Rod Hissong tries to look at things with a positive attitude. And while it’s tempting to be optimistic going into 2013, he has to admit there are a number of unknowns.
The No. 1 unknown is the weather.
“There are some bullish things and there are some bearish things, and I think it depends on the weather,” he says. “I don’t think any of us can guess what Mother Nature is going to do.”
If there’s another dry year, which would keep feed costs high and limit milk-production increases, then milk prices are likely to go up, Hissong says. If there is good weather and a bumper crop, which would encourage milk production, then milk prices are likely to be tempered.
For Hissong, dairy producer from Mercersburg, Pa., and former president of the Professional Dairy Managers of Pennsylvania, having a positive attitude is a plus. But it has to be balanced with a healthy dose of realism and an ability to deal with the unknown. That led him to work with a professional risk-management and commodity firm to lock in prices for his feedstuffs, which served him well in 2012.
Hissong is right. Weather is the big unknown going into the New Year. As an article on page 17 of this issue points out, even the weather experts don’t know what to expect more than a few months out. When you get March and beyond, “our crystal ball isn’t that good,” Jed Lafferty, managing director of life sciences for Planalytics, told a webinar audience on Dec. 12.
Acknowledging the uncertain weather, we went ahead and asked a group of experts to share some of their ideas on what the New Year could bring in terms of crop prices and dairy prices. In making their predictions, these experts assume that the weather will be a bit more “normal” this year than it was in 2012.
Only time will tell whether that was a good assumption or not.
Dairy Outlook: All-milk price could average $20
By Bob Cropp
As we enter 2013, there is considerable uncertainty where milk prices are headed, especially for the last half of the year.
This uncertainty is evident as we look at what happened in 2012. The widespread drought of 2012 resulted in high feed prices. High feed prices made for unfavorable margins (returns over feed costs) that resulted in less milk being produced, but much higher milk prices for the last half of the year than what had been earlier forecast. The year ended with two-thirds of the U.S. still under drought conditions.
One uncertainty impacting milk prices in 2013 is moisture. Adequate moisture next spring and summer will be needed for good crops in 2013. If adequate moisture materializes, feed prices will fall, improving margins for dairy producers, and this would be positive for milk production.
There is also uncertainty as to the level of dairy exports for 2013. Dairy exports are now an important factor for the level of milk prices. Preliminary data indicate exports set a record high in 2012, accounting for about 13.6 percent of U.S. milk production on a total solids basis.
As I write this article the middle of December, final milk production data and milk prices referred to for 2012 are preliminary.
Lingering impact of drought
Let’s first look at the impact of the 2012 drought. Milk production for the first quarter of 2012 on a daily basis was 4.1 percent higher than the year before and for the second quarter 2.1 percent higher. This growth in milk production pushed down the U.S. all-milk price from $19 in January to a low of $16.20 by May and June. Much lower milk prices, along with rising feed prices, cut margins. Margins which approach $9 per hundredweight for milk some months in 2011 were $6.30 for January and fell to about $2 by June and below $2 for July and August. As a result, milk cow numbers, which were increasing beginning back in October 2010, peaked in April and started to slowly decline by May. With much lower margins, producers cut back on grain and concentrate being fed, which dampened increases in milk per cow. Increases in milk per cow fell below 1 percent by June and was negative for August and September and up only slightly for the remainder of the year. With the declining number of milk cows and dampened increases in milk per cow milk, production for the last half of the year fell slightly below year–ago levels. This improved the U.S. all-milk price, reaching $22.10 in November. But, with high feed cost, margins improved to just over $6 per hundredweight of milk.
The year ended with 1.8 percent more total milk being produced than 2011.
Feed prices will remain high for at least the first half of 2013, keeping margins relatively tight. We can expect milk cow numbers to continue to decline for the first half of the year, and milk per cow below year-ago levels. Assuming good moisture and favorable outlook for 2013 crops, feed prices will fall for the last half of the year, improving margins. But the financial stress experienced from 2012, which forced an above-normal number of dairy operations to exit the business or down-size, will persist. For the year, we could see the average number of milk cows 0.5 percent to 1.0 percent lower than 2012 and milk per cow up about 1 percent, resulting in an increase of less than 0.5 percent in total milk production over 2012.
