Milk prices fall, feed prices soar as dairy herd numbers grow

by Ron Sterk
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Record high milk prices last year encouraged producers to increase herd sizes and allowed many to lay up profits that have resulted in continued growth in dairy cow numbers and milk production even as milk prices have since dropped and feed prices have continued to rise.

Now dairy producers are faced with record high corn prices, with most futures at the Chicago Board of Trade well over $7 a bu and even exceeding $8 for the first time ever in the March, May and July 2009 contracts in recent trading. The feed situation has been exasperated by flooding in key corn and soybean producing areas of the Midwest, which is expected to reduce corn production more than expected and limit expected increases in soybean outturn. Strong corn prices have pulled other feed ingredient prices higher in their wake.

The U.S. Department of Agriculture in its June 17 Livestock, Dairy and Poultry Outlook said it expects dairy cow numbers to decline in each of the last two quarters of 2008 and in 2009 mainly because of high feed costs, but some analysts disagree.

"At the moment a lot of dairies are in the expansion mode," said Bill Brooks, economist with eDairy Inc., part of FCStone Group, Inc., which held its annual outlook conference in Chicago last week.

"Dairy cow numbers will still see some expansion next year," Mr. Brooks said. "It will slow down quite a bit but still grow. If feed gets bad enough we could see some reduction, but we’re not there yet."

Mr. Brooks noted that most dairies have locked in feed costs and were not greatly affected by the most recent run-up in corn prices. Feed supplies for producers that raise their own feed "could be a huge negative" this year because of weather-related crop losses and delayed forage harvesting, he added.

The latest milk cost of production data from the U.S.D.A. indicate feed costs account for 62%, or $11.17, of the $18 it cost to produce 100 lbs of milk in April in California, compared with 58.5%, or $8.73, of $14.92 a year ago and 50%, or $7.07, of $13.83 five years back. Other costs of production, including energy, also have risen but at a much slower rate.

"Despite higher feed costs, milk production continues to rise, and the year-over-year increase in 2008 will be about 2%," the U.S.D.A. said. "The effect of this year’s soaring feed costs will not be apparent until 2009." The U.S.D.A. forecast 2008 milk production at 189.3 billion lbs, up 3.7 billion lbs from 185.6 billion lbs in 2007. Production in 2009 was projected at 190.3 billion lbs, up only 1 billion lbs, or 0.5%, from 2008.

In its June 18 Milk Production report, the U.S.D.A. said milk output in the 23 major states in May was 15.4 billion lbs, up 3.4% from May 2007. Production in the first five months of 2008 also was up 3.4% from the same period a year ago. Monthly milk production has been above the same month of a year earlier for every month since February 2005, according to U.S.D.A. data.

"Milk production is forecast to rise only fractionally in 2009 as higher feed costs are expected to slow growth in milk per cow and as cow numbers decline slightly," the U.S.D.A. said. "The expected decline is due partly to another round of dairy herd buyouts under the C.W.T. (Cooperatives Working Together) program."

Bids for a fifth round of dairy herd buyouts under the C.W.T. will be accepted through June 30. The C.W.T. is a voluntary industry funded dairy herd reduction program started a few years ago by the National Milk Producers Federation.

Mr. Brooks suggested that the latest C.W.T. buyout might not elicit much response because producers might get better prices for dairy cattle on the open market where values have been strong.

The number of milk cows in the 23 major states in May totaled 8,460,000 head, up 162,000 head, or 2%, from a year earlier, the U.S.D.A. said. Milk production per cow in May was 1,816 lbs, up 25 lbs, or 1.4%, from a year ago. The U.S.D.A. forecast production per cow to increase slightly less than 1% annually in 2008 and 2009.

Continued dairy herd expansion was evident in the annual Cattle report in February, in which the U.S.D.A. estimated the total number of dairy cows in the United States on Jan. 1, 2008, at 9,224,000 head, up 1% from a year earlier. The number of milk replacement heifers, for replacing older cows, was 4,457,000 head, up 3%. Those numbers compared with a decline of 1% in beef cow numbers and a drop of 4% in beef replacement heifers for the same time periods, the U.S.D.A. data showed. The next count of the cattle herd will be released by the U.S.D.A. on July 25.

"A lot of heifers are available this year," Mr. Brooks said, "and additional animals are coming in from Canada. There is not a shortage of dairy animals and they still are costly."

In its latest Livestock Slaughter report, the U.S.D.A. said the number of dairy cows slaughtered in April totaled 219,000 head, up 4,000 from March and up 6,000 from April 2007. Dairy cow slaughter in the January-April period was 884,000 head, up 1% from the same period last year. But the number of dairy cows slaughtered in April as a percentage of total cattle slaughter decreased, while the number of "other cows," which includes beef cows, increased. For the January-April period, "other cow" slaughter was up nearly 8% from a year ago.

"Slaughter is more than a year ago but not at a rate that would suggest dairy herd liquidation is under way," Mr. Brooks said. "It’s below the number of heifers available to maintain and grow the herd."

Mr. Brooks estimated a minority of milk producers currently were at break-even or below, but he warned that stagnating milk prices and rising feed costs may put more producers at that point.

"Profitability is not as great as last year, but most are in the industry for the long haul," he said.

Since peaking in the third quarter of 2007 milk prices have declined, although some seasonal rebound was expected in the third quarter of 2008.

The average price paid for fluid grade milk in April was $18 a cwt and for manufacturing grade was $17.70, the U.S.D.A. said in its April Agricultural Prices report. Those prices rose to $18.20 and $18.50, respectively, on a preliminary basis in May and compared with $18 and $17.60, respectively, in May 2007. Prices paid for fluid milk first topped $20 a cwt at mid-year 2007, averaging $20.20 in June 2007 and peaking at $21.90 in November, according to the U.S.D.A. Manufacturing grade milk peaked at $20.80 a cwt in December 2007.

Mr. Brooks expects class III milk (used to make cheese) will average $18.30 a cwt in 2008, slightly below the midpoint of the range of $18.16@18.56 forecast by the U.S.D.A. in its latest Outlook report. The U.S.D.A. projected average class III milk prices to range from $17.09@18.09 in 2009.

Milk and dairy product prices will remain strong in 2008 in part because of continued good export demand, the U.S.D.A. said. The agency expects exports to decline in 2009 as international production increases from current levels.

Although butter and cheese prices have remained strong or moved higher from a year ago, dry dairy product prices currently are well off their highs set in the second and third quarters of 2007, in some cases down more than 50%. But most dry products have since increased from lows set late in the first quarter of 2008. The U.S.D.A. forecast dry whey and nonfat dry milk prices to strengthen in the final two quarters of 2008 and into 2009.

This article can also be found in the digital edition of Dairy Business News June 24, 2008, starting on Page 14. Click here to search that archive.

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