Mielke: Drought rattles dairy producers

Lee Mielke

By LEE MIELKE

For the Capital Press

Hot weather remains the center of attention across most of the nation with little to no relief in sight and likely too late anyway. Ramifications will be with us for months and maybe years. U.S. Agriculture Secretary Tom Vilsack thus called on House lawmakers to pass the farm bill before they adjourn.

Milk supplies and milk composition are falling due to the heat. Dairy Profit Weekly reported that Vilsack designated 76 additional counties in six states as primary natural disaster areas. Some 1,369 counties across 31 states have been declared disaster areas, 1,234 due to drought, making qualified farm operators in the areas eligible for low-interest emergency loans.

Drought across the grain states are causing producers to re-evaluate their feed on hand, crop yields, projected feed input costs, financial resources and herd size that will allow them to stay in business through winter, warns USDA. Lots of cows are going to slaughter because farmers can't afford to feed them.

Daily Dairy Report market analyst Sarina Sharp said in the DDR's Daily Dairy Discussion -- a free download at www.dailydairyreport.com -- that the June Milk Production report indicated that dairy cow numbers have been declining since April and quite significantly. The July 20 Cattle Inventory report confirmed that, she said, as heifer and milk cow numbers were unchanged from a year ago.

"We have fewer cows than we did earlier this year and production per cow is slowing," Sharp said. She blamed the heat and the rising cost of production.

"Spot corn is over $8 per bushel. New crop is flirting with $8, and nearby soybean meal is well over $500. A lot of dairy producers who grow their feed are concerned they won't have the production they were counting on and will therefore have to purchase this very expensive feed."

She warned that grains, protein, and forage will be very hard to come by at a reasonable price and reported that farmers in the Great Lakes region are mowing their corn under.

"There are no ears or grains on the stalks so they're simply chopping these stalks into silage and will feed it," she said. "But this low-quality forage can really hurt milk production in the long run and in the short term we're dealing with the heat, so per cow production can really take a hit thanks to this drought."

Nitrate levels can also be problematic in drought-stressed corn, she added.

Cheese markets

Cheddar blocks closed the last Friday of July at $1.7050 per pound, down 1 1/4-cents on the week, up 6 1/2-cents on the month, and 45 cents below a year ago. The barrels closed at $1.6850, down a penny on the week and 44 1/2-cents below a year ago. Eight cars of block traded hands on the week and four of barrel. The AMS-surveyed U.S. average block price inched 0.4 cent higher to $1.6488, and the barrels averaged $1.6895, down 0.4 cent.

USDA's July 20 Dairy Market News reported that the cheese market is "unsettled" as manufacturers and buyers try to anticipate its direction. Cheese-makers are increasingly using nonfat dry milk or condensed skim to fortify milk for the vats, thus powder prices have strengthened. Cheese stocks are adequate but some storage facilities report lower inventories than previous years.

Cash butter closed the week 8 cents higher, at $1.67, 43 cents below a year ago. Twenty-one cars found new homes, 16 on Friday. AMS butter averaged $1.5487, up 1.1 cent.

Butter markets remain firm. In most regions cream volumes are declining as milk production decreases and butterfat levels fall. Cows are eating less and drinking more, thus not maintaining a positive dry mater to liquid balance, USDA says.

Cash Grade A nonfat dry milk finished the week at $1.3750, up 1 1/2-cents. Extra Grade was up a nickel to $1.30. AMS powder averaged $1.1759, up 1.7 cents, and dry whey averaged 51.02 cents, up 1 1/2-cents.

June butter holdings, at 350.8 million pounds, were down 18.9 million pounds or 7 percent from May but were 52.4 million or 28 percent above June 2011, according to the latest Cold Storage report.

American cheese, at 629.9 million pounds, was up 9.9 million or 2 percent from May and 10.8 million or 2 percent above a year ago and the highest June inventory in 10 years, according to the DDR. Total cheese stocks at a little over 1 billion pounds are also up 2 percent from May but unchanged from a year ago.

The Cold Storage data was "bearish to cheese," according to the DDR's Sarina Sharp, who said the growing cheese stocks are priced out of the global market but added the caveat that most U.S. cheese is produced in the drought-plagued Midwest, where heat is taking its toll on milk production. That will likely keep floor under the cheese market.

Butter is a different story, according to Sharp. Butter stocks usually peak in June, she said, but it appears they peaked in May this year. June showed the first month over month decline in stocks since November, according to Sharp, however inventories are still almost 30 percent higher than a year ago.

Dairy politics

The International Dairy Foods Association charged this week that the Dairy Market Stabilization Program proposal in the new farm bill would have been limiting U.S. milk production since May, if it had been in effect, even as agricultural economists and USDA are warning that the drought throughout the country will reduce milk supply and raise consumer prices."

