Soaring feed prices have had no greater impact on any agricultural sector than on dairy, where milk producers were facing negative margins due to lower milk prices before the summer drought sent feed prices through the roof, sinking margins even further into the red and forcing some producers to liquidate herds.

Estimated feed costs for dairy cattle were up sharply and have increased monthly since January, according to the latest Monthly Milk Cost of Production report from the U.S. Department of Agriculture’s Economic Research Service. Feed costs in July were $15.85 per cwt of milk sold, up 33% from $11.95 per cwt in January and up 25% from $12.63 per cwt in July 2011.

Total costs (adding allocated costs, feed costs and other operating costs) were $27.43 per cwt of milk sold in July, up 19% from $23.05 per cwt in January and up 15% from $23.82 per cwt in July 2011, according to the E.R.S.

The price for milk received by farmers, meanwhile, has risen in recent months but remains below year-earlier levels. In July farmers received an average of $16.90 per cwt for all milk, up 90c from June but $5.20, or 24%, below $21.80 a cwt in July 2011, according to the U.S.D.A.’s monthly Agricultural Prices report. The average increased another 90c to $17.80 a cwt in August, but still was $4.30, or 19%, below $22.10 a cwt in August 2011.

“Weekly dairy cow slaughter turned substantially upward in July,” the E.R.S. said in its latest Livestock, Dairy and Poultry Outlook, citing data from the U.S.D.A.’s Agricultural Marketing Service.

“Higher apparent culling, combined with higher feed prices, leads to a reduced 2012 herd size estimate of 9,215,000 head in August. While herd size is expected to be slightly higher on a year-over-year basis compared to 2011, the U.S. dairy herd is forecast to contract to 9,110,000 head in 2013,” the E.R.S. said.
Dairy cow slaughter in July, the latest data available, was 239,000 head, up 4% from 229,000 head in June and up 15% from 207,000 head in July 2011, the U.S.D.A. said. January through July dairy cattle slaughter totaled 1,762,000 head, up 6% from 1,665,000 head during the same period in 2011.
In its mid-year Cattle report, the U.S.D.A. estimated the U.S. dairy cow inventory at 9.2 million head on July 1, unchanged from July 1, 2011. But milk replacement heifers, young cows kept to replace aging cows or to add to herds, was 4.1 million head, down 2% from a year earlier. In its January Cattle report, the U.S.D.A. said the dairy cow inventory was up 1% from Jan. 1, 2011, and the dairy replacement count was down 1%.

“The severe drought will impact milk production per cow both this year and next,” the U.S.D.A. said.
“In light of higher feed prices,” the E.R.S. forecast 2012 milk output per cow at 21,705 lbs, down 125 lbs from its July forecast but still up 359 lbs from 2011. Milk per cow was projected at 21,830 lbs for 2013, down 230 lbs from the July projection but up 125 lbs from 2012.

The increase in milk production over the same month a year earlier has been easing as the year progressed. In July U.S. production was 16,600 million lbs, up 0.7% from July 2011, compared with January production of 17,011 million lbs, up 3.8%, and March at 17,701 million lbs, up 4.2% from March 2011. February was not comparable since it had an extra day due to leap year in 2012. Milk production per cow above a year ago also declined as the year progressed. In July, production averaged 1,799 lbs per cow, up 7 lbs from July 2011, compared with 1,841 lbs, up 51 lbs, in January and 1,910 lbs, up 59 lbs, in February. Total milk production in 2012 was forecast at 200 billion lbs, down 1.6 billion lbs from the July forecast but still up 3.8 billion lbs from 2011. Next year production was projected at 198.9 billion lbs, down 2.8 billion lbs from July’s projection and down 1.1 billion lbs from 2012.

At the same time, the U.S.D.A. has ratcheted up its forecast prices for milk and milk products for this year and next. The average price paid to farmers for all milk was forecast to range from $17.55@17.75 a cwt in 2012, up from $17.05@17.35 forecast in July, but still below the 2011 average of $20.14. Milk prices in 2013 were projected at $17.80@18.80, up from $17.35@18.35 projected in July.

The U.S.D.A. forecast 2012 average dry whey prices at 55@57c a lb, up 10c from its July forecast, nonfat dry milk at $1.25@1.27 a lb, up 30@40c, butter at $1.53½@1.57½, up 4½@6½c, and cheddar cheese at $1.63½@1.65½, up 35@45c. For 2013, August forecasts were increased 15c a lb from July projections for dry whey, 30c for nonfat dry milk, 35c for cheddar cheese and 50c for butter. Still, all prices were below 2011 levels for both 2012 and 2013 with the exception of dry whey.

Despite rising prices for milk, dairy farmers face projected record high prices for corn and soybeans in 2012-13, with little relief expected until the second quarter of 2013 for soybeans, when the South American crop is harvested, and until fall for corn, when the 2013 U.S. crop is harvested.