Dairy industry still seems very reluctant to expand herds

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Dairy farm Wednesday’s monthly USDA Milk Production report stated February’s national total at 15.935 billion pounds, which represented a 1.1% annual increase.

The report was quite similar to its February counterpart. That is, both reflected much improved milk production per head, which offset 11,000- 12,000 head year-to-year reductions in the U.S. milk cow herd.

In contrast, the dairy population in the 23-major producing states posted a 13,000-head year-to-year increase, but the number actually fell by 1,000 head from the level reported for January.

click image to zoomDairy HErd

The chart above places the latest production figure in context, with the r click image to zoomDairy HErd

The real question for the milk and product industry is why farmers have not responded more aggressively to the huge price advance posted since last fall.

For example, the monthly price of Class III milk has climbed from $17.38/cwt last July to $18.95 in December and to a record at $23.35 in February. The rally has almost surely reflected vigorous demand, especially from the export sector. The value of U.S. dairy exports averaged almost 50% over the comparable year-ago figure during the fourth-quarter of 2013, although the January total rose ‘just’ 34.4% annually.

That suggests the price strength has begun to stifle those sales. Nevertheless, having milk prices trading at such hugely elevated levels provides major incentives for producers to boost production.

Rapid industry expansion also seems indicated by relatively low feed costs, especially when compared to the extreme heights those reached in the wake of the 2012 drought. Hay is also much more plentiful than it was last year. Ultimately, several factors appear to be deterring production.

First, industry sources cited low quality feed for the drop in milk production per cow experienced late last year.

Second, wintry weather over much of the country probably distressed cows and discouraged producers.

Third, CME futures were implicitly forecasting a major price decline from early 2014 into 2015, thereby providing considerable disincentives to aggressive expansion. Indeed, the deferred contracts remain at substantial discounts to current market prices, which may still be deterring dairymen from responding more aggressively.

Thus, the U.S. dairy industry continued reacting very modestly to record high milk and product prices during winter. That probably reflects concerns about a major price decline as the year passes, but farmers have to be aware of wide industry margins now being earned, which should eventually spur increased supplies.

Spring will almost surely bring the usual seasonal surge as cows freshen and active expansion seems likely to exaggerate that increase. Meanwhile, demand seems stunningly strong, with much of the credit likely going to export customers.

We still tend to expect a substantial price decline during the coming weeks and months, but the late strength exhibited by the whole protein complex suggests the drop could prove rather modest.

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wi  |  March, 24, 2014 at 12:57 PM

Apparently you've forgotten that 2012 and 2013 were drought years in Wisconsin. Feed was record high, and heifers were going to feed lots. Those heifers aren't going to suddenly reappear and start making milk. Also, farmers used less sexed semen when milk prices tanked in 2009. Again, fewer heifers three years later.

PNW  |  March, 28, 2014 at 10:08 AM

I think its the high beef prices across the country. If we can beef mediocre 3-6 lactation at 1000 dollars or more why keep them, then it takes a lot more heifers to maintain the herd.

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