At the same time, dairy producers have also been realizing benefits on the cost side of their ledgers. Despite some firming in the grain complex of late, feed costs have plummeted relative to previous years. Using a representative ration, U.S. dairy feed costs are averaging $9.00/cwt., well below the $11.00 average in 2013. This lower cost basis should insulate producers from any correction in milk prices for the foreseeable future, and dairy producers probably won’t be worrying about margin pressures until late in the year, at the earliest.
Riding a global tidal wave
U.S. dairy producers are making money today at a pace never seen before. However, those dollars are beginning to stimulate more supply. Western and southwestern dairies that used to stand empty are being repopulated. Greenfield construction is underway in some regions, and expansion projects are moving hurriedly from concept to reality. Culling has slowed to a pace not seen in five years, and higher margins are encouraging producers to boost feed quality and ingredients to maximize milk per cow. Unsurprisingly, February milk production topped year-ago levels by 1.1% (the largest year-over-year gain since October). Dairy farmers are just getting started on rebuilding their herds, however, as cow numbers were steady month-to-month and still 12,000 head below last year.
New Zealand output quietly remains strong, with production through January up 6% on a season-to-date basis. Some well-timed rains in March kept pastures green enough to hold more cows in milk later in the season than just one year ago. Stockpiles of feed from earlier in the season should also help bolster milk production as the season begins to wind down.
Not quite enough
Despite the rosy supply-side outlook, surplus product is currently hard to find. Exports have played a role here so far, with any excess easily placed into the world market. Such placements were much easier, however, when U.S. prices were at a significant discount to Europe and Oceania. Now, with that pricing advantage all but gone, it remains to be seen how much new business will come to the U.S. when both Europe and New Zealand have product to offer.
Higher prices are curbing domestic demand too. Cheese, milk and other dairy products are being moved to higher grocery store shelves as promotions and trade spend are being cut. It just doesn’t pay to promote cheese with the wholesale price hovering near $2.50/lb. Fluid milk prices are also creeping higher, as manufacturers tie their selling price back to the monthly USDA price. And, when fluid milk prices climb to current levels on a per gallon basis, it’s not surprising to see a large swath of consumers back away, with declining sales the result.