Dr. Cameron Thraen, Extension Dairy Specialist, The Ohio State University
The MarketView installment of Buckeye Dairy News, December 2009, discussed the relationship between the annualized rate of change in U.S. milk production and the level of the Class 3 milk price. In that piece, I stressed the point that in order from U.S. milk prices to move up sharply and get back into the plus $16 level, the United States dairy herd would have to contract to less than 9 million head. This would contract U.S milk production to the extent necessary for weak domestic and international demand to balance out with supply and produce stronger prices. Now with the latest USDA milk production report released, it does not appear that we are headed in that direction going into 2010.
In this edition, I will take a look at the relationship between the change in the number of U.S. milk cows by month and the annualized rate of change in U.S. milk production. My comments center on the two charts shown below.
The first chart shows the change in the number of milk cows, from December 2008 through February 2010. January 2009 was the first month, going back to January 2004, which milk cow numbers in the United States did not increase from the prior month. Over the next 12 months, the number of milk cows in the U.S. dairy herd declined each month from the prior month. The total net decline in 2009 over 2008 was 224,000 head. The decline in average number of milk cows, 2008 to 2009, was 115,000 head. It is important to recognize that of the 224,000 head removed from the U.S. dairy herd in 2009, 201,500 were removed under the purchase-slaughter program of the Cooperative Working Together (CWT). The non-CWT removal over the entire year was only 22,700 head.
By the end of 2009, the net decline in the number of milk cows in the United States had slowed considerable, with only a 3,000 head reduction in November to December. With the release of the January and February 2010 milk cow number estimates by the United States Department of Agriculture, the U.S. dairy herd has begun to expand once again, increasing 6,000 head over the December 2009 level. With strong economic recovery in the domestic market and the international market yet to appear, this is not good for hopes of a stronger milk price in coming months.
Now look at the second chart. This chart shows the annualized rate of change, growth or decline, in U.S. milk production over the December 2008 through February 2010 period. The chart shows a significant production adjustment to support level prices in February 2009 followed by positive but nearly zero growth March through July 2009. What is also evident from the data is the fact that U.S. milk production growth, while slowing down considerably, did not contract in any meaningful way until the last 6 months of 2009. Over this period, U.S. milk production capacity contracted at an annualized rate of +0.6 of a percent each month through January 2010. In February 2010, milk production capacity in the United States ceased contracting and turned in a slightly positive growth. This is the result of increasing output per cow and more cows in milk.
The question is what will happen as we move further into 2010? Has the U.S. dairy financial situation turned a corner, with feed costs, utility and fuel costs enough lower, resulting in a return to marginal profitability for dairy farms? Is this reversal in the contraction of the U.S. dairy herd merely a short-term pause before regaining momentum for another contraction as happened back in 2002-2003?
The answer to these questions will determine what market price outlook will be for the rest of 2010. The USDA reports show that there are considerable dairy product stocks in inventory, especially cheese, and a return to positive growth in dairy cow numbers and with it milk production will mean that the modest gains in prices to date will be unsustainable in the coming months. If this happens, this will place renewed pressure on the already financial strapped dairy farm sector, and we could very likely see a renewed exodus of milk cows beginning in the second half of 2010, as ag lenders finally close the books on underwater dairy farmers. It would be a positive sign to see the number of milk cows contract again in the coming months. The CWT has announced that it will resume export subsidies for cheese in an attempt to remove some of the overburden. A renewed CWT dairy herd removal would also help at this stage; however, after the significant effort in 2009, this does not appear too likely in the coming months.
The current Chicago Mercantile Exchange (CME) futures market is forecasting a Class 3 milk price for the April through December 2010 at $14.50/cwt. This is down $1.00/cwt over the last 2 months as CME cheese, butter, and non-fat dry milk markets have all lost ground over the past 8 weeks of trading.
This would be a good time to learn more about the use of futures and options to protect your milk price should a pricing opportunity arise in the coming weeks or months. Also, consider learning more about the Livestock Gross Margin Insurance product available to dairy producers. Each of these programs provides a management tool to assist you in protecting your milk price in 2010 and 2011. You can find out more about this by visiting my website: http://aede.osu.edu/programs/ohiodairy. Look for the links to Livestock Gross Margin Insurance or Price Risk Management.