Dairy producers should capitalize on any price declines in key feed ingredients, such as the corn market’s sell-off over the past week, and lock in supplies for the longer-term, INTL. FCStone economist Bill Brooks says.
Corn supplies are expected to remain tight and prices will remain historically high through next year, meaning recent pressure on dairy margins is likely to intensify in the months ahead, Brooks said this week.
Dairy producers input costs “are going to remain elevated,” Brooks said. While most producers are currently “eking out gains,” profits later this year “will probably be smaller than they’d like to see,” Brooks said. He spoke during FCStone’s annual market outlook conference June 15-16 in Chicago.
Milk income over feed costs, a measure of dairy profitability, is expected to average $8.22 per hundred pounds this year, down from $9.09 in 2010, Brooks said. In 2012, Brooks projects an average of $5.72.
“We’ve had a decent start to the year” for dairy profits, Brooks said. “As we work our way toward the end of the year, it starts shrinking and gets tighter.”
Corn prices have more than doubled over the 12 months, reflecting expanding ethanol industry consumption a smaller-than-expected harvest last year. While the market fell sharply over the past week, many analysts expect prices will remain high amid uncertainty over this year’s crop. U.S. corn stockpiles by the end of August will fall to a 15-year low and are expected to shrink further in 2012, according to a government forecast earlier this month.
In trading June 16, July corn futures fell 24 ¼ cents to $7.01 ½ a bushel, down more than 12 percent from an all-time high of $7.99 ¾ on June 10.
Rapidly-rising retail prices for milk and other dairy products are also a concern, especially with the U.S. economy struggling with high unemployment, Brooks said.
Yet, export demand has been robust.
“We wouldn’t be looking at the prices we have now if we didn’t have that export market,” Brooks said. “We’re not out of the woods from an economic standpoint. I don’t know if international demand is going to keep up.”