I don’t like to be the bearer of bad news, but the sky over dairyland looks to be very stormy with good possibilities of tornados.
There is a lot of milk being shipped from U.S. dairy farms right now. Unless the demand for dairy products increases markedly, potential disaster may be looming.
As I write this, the cash markets for dairy products do not bode well. Chicago blocks and barrels of cheddar cheese are selling for about $1.5350 and $1.47 per pound, respectively. Chicago AA butter price stands at $135-1/2; non-fat dry milk is trading around $1.11/lb.
Unless commodity prices recover from these levels, June class prices for cheese, butter and powder could be around $5/cwt less than last year’s class prices.
Combined with near record prices for feed, we may be facing disaster in months ahead of us.
Too much milk
The downward pressure on dairy commodity prices is not just a domestic phenomenon; the amount of milk being produced is on the rise in all major dairy producing regions of the world.
It has rained in Oceania — lots of rain. New Zealanders and Australians are doing what they normally do when there are tons of grass around: add cows and make more milk.
Ultimately, Oceania is a world price taker. The domestic market in both Australia (22 million people) and New Zealand (4 million people) is so small that milk produced in these two countries must find a place on the world’s markets.
New Zealanders, in particular, clearly understand this reality and are actively marketing dairy products in all areas of the world, but particularly Asia.
EU quota to end
European producers are increasing milk production in spite of the quota system still in place. The quotas are scheduled to disappear in 2015. Thus, their value is dropping and some producers are rapidly expanding their herds to become more competitive on a world basis.
Consequently, according to Dairy Market News, the milk supply in Oceania and Europe is much like it is in America: “Current output is far exceeding demand.”
Powder puff
Milk powder markets are no different. The market for nonfat dry milk is weak at best.
Interest from export markets is weakening. Unfortunately the U.S. now exports a substantial proportion of its nonfat dry milk production. The U.S. is now exporting close to 15 percent of its milk solids production.
In a way, this is good because our domestic markets would literally crash if these solids were trying to find a home in an American stomach. But exporting brings new factors into the pricing of dairy products and these new factors can only add to price volatility.
Drink more milk
Meanwhile, the proportion of milk being used for Class I keeps dropping. In federal order areas, it was reported to be 3.4 percent lower this March than last. In California, the class 1 pool usage dropped by a staggering 6.7 percent.
Batten your hatches
I wish that I could see a ray of sunshine somewhere in these figures, but I don’t. Let’s hope that my dairy barometer is completely off, but don’t count on it.
It is time to go back to your cash-flow budgets and set plans for six months of negative profitability and tight cash flows.
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So who will survive better? The dairyman who hedged his cheese price and will go on making the most milk his cows can make to drive the price down low enough to drive others out, even with high-priced feed, or the one who hedged his bets by diversifying? Sure is good that the Dairy Security Bill (Foundation for Future Failure) that National Milk is pushing, is not in effect, or the first option would be the prevailing one. The diversified farms will survive better, the ones buying all their feed will be hurting the most.