Milk prices, profits set records but production holds steady

By Jim Webster

© Copyright Agri-Pulse Communications, Inc.



WASHINGTON, April 23, 2014 - Driven by record dairy exports and growth in U.S. cheese consumption, prices for milk and dairy products have been setting records since the first of the year and show little prospect of weakening soon. The price spike caught some analysts by surprise. “I don't know anyone who even came close to catching this,” says highly regarded Wisconsin economist Mark Stephenson.

The overriding question today is how long high milk prices will stick around. “We're probably at the peak price right now,” Stephenson said in late March. “But everybody's pretty optimistic that prices will be fairly strong the first half of the year.” Veteran Wisconsin dairy analyst Bob Cropp agreed with Stevenson, adding that “eventually our milk production has got to pick up again.”

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Despite a recent firming in corn, soy and alfalfa prices, the margin of milk prices over feed costs averaged $14.25 per 100 pounds in March - more than $9 higher than March 2013. With dairy farm profit margins at unprecedented levels, analysts typically expect production to increase.

But so far this year, farmers have not expanded on a nationwide basis. USDA reported Monday that milk production in the first three months was up only 1 percent from the previous year and the number of milk cows in the 23 principal dairy states was up only 1,000 head from 2013. “Cow numbers are just flat,” Stephenson said. “They're just sitting there. They're not growing. You would think they would increase.” Most production growth is in milk per cow.

Experts look at several factors to explain why farmers have not been adding cows to take advantage of the healthiest profits in a generation. Stephenson said one factor is the need to recover from heavy financial losses in 2009 and 2010. In California, which produces 21 percent of the nation's milk, “farmers tell me it's time to restore balance sheets rather than time to aggressively expand,” Stephenson says. Cropp says some of that is true in the upper Midwest.

“I'm not surprised,” says Peter Vitaliano, vice president and chief economist at the National Milk Producers Federation (NMPF). “It's explainable if you look at the last five years, which were not profitable. Two of those years were the worst; 2009 left them with a different attitude. Producers are leery,” he told Agri-Pulse. “Bankers are very, very cautious. There's not a lot of appetite to add cows. Beef prices are good, which means better prices when they sell less-productive cows.”

Vitaliano expects a “soft landing” for prices as they come down, following recent weakening of international prices. Yet farm milk and dairy-product prices “will likely remain at historically high levels for much of the remainder of 2014,” Vitaliano says. He points out that the increase in production in the first quarter of 2014 is below the 1.4 percent average annual growth of the past five years.

USDA analysts appear more bullish on milk production later this year, forecasting a 2.4 percent gain in output for 2014 as a whole. The department also forecasts increases in dairy exports and U.S. consumption of dairy products - except for fluid milk, which continues to show slow, steady declines - resulting in continued strong prices. It forecast farms will see an “all-milk price” average between $22.55 and $23.05 per 100 pounds. The $22.80 midpoint of that forecast would be up 11.5 percent from last year and a whopping 23 percent from 2012.

The USDA Economic Research Service (ERS) said last week that feed costs “are still favorable for herd expansion” on dairy farms later this year. It pointed out that the 2.4 percent increase in this year's production forecast is predicated on higher output per cow rather than herd expansion.

Severe drought also has limited growth, especially in New Mexico, west Texas and other areas fed by the Ogallala Aquifer, Vitaliano says. He sees California as less affected, although its milk production is concentrated in a few areas experiencing severe or extreme drought. Lingering drought curtailed production of alfalfa, with prices up nearly 86 percent between 2009 and 2012.

One of the factors holding up prices is the record pace of dairy product exports, which account for 15 percent of U.S. production in January-February, according to the U.S. Dairy Export Council (USDEC). The value of U.S. dairy exports has surged from $982 million when USDEC was formed 20 years ago to more than $6 billion annually - with the yearly growth rate averaging 21 percent for the last decade. The exports are mainly cheese and milk powder (whole, skim, whey and lactose) to Mexico, Southeast Asia, North Africa, the Middle East, China, Japan and South Korea.

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