Editor’s note: This market commentary is provided by Dave Kurzawski and Eric Meyer, risk-management consultants with FC Stone/Downes-O’Neill, Chicago, Ill.

Key Statistics from Report:

  • California production UNCHANGED, Milk Per Cow UP 75 lbs (UP 4 percent) vs. April 2009, Cow Numbers DOWN 5,000 head vs. Mar 2010
  • Other key states (Y/Y):  Wisconsin UP 6.2 percent, Michigan UP 5.1 percent, Minnesota UP 3.3 percent, Idaho UP 3.3 percent, Washington UP 7.2 percent, New York UP 1.7 percent, Arizona DOWN 4.9 percent, New Mexico DOWN 1.7 percent, Texas DOWN 2.2 percent
  • ALL US & 23 STATE REVISION - 9 million lbs ADDED to March figures - not enough to change percentages

Our take:

This month's surprising numbers have taught us a lesson:  Never underestimate the perseverance and dedication of the nation's dairy farmers.   Their ability to produce milk during times of economic stress has been and will continue to be very impressive.  After the worst dairy price meltdown in 2009, dairymen are producing milk at a very swift clip with less cows.   Let's examine some of the reasons why.

  • Dairy Cow Slaughter Prices Are Outstanding - This might be the reason that has allowed many dairymen to stay in business over the past few months.   Beef prices have risen dramatically over the past three months providing dairymen a more efficient economic model for producing milk (for now).   In the old days (think six months ago), dairymen would have to cull two, sometimes three cows in order to purchase one springing heifer.   Now, that number is close to one for one.   Fifty pound per day cows are sent to slaughter and replaced by fresh cows that can produce 70-80+ pounds per day.   January's Cattle Inventory Report told the industry that we had 3 percent more dairy replacement heifers than the previous year, and had not much of an answer as to where they would end up.   A significantly higher cull rate on dairies due to record high beef prices may be the cure for that problem.
  • Feed Prices Are Lower - While corn and some of higher quality feedstuffs have not retreated as much as dairymen would have liked, hay and forages have come down quite a bit since last year.  According to the USDA's Ag Prices report in April, hay prices are down nearly 14 percent vs. last year and overall feed costs are down nearly 10 percent.  Hay prices have been low since September 2009, quietly lowering production costs that producers aren't talking about.
  • Excellent Weather - With the exception of Texas and New Mexico, the nation's dairy herd has enjoyed near-optimal milking conditions for the past four years.  Cow comfort technology has certainly assisted where milking conditions aren't perfect (think Arizona), but mild weather has been another reason milk per cow continues its long term upward trend.  

These reasons above are the largest contributing factors to the milk production increase, since cow numbers are not trending higher nearly as swift as milk per cow.  However, we also need to mention that the economic climate for dairymen is such that no matter where the price of milk, dairymen are encouraged to produce more.   It seems counter-intuitive, but it is 100 percent true.  

When milk prices are high, dairymen are rewarded with higher margins and look to maximize their output in order to maximize their margins.   When milk prices are low, dairymen will do just about anything in order to lower their break-even costs.   While some dairymen chose to cut back on quality feed, most took their nutritionist's advice, kept rations the same and removed cows.   Lo and behold, milk in the tank remained the same or even pushed higher as a result.   In 2010, high culling and moving to milking 3X/day has lowered the dairymen's break-evens even further.   If margins are slim, dairymen try and make up the difference in volume.  Given the fact that most dairymen we know have been adhering to this strategy for decades, we find it hard to believe that the nation's dairymen will adopt supply management as their preferred method of "risk management".

April's production report tells us that the raw milk supply side of this market is whole.   However, U.S. supply is only one side of the equation.  There is also the world supply of milk to consider; and global demand.  

23 State Milk Production UP 1.7 percent vs. Apr 2009
23 State Milk Cows UP 3,000 vs. Mar 2010, DOWN 155,000 vs. Apr 2009
23 State Milk Per Cow UP 63 lbs vs. Apr 2009

US Milk Production UP 1.5 percent vs. Apr 2009
US Milk Cows UP 3,000 vs. Mar 2010, DOWN 186,000 vs. Apr 2009
US Milk Per Cow UP 61 lbs vs. Apr 2009

Source:  FCStone/Downes-O'Neill