Dairy Economists Answer Three Buzzing Market Security Questions
January 25, 2022
After enduring a world pandemic that has impacted every industry, dairy included, producers are trying to stay optimistic. Opening a milk check that surpasses $20, a price not seen since 2014, gives producers reasons to cheer. However, most producers are realistic, too, and wonder if this is all too good to be true and how long will the good times roll.
Dan Basse, president of AgResource Company in Chicago says, “There are reasons to finally be upbeat in dairy. It’s taken us eight years to get back to where we were in 2014.”
With volatile butter prices as of late, one might wonder if we reached the top. Basse said he doesn’t believe so. He states, “The CME butter prices are rising because of the lack of production coming out of the EU and Oceana, giving the U.S. butter price an advantage, and while that spread relative to the EU and Oceana has been narrowing, the demand for butter globally has been strong.”
With the lack of protein supplies globally, Basse believes the butter market will continue to head higher and has not bottomed out yet.
Owen Feenstra, a dairy market analyst with ever.ag, says that short term we could still see some upside volatility. “New high isn’t bearish,” he states. “However, I think some fault lines are beginning to expose themselves.”
Will High Cull Rates Continue?
Year-over-year culling has been on the rise, with USDA reporting 267,800 dairy cows were culled in December, more than 22,500 than a month prior. More than 3.1 million dairy cows were culled in 2021, 42,500 more than a year prior. Will high feed prices and high beef prices incentivize producers to get rid of problem cows? According to Erick Metzger, general manager of National All-Jersey based out of Reynoldsburg, Ohio, higher milk prices will slow down culling some. “But feed prices are high, too, so that’s an incentive not to put up with troublesome cows.”
Basse says to remember the number one struggle dairy farmers are facing, which is the lack of ability to hire help. He says couple that with rising feed costs, many dairies are pushing pause in terms of expansion right now. “So, this cycle of thinking about producing more milk is not going to be to the same degree as before when prices reached up to $21 or $22,” he shares.
Metzger concurs, stating that even if Class III or Class IV prices hold to that $20 plus range, he doesn’t see cow numbers growing very rapidly. “To me, the key question will be can the U.S. take advantage of their cheese price to increase cheese exports,” he shares. “We only export 5-6% of cheese production currently.”
Feenstra expects cow numbers to slow in the coming weeks and months. “Future milk prices and recent mailbox prices I believe are incentivizing producers to make as much milk as they can,” he shares. “We are seeing and hearing reports of increasing values for replacements, which was not the case 3-4 months ago when culling and replacing could be done at a narrow spread.”
Factor In Feed Costs
Rising feed costs crippled dairy farmers in 2021 and hay stocks are the lowest in a decade and planting of hay is the lowest since 1909. Factor in the dryness from Texas northward to the Dakotas and Basse says it a potent argument for higher forage prices going forward. “We think that forage price for hay will continue to rise, probably as we get into May, April timeframe it will be $210 to $220/ton relative to alfalfa,” he shares.
Feenstra believes availability and cost will cause producers to experience a bit of a squeeze on fiber purchases in the early parts of 2022. “The water issues being experienced out west are not helping the issue either,” he shares. “With increasing inputs leading to higher ration costs, producers need to watch both the income and expense side of the ledger carefully – and risk management will play an important role in profitability.”