On the milk sales side, the continued rather slow growth in the economy will mean slow growth in sales. Fluid milk sales will likely continue its downward trend, with cheese sales growing as well as some of the other dairy products like yogurt.
With little or no growth in milk production, exports are likely to be lower but could still account for about 13 percent of milk production on a total solids basis.
Drought conditions not only in the U.S. but parts of Western Europe and higher feed prices worldwide have slowed milk production in three of the five leading exporting countries —United States, the European Union countries and Argentina, which combined account for about 60 percent of the world dairy trade. The other two countries — New Zealand and Australia — are experiencing increases in milk production, but not the double-digit increases as experienced a year ago.
World demand continues to grow. So, for at least the first half of the year, the world supply of dairy products will remain tight, particularly for milk powders and whey proteins and less so for cheese and butter. This will be favorable for U.S. exports in 2013.
Higher prices forecast
Under this dairy situation, my forecast for 2013 milk prices is shown in the table.
I forecast the Class III price to average $18.75 for the first quarter, $18.50 for the second, $19.00 for the third, and $18.45 for the fourth. The respective average Class IV prices are $18.50, $18.40, $18.10 and $17.90. And the respective average U.S. all-milk prices are $20.15, $19.90, $20.40 and $19.85.
Averages for the year will be $18.65 for Class III, about $1.25 higher than 2012; Class IV $18.20, about $2.15 higher than 2012; and the U.S. all-milk price $20.00, about $1.55 higher than 2012.
But recent history tells us that milk prices can deviate quickly with rather small anticipated changes in milk production and/or sales both domestic and exports. With the uncertainties I indicated, milk prices could turn out quite different, especially for the last half of the year.
Bob Cropp is an economist and professor emeritus at the University of Wisconsin-Madison.
Export Outlook: A challenging year ahead
By Tom Quaife
Dairy exports will encounter headwinds this year, but officials remain cautiously optimistic. Speaking at a “Global Dairy Outlook” webinar on Dec. 4, U.S. Dairy Export Council Vice President of Communications Alan Levitt said he is optimistic that the record-high levels achieved last year can be maintained.
In 2012, the U.S. exported about 13.6 percent of its milk production (on a milk-solids basis).
According to Levitt, the companies that export U.S. dairy products abroad have seen the value of positive growth and have become more sophisticated in meeting the needs of foreign buyers. And, that should carry into 2013, despite the challenges ahead.
“I think our volumes will still be there in 2013,” he said.
Still, there is the expectation that dairy supplies on the world market could tighten. For example, milk powder stocks have dwindled. “The world just doesn’t have buffer stocks of powder anymore,” Levitt said.
Expectations of lower stocks are fueled, in part, by the economic difficulties facing dairy farmers throughout the world.
Dairy farmers in many countries are receiving low prices for their milk, and that will restrain production increases. The U.S. has been a notable exception, but prices are expected to fall here, as well. Certainly, that has been the trend lately in Class III milk futures trading on the Chicago Mercantile Exchange.
The continuing drought in the U.S. and high feed costs will put further restraints on production growth.
Tighter supplies of dairy products on the world market could drive up prices and dampen demand.
On the other hand, demand in emerging markets like China may be great enough to overcome those price barriers.
For instance, Levitt pointed out, the peak of the “Oceania flush” — the time of year when milk production is highest in New Zealand and Australia, which generally occurs from late August though early October — came and went without any adverse effect on prices. “The market absorbed that production and prices did not go down,” Levitt said.
So much depends on the world economy. Even though the European Union is in recession and the U.S. faces slow economic growth next year, “China shows signs of accelerating growth into 2013 which, in turn, will support Southeast Asia regional economic growth,” said Marc Beck, vice president of strategy and insights at the U.S. Dairy Export Council.
China continues to be a critical driver of global trade. And, there are particular opportunities for dairy, since China wants more dairy products, but doesn’t have the domestic infrastructure to supply the demand on its own. “(The Chinese) can’t produce milk as cheaply as they import it,” Levitt said.
Meanwhile, “the challenge for the U.S. will be balancing the needs of the international market with the needs of the domestic market,” Beck said.
Will 2013’s weather be a reapeat of 2012’s?
