High feed costs squeezing milk producers

by Laura Lloyd
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KANSAS CITY — Dairy producers across the United States are facing unsustainable feed costs as agricultural commodities prices surge amid the worst drought in more than 50 years, said Scott Brown, Ph.D, agricultural economist at the University of Missouri-Columbia.

Dairy farmers currently face no good alternatives when it comes to what to put in feed rations, Mr. Brown said, because all ingredients “are at record levels.”

“Their palette is pretty limited without affecting yield,” Mr. Brown said. He mentioned corn silage, alfalfa, high-quality hay and canola meal as possibly being nominally more affordable than corn, soybean meal or millfeed, which are trading at historically high levels.

“The problem is, farmers can’t substitute and save,” he said.

Corn, devastated by the current drought, started this week moving once again above $8 a bu for September through March futures.

The market will receive some direction on dairy prices today, when the U.S. Department of Agriculture releases its Agricultural Prices report, which will include revised June price data for all milk as well as preliminary estimate of all milk prices for July. Mr. Brown said he expects some increase in the July price estimate compared with June, but not to the break-even level the dairy industry needs. He added that the Aug. 10 U.S.D.A. Crop Production report would provide a better picture of how much more damage the drought has wreaked on staple crops used in animal feed.

The U.S. all milk price has been lagging producers’ rising costs and that is not likely to change for a while, Mr. Brown said. He estimated the break-even point at between $18.50 and $19 a cwt, well above the most recently calculated April-June price of $16.35 a cwt for all milk.

The excessive heat and dryness through much of the United States also has the effect of lowering milk yields per cow, another factor pushing dairy prices higher, Mr. Brown said.

A jump in prices is not likely to be immediate, he said. It will take time for the higher feed costs to percolate through the supply chain and into the grocery store. He said milk retails for about $3.40 a gallon now. Retail milk prices should rise over the fall and winter to about $3.96 a gallon, he said.

Mr. Brown said prices of milk products such as cheese and butter have started to climb, indicating the market is starting to account for the historically high feed costs facing the dairy industry.

The scenario gets more complicated if the drought stays for the next two or three months, he said. If that happens, continued high feed prices may translate into outright shortages for dairy farmers, who will then accelerate the culling of herds they cannot afford to feed.

June 2012 production of milk rose 1% to 15,543 million lbs, compared with the same month a year ago, the U.S.D.A. said in its most recent Milk Production report. The number of dairy cows in the 23 major milk-producing states declined by 14,000 head in June to a total of 8,507,000 head, indicating some liquidation may already be occurring.

Mr. Brown said so far such herd reductions have been relatively minor, but that could change. Smaller herds producing less milk would surely limit export opportunities, which now account for about 10% to 15% of domestic milk production, he added.

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