"Dairy farmers enrolled in the program would have had their revenue reduced from 2 to 6 percent in May and possibly by 3 to 7 percent in June," according to an IDFA press release. "As a result of the lost revenue, farmers would be expected to reduce their milk production, most likely by reducing herd size."

"Not only will consumers be facing higher prices in the near future, because cows produce less milk during high heat conditions, and the cost of feed will be higher, but this new program would have already dug the hole deeper," said Connie Tipton, IDFA president and CEO.

National Milk Producers Federation shot back, stating: "IDFA has mischaracterized the real issue facing dairy farmers this summer. Summer heat always leads to a slowdown in milk output, this year will be no different, but the USDA reported last week that milk production in the second quarter of 2012 was up 2 percent compared to 2011, while the first quarter was up a whopping 5.3 percent. The U.S. is well on track to produce a record volume of milk this year, a hot summer notwithstanding.

"As a result, farmers' prices this June were down 18 percent from June 2011, 30 cents a gallon less. Consumers really should be asking if the price they pay at retail for dairy products have dropped by the same amount. The answer is, retail prices haven't changed, even as the farm price this year has reflected the fact that supply has raced ahead of demand. Meanwhile, grain prices reflect the opposite: that supplies are short in relation to demand.

"The dairy policy provisions in the Senate and House farm bills are tied to the critical difference between the farmer's milk price, and the cost of feed. When that margin contracts to dangerously low levels, those who volunteer to use the proposed program will be insured against these low margins and they are also expected to trim their milk output until margins reach healthy levels," NMPF said.

"These summer temperatures, and the possibility of a poor crop harvest, are exactly why we need a dairy farm safety net that takes into account higher feed prices, and also gives us a tool to better align supply and demand. Relying on the weather to perform this process is foolish."

Out west

A California Department of Food and Agriculture hearing panel found that, based on the testimony provided at the recent hearing, there should be no change in the California 4b milk price formula. However state Agriculture Secretary Karen Ross, concerned about the increasing costs of feed, made the decision to increase prices by modifying the formula in such a way that as of Aug. 1, the Class 4b milk price will be improved by a maximum of 10 cents per hundredweight when the price of dry whey exceeds 60 cents a pound. The price floor of 25 cents was not changed but each bracket in the sliding scale will increase an extra 1.25 cents. At the current dry whey value of 49.5 cents per pound the improvement will be 6.25 cents per hundredweight.

"The results of this hearing, while disappointing to those with high expectations, should not have been a surprise to anyone," Bill Van Dam wrote in the Alliance of Western Milk Producers newsletter. "A CDFA hearing is not a political contest, it is not a court of law, nor is it a popular vote of the people. It is an economic exercise in which decisions are based on cold hard economic facts."

California's Milk Producers Council's Rob Vandenheuvel wrote in his newsletter that "disappointing is a huge understatement" in describing the announcement.

Corn prices

The Alliance's Bill Van Dam points out that "There was huge financial suffering as dairy producers adjusted to the first doubling ($2-$4 per bushel) of corn prices. Now the second doubling has occurred ($4-$8) and it looks as if a way has to be found to adjust to $8.00 corn prices."

One source told me double digit corn prices are possible.

"The combined livestock industries were not able to get an adjustment in the ethanol mandates when they attempted to reduce them a few years ago. It made sense then and makes even better sense now that the ethanol mandates be cut from 10 to 5 percent of our US gasoline the amount that is needed to oxygenate the gasoline," VanDam wrote. "The balance of the U.S. ethanol program cannot be justified.

"The drought is real and is persistent. On the Market to Market show this morning the analyst opined that if not later this year then next year corn is likely to hit $9.00 a bushel and perhaps $10.00. At some point demand destruction comes into play as users get priced out of the market. Doesn't it make better sense to reduce the artificial demand dictated by government decree? Cut it in half," VanDam concluded.

Corn and soybeans aren't the only feed prices going up. Dairy Profit Weekly reports that the whole cottonseed dry spell is expected to intensify in 2013, as competing crops threaten to cannibalize even more cotton acres in 2013.

Cotton farmers planted 14 percent fewer cotton acres in 2012, explained Tom Wedegaertner, director of agricultural research at Cotton Inc.

"While a more 'normal' summer could produce more harvestable acres of cotton, and more cottonseed, we anticipate the amount of whole cottonseed available for dairies will remain flat compared to 2011," Wedegaertner said.

If USDA's June 29 forecast of 17 million bales holds true, the crop could produce 5.7 million tons of cottonseed, of which 3 million tons would be available for feeding.

Cotton Inc. now offers a Cottonseed Marketplace publication for farmers to receive periodic updates. Sign up for the Whole Cottonseed E-newsletter at www.wholecottonseed.com .

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