By Tom Quaife
Weather forecasters have some idea what will happen through the end of February, but when you get to March and beyond, “our crystal ball isn’t that good,” acknowledged Jed Lafferty, managing director of life sciences for Planalytics, during a webinar on Dec. 12.
Whether a full-fledged El Niño, La Niña, or something more neutral develops, “it’s too early for us to tell,” he added.
The possibility of La Niña is something to keep an eye on, since it’s usually associated with warm winters and drier-than-normal conditions in the South. No one needs dry weather, since much of the nation is already suffering severe drought.
“(La Niña) is not our forecast, but it has to be a consideration,” says Fred Gesser, senior global agricultural meteorologist at Planalytics.
A La Niña pattern was responsible for warmer-than-normal weather across much of the United States during the winter of 2011-12. It allowed the jet stream to flow from west to east, without a “blocking” ridge, which effectively kept arctic air bottled up well north of the U.S.
By March, soil temperatures were much warmer than usual. March itself was very warm. And, the six-month period from January through June period was the warmest January-June in much of the U.S. since temperatures began being recorded in 1895.
The warmer temperatures and early planting “got us off to a rip-roaring start” last spring regarding the crops, but then chinks in the armor started to develop, pointed out Jeff Doran, senior business meteorologist at Planalytics. The hot, dry weather continued. In July, a critical month for corn pollination, that particular weather pattern became “kind of the death knell for corn crops in many areas,” Doran added.
“It was just amazing how fast (the drought) crept up on us,” Doran said. On May 1, U.S. government drought monitors showed normal conditions in much of the nation’s midsection, but by Aug. 28 that area was covered by extreme drought.
Now, there is concern that the drought pattern will continue into 2013.
In the absence of definitive prediction models, there is one consolation: Weather rarely repeats itself from one year to the next, the meteorologists from Planalytics point out. Year-over-year weather only repeats itself 20 percent of the time.
Corn Outlook: The focus now shifts to demand
By Marty Foreman
The drought of 2012 will be ranked as one of the worst in the last 100 years, standing out for its scope and intensity, reminiscent of previous drought years 1980, 1983, and probably most similar to 1988.
The corn crop took a hit. Production is down 13 percent from 2011 and 27 percent below USDA’s pre-drought spring estimates of a record-shattering 14.8 billion bushels. At an estimated 10.7 billion bushels, this is the smallest corn crop in six years.
The focus now is on demand. Overall, the corn market must slow consumption enough to wind up with corn stocks as of Sept. 1, 2013, at 600 to 700 million bushels. That means corn use in 2012/13 must be cut by 1.3 to 1.4 billion bushels from last season. This would be the largest decline in absolute terms in history and would be the largest year-over-year cut in percentage terms since 1974/75. Note that the short crops in the 1980s were supplemented by large stocks in storage, which cushioned the decline in use. That’s not the case this year. Demand rationing must be accomplished through market forces which will play out over the next several months.
How is demand shaping up? Exports have already garnered much attention. They are reported weekly, making them easy to track. Export commitments thus far in 2012/13 have been dismal, down 45 percent to 50 percent from a year ago and the five-year average.
Doane forecasts exports for the marketing year at only 1.2 billion bushels, down 22 percent from a year ago. If realized, this would be the lowest export total in nearly 40 years.
The poor pace of exports has been negative for the market. Importing countries have relied on South America and Ukraine to meet their import needs. However, South American supplies are nearly exhausted. The Ukraine faces icy ports and quality concerns that could limit buying interest. Also, the European Union is likely to supplement reduced production with additional imports from the Ukraine. U.S. exports got off to a poor start, but are expected to improve in early 2013. However, low water and shipping restrictions or even closure of Mississippi River from St. Louis, Mo., to Cairo, Ill., is a concern. Shippers are working on alternative rail shipments to the Gulf and increased exports out of the Pacific Northwest.
The ethanol situation is generally positive for the corn market. The Environmental Protection Agency denied requests to waive the ethanol mandate. The corn-based Renewable Fuel Standard climbs 600,000 gallons in 2013 to 13.8 billion. The corn-for-ethanol forecast for 2012/13 is 4.5 billion bushels.
