Herd liquidation, government activity supporting dairy prices

by Ron Sterk
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WASHINGTON — A combination of herd liquidation and government activity appears to be drawing down milk supplies and supporting dairy product prices, with more price strength expected in the second half of 2009 and into 2010.

"(Milk) production is being reined in as the dairy herd size is contracting," the U.S. Department of Agriculture said in last week’s Livestock, Dairy and Poultry Outlook. "Reduction in herd size will lead to lower milk production both this year and next despite rising output per cow."

The U.S.D.A. estimated the U.S. dairy herd at 9.28 million head in April, down from 9.31 million a year earlier. The department forecast cow numbers would average 9.17 million head for 2009, down 1.5% from 2008, and drop another 2.5% in 2010, to average 8.94 million head. The June numbers for all of 2009 and 2010 were down 8,000 and 11,000 head, respectively, from the U.S.D.A.’s May forecasts. Herd reduction was attributed to a combination of high feed prices (although down from 2008) and lower milk prices, the result of weaker domestic and export demand for most dairy products.

"Commercial dairy cow slaughter will increase as a result of liquidation of the sector in response to poor returns," the U.S.D.A. said. Dairy cow slaughter in the first four months of 2009 was up about 11% from the same period a year ago, according to the latest U.S.D.A. Livestock Slaughter report. Although slaughter dipped below a year ago in April, it was up about 12% from a year ago during the week ended May 16.

Higher milk production per cow, as lower-producing cows are culled first, will only partially offset the smaller herd size. The U.S.D.A. forecast 2009 milk production at 187.5 billion lbs, down 1.3% from 190 billion lbs in 2008. Milk outturn was forecast at 186.4 billion lbs in 2010, down less than 1% from this year. June U.S.D.A. numbers for both years were down from May forecasts.

Meanwhile, milk and dairy product prices have been rising, although 2009 levels are expected to average well below those of 2008 for nearly all items. Prices reported by Food Business News show values for dry whey, 34% whey protein concentrate (W.P.C.), lactose and dry buttermilk have risen from 67% to 86% from January-February lows (October 2008 for W.P.C.), but remain about 30% to 40% below year-ago prices, except for dry whey, which is 1c a lb higher.

The U.S.D.A. 2009 average price forecasts in June for all classes of milk, as well as for dry whey, nonfat dry milk (N.D.M.) and butter were all raised from May, with cheese the only item forecast slightly lower. Projected average prices for 2010 also were raised from May projections, and all were above forecast levels for 2009. Still, prices for 2010 were below 2008 levels except for butter and dry whey.

Government price support and various programs have helped to reduce excess supplies of some products, which resulted from weak domestic and export demand.

The Commodity Credit Corp. of the U.S.D.A. has been "incentivizing" export sales of some dairy products under the Dairy Export Incentive Program (D.E.I.P.) the past couple of weeks. In addition to export bonuses for N.D.M., export bonuses of $100 per tonne are available for eight types of cheese, $450 per tonne for butter and $650 per tonne for anhydrous milkfat, butteroil and ghee.

So far the C.C.C. has awarded bonuses for 7,654 tonnes of N.D.M. averaging $119.59 per tonne, or about 5.4c a lb. A bonus of $100 a tonne also was awarded for 19 tonnes of mozzarella cheese.

The U.S.D.A. has been active in the dairy products market since late last year when N.D.M. prices dropped first to the C.C.C. support price of 80c a lb in the West region in October then below in November. Since Oct. 1, 2008, the C.C.C. has purchased nearly 260 million lbs of N.D.M., all in the West. N.D.M. has been flowing into C.C.C. stocks at an average of more than 5 million lbs a week since the buying began.

Sales to the C.C.C. have, as planned, worked as a floor for N.D.M. prices in the West, but they also appear to have limited upward price movement. Values for low- and medium-heat N.D.M. in the Central and East regions have risen from 80c a lb on the low end of the price range in mid-February to 89c in mid-June, while prices in the West rose only to 80c from 78c during that time. The price spread between the two regions historically has been only 2@3c a lb, and seldom more than 5c, compared with 8@9c currently. The spread had widened to 20c at one point last year before sales of product to the C.C.C. had begun.

About 4.6 million lbs of butter was sold to the C.C.C. earlier in the year, but as prices began rising in late February, there have been no additional sales.

This article can also be found in the digital edition of Dairy Business News, June 2009, starting on Page 14. Click here to search that archive.

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