Feed Costs Reach Multi-Year Highs
January 4, 2021
Feed prices have rallied to multi-year highs, raising the cost of milk production. USDA’s Agricultural Prices report released last week showed sharply higher grain and soybean meal costs in November. National average hay prices took a small step down in November, but the price of premium alfalfa hay held steady or moved higher in all of the major dairy states. According to USDA’s national average prices and the Dairy Margin Coverage program’s formula for a typical ration, the average dairy producer spent $9.20 on feed per hundredweight of milk in November, the highest average feed cost since July 2019. Feed markets have staged a steep rally since November, propelled by strong demand from China and concerns about empty grain bins and dry weather in South America. Last week, the Argentine government highlighted just how tight grain stocks have become when it announced a ban on corn exports until new crop supplies arrive in March. With South America largely on the sidelines until harvest, the United States is the main source for feedstuffs, and exports are booming. Corn and soy product values in China stand at multi-year highs, providing a hefty margin for imports despite the recent run up.
Historically, when corn futures approach $5/bu., feed costs drag down dairy producer margins, reducing output and lifting milk prices. But the invisible hand of the markets can move very slowly. In 2009, for example, dairy producers had to stomach both high feed costs and low milk prices as global economic hardship weighed on demand. Today the relationship between feed costs and milk prices is much more palatable for dairy producers than it was in 2009, and there is more hope that the global economy and dairy demand will soon be on the mend. Nonetheless, the rapid growth in the U.S. dairy herd and in milk output suggests that milk and dairy product prices could remain under pressure even if feed costs continue to rise.