well as strong production in previous months continues to push inventory levels higher. Seasonally, inventory will increase until June, and then it begins to decline as milk production and cheese yields decline. This continues through the end of the year. The current level of milk production and cheese production may extend this growth a bit longer unless demand increases greater than it has been or production declines in the next month or so.
Cheese and curd exports during the month of April increased 6% over the previous year, totaling 25,551 metric tons (mt). Whey exports were up 2.2%t to a total of 43,058mt. Strong exports are expected to continue the rest of this year but maybe not as strong as earlier anticipated when drought gripped New Zealand and Australia. Butter exports during the month of April fell 28.8% from a year ago, totaling 4,267mt. This is the same decline experienced in 2012 compared to 2011. Cooperatives Working Together has not assisted in the export of butter since April 29. It is not surprising butter stocks are growing at a rapid pace. The bright spot was that exports of nonfat dry milk for the month jumped 40.5% to 55,187mt.
- World Agricultural Supply and Demand report on June 12
- Global Dairy Trade auction on June 18
- May Milk Production report on June 19
- May Cold Storage report on June 21
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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