Corn feed use is a wild card. High feed costs have caused livestock producers to curb production. Cattle feedlot placements were down sharply through the fall with cattle on feed as of Jan. 1 expected down 5 percent to 7 percent. Broiler placements were down about 4 percent through the fall and down 2 percent cumulatively for 2012. Hog farrowing intentions for Sept-Nov were down 2.7 percent, pointing to fewer hogs next spring. However, rising hog prices may have caused producers to rethink their intentions. Feed and residual use is forecast at 4.1 billion bushels, down 10 percent from last season. This is a large cut, particularly in the face of reduced dried distillers grain production.
Feed use will be lower, but it’s not clear that rationing will occur at the needed pace. Quarterly grain stocks are used to estimate feed use. Stock estimates over the past few years have been noted for their large deviations from expectations. Given historically tight supplies and uncertain demand, the stage is set for volatile markets in response to the stocks reports.
We expect nearby futures to hold above $7 through the winter, but also have difficulty pushing above $8. Looming dryness this spring will be supportive, but, with timely planting and rainfall, prices become increasingly vulnerable to the downside through the spring and summer. With normal yields, December 2013 futures have downside risk to $4.50 by the fall.
Marty Foreman is a senior economist at Doane Advisory Services.
Soybean Outlook: Planting projected higher
By Bill Nelson
Soybean and meal prices vaulted to records in 2012, and they will begin 2013 at high values that reflect tight supplies and the uncertainties posed by the main growing season for South American production. Following three consecutive disappointing global crops — 2011 in the U.S. and 2012 in both South America and the U.S. — world soybean consumers are in desperate need for a big soybean crop harvest this spring.
The crux of how 2013 prices play out is hugely dependent on the success or failure of the South American crop harvest that occurs largely between February and April. High prices encouraged record plantings in Argentina, Brazil, and Paraguay. Planting weather was challenging in both Argentina and Brazil, resulting in later-than-normal plantings. There is still much weather ahead now in early 2013 to determine the outcome of South American production.
Global soybean markets will pay much attention to the weather forecast maps during February, probably the most important month in determining the final outcome for those crops.
We don’t have a crystal ball to predict accurately what will happen for the weather and soybean production. What we can forecast is that because demand for U.S. beans has been so strong and will continue that way over the next two to three months, U.S. soybean supplies project to multi-year lows on March 1, 2013.
All eyes on South America
Basically, there is a global gamble in the soybean situation to consume as much of any surplus stocks of U.S. beans as possible by that date. The strategy at that point is for soybean demand-sourcing by global consumers to shift south immediately as those beans come in from the harvest. It is a delicate balance between covering the immediate needs out of the U.S., then swiftly and smoothly transitioning to South America to cover global needs from about March up until September 2013.
If things were to play out in the real world as they are choreographed on paper, the U.S. will be largely out of beans for export, either as beans or as meal, by April 1. Soybeans on hand in spring and summer 2013 will be just enough to meet domestic needs ahead of a large fall harvest, and really not much more than that.
The grave risk for consumers would be that there is another disappointing harvest in South America. If the market senses that development during this first quarter of 2013, we would expect soybean prices to rally sharply and remain high into the second half of 2013. But if it turns out that South America produces some fairly decent-sized crops, soybean prices will be vulnerable to more losses off of the summer peak.
Plantings projected higher
Among the most important decisions that farmers must make over the next three months is what their acreage mix will be for plantings this spring.
Our general view is that U.S. plantings will be a little higher in 2013. Southern and eastern Midwest farmers will again be attracted to the potential to plant soybeans after the wheat harvest. And, in parts of the Plains, those plantings may go in early on failed winter wheat if moisture levels show any improvement. Corn, of course, will compete strongly for acres, and that competition is the major impediment against a multi-million-acre increase in soybean plantings.
We see the soybean market doing what it can to ensure that there will be plenty of U.S. beans sown so that the recent era of tight stocks may be a thing of the past and find a means to produce more margin of supply comfort against the ever-present weather risks.
Assuming that weather returns to some semblance of normal in both major growing regions, soybean prices are expected to be under downward price pressure during much of the year. Under normal weather conditions, which most would characterize as favorable weather, soybean prices may reach back toward harvest lows at $12 per bushel, maybe lower. Meal prices would retreat back toward $300 per ton late in the year. But if there are more production losses in either South America or the U.S. next summer, $15 or higher soybeans could find an extended stay.
Bill Nelson is a senior economist at Doane Advisory Services.