What producers should know in shaking off the dairy doldrums

Posted on July 20, 2023 in Dairy Performance
High inflation and interest rates should have minimal impact on landowners, asset holders and businesses with debt interest rates locked in, according to Sarina Sharp, a risk manager with Ag Business Solutions.

During her presentation at the Midwest Dairy Conference on June 13, Sharp gave her insights on the markets and the impacts on dairy producers.

Feed markets

Sharp said “it’s all about the weather” when it comes to the feed markets.

At the time of her presentation, Sharp reported that the USDA’s predicted corn price was in the $3 to $4 range.

“To get there, producers need to grow a lot of corn, but it’s dry,” added Sharp. “A large portion of the Midwest and other areas of the U.S. are experiencing drought conditions. This is setting the stage for grain production. It will be a stretch to get to the 181 bushels per acre that the USDA is predicting, possibly the upper 170s.”

The demand for corn for feed and ethanol is high, which will affect exports. Sharp pointed out that continued drought conditions and a sub-par crop will mean sharply higher prices.

Exports also will be affected by a large South American crop. Brazil and Argentina had an all-time high corn and soybean output—dominating the export markets.

“The U.S. will really need to compete for corn and soybean exports,” said Sharp. “If the weather cooperates, corn prices will go much lower, but, if there is another sub-par crop, it will mean sharply higher prices.”

For soybeans, new soy crushing capacity could mean cheap hulls.

“We’re raising U.S. soybean processing capacity without raising demand for soybean meal or hulls,” she explained. “This means cheaper meal and cheaper hulls relative to the soybean price.”

Sharp also pointed out some of the effects of decreased forage production due to drought conditions across the Midwest, including high demand for corn silage, wheat midds, soy hulls, etc. In general, hay prices follow corn, but local prices can be higher in areas with more significant drought.

Cattle markets

The USDA estimates that 40% of the cattle inventory is in a drought-affected area, causing producers to liquidate because of lack of feed. The four-week average for female beef slaughter is elevated compared with previous years.

Less beef in production will mean higher prices for consumers.

“It means that the beef industry needs calves coming from the dairy industry. Bull calf sales are at a three-year high,” Sharp said.

The trend is also impacting the dairy cull cow price as the average springer price at auction is $500 more than a beef cull, according to Sharp.

U.S. milk production

Cow numbers are strong, but producers know that cow numbers need to decrease to support milk price.

Sharp noted that fluid milk sales are below capacity due to lower demand. That drop in demand was enough to equal a 0.3% increase in milk output in the first quarter.

Labor issues and strong milk supplies have led to spot loads of milk being either dumped or sold at a steep discount to processors that have capacity for it, Sharp noted. Processors that have capacity to process extra milk are in a much better position than those that are forced to sell those extra tankers.

International milk production

Globally, the top five exporters are showing modest growth. Sharp explained that slower growth in Europe is due to low pay prices and major long-term issues.

Oceania milk production is lower with New Zealand’s milk production at 46.9 billion pounds compared with 47.2 billion pounds in 2022. Australia’s milk production is at 8,110 million liters in 2022-2023 compared with 8,554 million liters in 2021-2022.

Sharp reported big gains in China with 41 million metric tons produced in 2023 compared with 39 million metric tons in 2022. Chinese whole milk powder imports have increased to 90.5 million pounds in April compared with 86.1 million pounds in March, but they are much lower than last year.

Year-over-year changes in China’s year-to-date imports are mixed with whey at +44%, Cheese at +7%, skim milk powder (SMP) at +20% ultra heat treatment (UHT) processed milk at -38%, butter at -20% and whole milk powder (WMP) at -58%. Chinese whey imports have seen recent increases as well with 58.3 million pounds imported in April as compared to February’s 49.7 million pounds.

Domestic dairy production

Overall, cheddar cheese production in April was at a four-month high at 346.2 million pounds with U.S. cheese exports totaling 80.3 million pounds that month, according to Sharp.

She noted that the overall cheese market trends include:
• Cheddar production is growing steadily.
• New plants are opening soon.
• Decent exports are expected.
• European competition will be less fierce in the future.
• Interest rates are reducing buyers’ appetites to stock up.
• There is room for a price bounce.

Currently, we are building butter stocks seasonally with stocks at 327.7 million pounds in April, Sharp said. That’s higher than April of last year, but lower than 2021. Sharp noted that the CME Group’s spot butter price was at $2.36 per pound at the time of her presentation and it has been steady for the first half of the year.

Sharp also commented that the CME spot nonfat dry milk was $1.16 per pound as recorded in June, which indicates that production isn’t burdensome, but there’s a lot of competition. She also reminded dairy producers that the new cheese capacity will pull milk away from butter and milk powder. Any slowdown in milk production will impact Class IV first.

Looking ahead, Sharp indicated that a lot would depend on China; however, dairy exports to Mexico are record-breaking.

Sharp’s outlook for the milk market was that the prices are probably cheap enough, but any sizable rally will slow contraction and prolong the dairy downturn.

She advised, “Get protection but be careful about ceilings, especially for Class IV.”

Click here to download Sharp’s PowerPoint presentation from the Vita Plus Midwest Dairy Conference.

Category: Dairy Performance