Operating Costs Continue to Rise Unabated
December 8, 2021
Agricultural product prices continue to rise around the globe. The Food and Agricultural Organization (FAO) of the United Nations’ Food Price Index notched another increase in November, rising 1.6 points from October to 134.4, the highest level since mid- 2011.
Rising dairy prices are contributing substantially to the increase. The FAO Dairy Price Index rose to 125.5 points in November, representing a 4.1-point jump vs. the prior month and pushing the index to its highest value since 2014. The Cereal and Sugar Index also increased compared to the prior month, while the Meat and Vegetable Oil Index saw modest declines.
While rising dairy prices have translated into climbing milk prices, producer financials remain under significant pressure due to rising input costs. In particular, soaring feed costs are crunching producer margins. According to USDA’s Agricultural Prices report released last week, many components of dairy rations have appreciated considerably in recent months.
For example, year-over-year corn prices in October were up $1.41/bu., although at $5.02/bu., prices declined modestly vs. the prior month. Forage costs also rose. The weighted average price of premium- and supreme-quality alfalfa in the top-five dairy states rose to $247/ton in October, up $53 or 27.3% from October 2020.
Costly feed is not the only expense giving producers a headache. As feed costs have risen, so too has the cost of labor, fuel, fertilizer, and other agricultural inputs for producers around the world. The cumulative pressure of these ballooning costs has depressed producer sentiment and is one of the key drivers behind the recent global slowdown in milk production. With little reprieve on the horizon, further milk production declines are possible in the near future as producers attempt to limit their exposure to rising costs. If milk production were to materially decline, it would place additional upward price pressure on dairy commodities and could have negative repercussions for demand.