DFA chief warns of price risks
'The market doesn't care what anybody's cost of production is', Gallagher warns
By CAROL RYAN DUMAS
Milk prices have recovered from the dismal lows of 2009, but nothing is certain in dairy markets, said Ed Gallagher, Dairy Farmers of America's vice president of economics and risk management.
That's why producers need risk-management programs, be it through their co-ops, lenders, brokers or other financial services companies.
The average annual Class III price in 2010 will be close to $15 per hundredweight of milk, the third-highest annual price ever. But at best, producers are only breaking even.
"We've got to do better yet," he said. "The market doesn't care what anybody's cost of production is. The long-run average price will just about equal long-run costs."
Margins keep tightening, and they're likely to tighten further.
"Ethanol is not going to go away," he said.
Demand in China and Southeast Asia is growing for dairy and all commodities used on the farm.
"You're going to see more and more gyrations in everything you buy and milk prices. You need to manage your risk," he said.
Gallagher expects global milk supply to grow by 10 billion to 25 billion pounds.
"The wild card in all this is what's going to happen to demand. Economic growth is there; will it be strong enough to soak up the extra growth in milk production?" he asked.
With milk supplies trending up and stronger U.S. cheese inventories than he's ever seen, Gallagher sees no upside potential in the first part of 2011.
"So protect your downside," he said. "You have to manage your risk, not just for milk but feed as well. Look at this stuff as insurance; you've just got to accept it as part of cost of production," he said.
While domestic production is up 3 percent, domestic demand is only up 1 percent. Producers saw what happened when export growth fell off the table in 2009. That wasn't the case with other dairy exporters.
"All major dairy-exporting countries actually saw growth. We bore the brunt," he said. "We can't balance the world supply anymore. We have to be a consistent supplier."
Considering a 2 percent increase in domestic milk production and no change in export levels, the U.S. would need a 2.5 percent increase in domestic demand to consume the surplus.
On the other hand, U.S. exports would have to rise 15 percent if domestic demand was only up 1 percent.
With everything that's happened, there's not enough equity or financial backing to sustain Class III producers with non-feed margins below $7.75 per hundredweight, and economists aren't even forecasting $6 margins, he said.
"You need to look at hedging margins," he said. "What we need to do and what you folks need to think about is a strategy to help handle your risk."