Although milk prices have increased over the summer, they have not kept pace with grain commodity price changes. The result has been in negative profit margins for producers, writes Iowa University’s Kristen Schulte.
Dairy product demand and disappearance has remained strong for the first half of 2012 helping to sustain higher milk prices than expected. Projected milk prices are expected to remain strong compared to the range of prices over the past three years. But there is room for upward movement due to decreasing U.S. cow inventory, sustained global milk production, and stable increase in global dairy product demand.
Milk Supply
Although milk per cow has increased year over year, the late summer heat hit U.S. milk production harder than a year ago. Rolling Herd Average at the end of September is 21,915 pounds per cow for the 23 selected dairy states, slightly down from end of second quarter 2012.
At the end of September, total milk production was up by 2.44 per cent for the year so far, but down 0.48 per cent for the month compared with September a year prior.
Iowa milk production has increased at a slower rate since the first half of the year. Milk production per cow increased 545 pounds per cow when comparing annual production from October 2011 to September 2012 to the same time period prior.
At the end of September, Iowa saw an increase in total milk production by 1.70 percent for the year so far compared to 2011.
The Iowa cow inventory has fallen to 200 thousand cows; the dairy herd in Iowa has fluctuated 8 thousand head in the past year. Iowa producers continue to be in the top tier of states in increased milk per cow, but the declining herd inventory results in the state falling to the bottom half of the 23 selected states for total milk production.
Tightened margins and strong cull cow markets have influenced a declining herd size and tighter milk supply. These factors are not estimated to change drastically in the next six months, further maintaining the question of where production and herd inventories will be at the end of 2012.
Milk Demand
For the first half of 2012, commercial disappearance of dairy products is up 3.05 per cent. There has been a large gain in nonfat dry milk production and cheese export sales since the beginning of the year. Current global demand for dairy products is strong with continued growth in demand from emerging countries and key export countries including China, Mexico, Middle East, and Southeast Asia. Despite strong production in Australia and New Zealand, total global milk supply is expected to remain tight in late 2012 due to drought conditions and tightened feed supplies in U.S., Europe, and South America.
These factors have helped to keep dairy product and milk prices at higher levels than expected in the second half of 2012.
Milk prices are holding for the remainder of 2012, however, they are softening over the course of the coming year when basing on the Class III Milk futures. However, with expected reduced total milk supply and sustained global demand growth, there is opportunity for milk prices to improve if our dairy products can be price competitive and meet the needs of our global consumers.
Current feed prices have subsided slightly in the past few months with corn in the low $7 range for the current corn crop in 2013.
Better than expected yields with late cuttings of hay has helped hay prices to level off in some areas of the U.S. Feed quality and inventory assessments will need to be completed as purchase of additional feed may compromise the financial position of farms if not properly planned for.
Based on current market prices, profit margins are slim to negative for all types of dairy enterprises, pasture or conventional.
Milk price protection, lower feed prices, or alternative sources of income will need to be explored to result in positive profit margins for some operations.
Both individual cow production records and enterprise cost analysis should be completed to determine areas of improvement so dairy producers can weather the storm of higher feed input costs and tight margins over the next year.
Source: Â The Dairy Site