Posted: Thursday, November 29, 2012 12:00 PM
High prices, drought, heat, poor-quality feed hurt dairies
The USDA's latest monthly dairy report shows only a slight reduction in milk production in October in the 23 major producing states compared to last year, despite a 10,000-head reduction in the dairy herd.
"That tells me milk producers are fairly ingenious," said Jerry Dryer, chief market analyst for Rice Dairy, a Chicago brokerage firm.
Dairymen have had to deal with high feed prices, drought, heat and lower feed availability and quality, yet they were able to keep production steady, he said.
"The whole deck is stacked against them, but they keep making more milk," he said.
Reduction in the herd, however, points toward future reduction of milk. It's not coming as soon as Dryer expected but will show up in the first quarter of 2013, he said.
The other big takeaway from the USDA National Agricultural Statistics Service's October report is a huge shift in production regions. The West and Southwest are giving up production, and it's shifting to the High Plains, the Upper Midwest and even the East, he said.
"It's a big structural change in the industry, driven by high feed prices and where they have to pay cash for corn," he said.
New Mexico's production was down 5.9 percent, Arizona was down 4.5 percent, and California was down 3.5 percent.
On the upside was Colorado with an increase of 5.9 percent, Kansas up 5.1 percent, Wisconsin up 4.7 percent, Michigan and New York up 2.7 percent, and Ohio up 2.6 percent.
A 0.1 percent decline nationwide goes against the seasonal trend, said Robin Schmahl, CEO of Ag Dairy LLC in Elkhart Lake, Wis.
It should be increasing, he said, but culling is high as dairymen exit the business.
He thinks "a good amount" of producers will go out of business in the year ahead. Many have not recovered from the downturn in 2009, and dairymen will still be facing high grain and hay prices, which could go even higher as supplies get tighter, he said.
"We're weeding out the market again. Those who can't make it will go out. Cow numbers will definitely be less and farms will be less, but I don't know about the whole production thing," Schmahl said.
Production for 2012 will be higher than 2011, but he doesn't know what that will do in 2013, he said.
The industry is in a down cycle that will continue until a new grain crop comes to market next fall. Feed prices could moderate next summer if there's good growing weather, but he thinks dairymen will struggle throughout 2013, which could potentially tighten the milk supply and return dairymen to profitability, he said.
Dryer, too, thinks it'll be a challenging year, and the industry is likely to see a "few more" dairymen exist the business as they simply run out of feed, he said.
"If you don't have feed now, you won't find any," he said. "It's pretty committed."
But the industry is more likely to see producers trim their herd to accommodate the feed they have, rather then exit the business, he said.
October milk production - 23 major states
2012 2011 %change
Calif. 3,307 3,428 -3.5
Idaho 1,131 1,121 0.9
Ore. 208 208 --
Wash. 512 523 -2.1
U.S. 15,165 15,170 0.1
Calif. 1,778 1,776
Idaho 577 581
Ore. 123 122
Wash. 261 266
U.S. 8,465 8,475
Milk per cow
Calif. 1,860 1,930
Idaho 1,960 1,930
Ore. 1,690 1,705
Wash. 1,960 1,965
U.S. 1,791 1,790