As I write this column in mid-June, the dairy and feed markets are displaying much uncertainty and even some incoherence. The increase in milk futures over the last two weeks has no fundamentals; it just doesn’t make sense.
Generally, when something does not make sense it doesn’t last for long. So I haven’t changed my views about milk prices for the rest of the year.
I am like the weatherman — when the air pressure drops, I call for rain. Here is why I see bad weather coming at us in the dairy markets.
All the numbers as of the end of April are now in. Year to date (YTD), the national milk production was up 3.9 percent from the same period in 2011. This substantial increase was the result of a 2.9 percent increase in milk production per cow and a 1 percent increase in cow numbers.
Production has increased throughout the country, but more markedly so in the western states (California, Idaho, Washington) with a cumulative 5.2 percent increase. These numbers, whichever ways you want to look at them, reflect that there is a lot of milk available to processors.
Some western cooperatives have even resorted to putting in place a number of base plans that encourage purposeful cut-backs by dairy farmers.
Federal inspected dairy cow slaughter is up 1.5 percent YTD, but all the increase occurred in March.
Cow slaughter in April was essentially the same as in April 2011. At some point, animal numbers will have to start falling through additional culling if we ever hope to see increases in production more in line with demand.
Perhaps one of the most discouraging statistics has been fluid milk sales. Ever since January 2010, fluid milk sales have been dropping. The drop is even more pronounced this year, ranging in the -3 to -4 percent drop.
In 2011, 1 billion pounds of milk had to be moved from fluid to manufactured products because of the drop in fluid milk sales. We will see an additional 1.5 billion pounds of fluid milk not finding a belly if the current trend is maintained for the balance of the year.
The problem is not just the lost Class I premiums for this milk, but that this milk doesn’t disappear and floods into cheese or butter-powder plants, hence affecting Class III and IV prices.
Butter production is up 7.8 percent YTD. Butter stocks were up a whopping 79.1 percent at the end of April with more than 250 million pounds of butter in storage.
American cheese production is up 3.1 percent YTD and stocks were up 1 percent at the end of April.
This doesn’t seem like much, but we had more than 630 million pounds of American cheese in storage, which is about 14 percent of our total annual production. Nonfat dry milk and skim milk powder (NFDM/SMP) production is up 23 percent YTD and are piling up in storage where stocks now exceeds 225 million pounds, up 54.2 percent from last year.
Fortunately, not all dairy statistics are bleak: we are still exporting a lot of dairy products. With the exception of butter (-32 percent, which we don’t export much anyhow) and dry whey (-6.2 percent), YTD export volumes are up from last year: 8 percent for NFDM/SMP, 12 percent for cheese and 13 percent for milk and whey protein.
These numbers are very important for some dairy products because we now export roughly 50 percent of our production of NFDM/SMP and dry whey, and more than 63 percent of our milk and whey protein production.
In 2011, the U.S. exported about 3.3 billion pounds of dairy products with a combined value of close to $5 billion. We are becoming a very important player on the world dairy markets. These exports have been a blessing, but the rise of our dairy exports also means that our domestic milk prices are now subjected to a great many new factors such as currencies exchange rates (i.e., the strength of the U.S. dollar), weather in Oceania, oil prices and economic turmoil in Europe.
You know how it goes — the wedding has been plan for over a year, but the weatherman is ruining everything by forecasting thunderstorms for Saturday afternoon, just about when the bride and the groom were scheduled to walk out of the church with radiant smiles, flowers, rice and cheers. Just remember that the weatherman doesn’t choose the weather for the wedding; he just calls what he sees on his instruments, graphs and computer models.
Hopefully, the black clouds will dissipate and the dairy wedding will go as planned. But may I suggest that you carry an umbrella just in case … as I write this column, the Class III futures are averaging $16.43/cwt for the rest of 2012; not great prices, but much better than I would expect based on the statistics that I just reviewed with you.
Now might be a good time to review your milk marketing and risk management plans. And tell the kids to drink more milk!
(The author is an Extension dairy specialist at Ohio State University. Questions or comments can be sent in care of Farm and Dairy, P.O. Box 38, Salem, OH 44460.)