Low margins will continue dairy cow liquidation in 2013
By CAROL RYAN DUMAS
Large gains in the milk supply in the first quarter of 2012, due mostly to a mild winter, resulted in lower milk prices into the summer. Lower milk prices combined with record-high feed prices, due to widespread drought, resulted in shrinking producer margins and more cows going to slaughter.
"Because of low margins, we've really seen this dairy slaughter pick up, especially since July," said Katelyn McCullock, ag economist at the Livestock Marketing Information Center (LMIC).
Dairy cow slaughter in July was 45,000 head, rising to 85,000 head in October and has been well over year-earlier levels for most of 2012. That is likely to continue through the remainder of the year and into 2013, she said during a webinar last week hosted by the Agriculture and Applied Economics Association.
LMIC is forecasting another 100,000 head will exit the dairy herd by the end of 2014.
"This is really to drive the milk price up and put it at a more profitable level," she said.
The Class III milk price started the year at about $17 per hundredweight, dropped to a little over $15 by May, was back close to $17 in July and moved steadily up to $21 in October.
Since summer, some milk prices have climbed drastically, mostly supported by cheese markets. The cheese price driving that Class III price is thought to have been largely supported by the export market, she said.
Despite milk prices being higher since summer, margins are still very tight for producers, and 2012 has had some of the lowest milk to feed ratios on record, actually worse than in 2009, she said.
A recent uptick in cheese prices and consequently Class III milk prices and all milk prices has slowed cow slaughter in the most recent weeks. However, that's expected to be short-lived as cash cheese prices have softened, she said.
Dairy cow slaughter is largely going to define market forecasts, she said.
"Further reduction really is needed to get producers to a profitable level," she said.
The key driver moving forward will be exports.
Across the dairy complex, exports have had steady gains year over year, however not nearly as strong as in the past. But cheese has remained a consistent growth market this year, she said.
The industry has come to rely on exports to pick up some of its excess milk, but overseas buyers didn't take as much as they normally do in the first part of 2012. The growth rate has slowed in some of the export markets, she said.
"So it's something we have to watch out for because oversupply can be an issue if we have very high gains again," she said.
LMIC is forecasting record-high milk prices in the end of 2013, with cow numbers returning at the same time. If stronger prices arrive before then, there could be less herd liquidation and a little faster turnaround
"Similarly, if we have aggressive farm bill policy that provides a strong safety net, that could really affect liquidation as well as where our prices are in the next couple of years," she said.