Will High Grain Prices Impact Milk Production?
There is much concern in the agricultural markets about the weather that has been experienced so far this spring. Summer will officially begin on Sunday, June 20th and so far much of the nation has experienced hot and dry weather which has come a little earlier than usual. Grain prices have been very volatile as they rise and fall depending on the weather forecasts. There are also other factors that have had an influence such a production and ending stocks projection and most recently the rumor that some Senators were putting pressure on President Biden to ease the fuel blending mandates. Surging renewable fuel prices moved to record levels with oil companies pushing Senators to recommend relaxing the blending mandate. There is no indication this will be done, but traders are not waiting around to see whether it is before liquidating positions causing further market swings.
This has brought about much discussion and analysis over the impact that will be seen on milk production and milk prices. The usual impact from high grain prices is that milk production declines due to heavier culling and sometimes the shift to lower cost rations that sometimes impacts milk output. The last time there were drought conditions similar to what is currently being experienced was in 2012. That year, corn price reached over $8.00 per bushel and held above $7.00 until mid-2013. Actually, corn price was over $7.00 per bushel through much of the spring and summer of 2011 as well. For a while, it appeared we were headed for that again and we still might be. There is a lot of growing season yet ahead of us.
So what can we expected for milk production and milk prices if the drought continues and corn prices move above and/or stay above $7.00 or maybe even $8.00? First of all, milk production in 2011 increased 4.6 billion pounds over the previous year totaling 196.2 billion pounds. Milk production in 2012 increased 4.1 billion pounds over 2011 totaling 200.3 billion pounds. The impact from continued high grain prices had some impact in 2013 with output increasing, but only by 1.1 billion pounds. Then came 2014 when we had record high milk prices, yet is was not because of lower milk production for overall milk output that year was 4.8 billion pounds higher than the previous year totaling 206.0 billion pounds. Other demand factors drove the market higher that year. In fact, the last time we saw milk output below the previous year was in 2009 and we all remember how low milk prices were that year.
This may shed some light on what the impact of grain high grain prices might have on milk production. But we also need to remember that much has changed in the industry over the last ten years. Dairy farms have become larger and less likely to make large changes to rations to save money that may result in lower milk. Rations have already been balanced for optimal milk production at the least cost possible. Advancements in technology, housing, cow comfort and milk production keep farms running efficiently with no desire to disrupt that efficiency. All farms have the ability to protect income over feed prices through the Dairy Margin Coverage program with the greater benefit falling to the smaller farms. Higher grain and hay prices will not have as much impact on smaller arms as they did 10 years ago when that program was not in place.
On the most recent World Agricultural Supply and Demand report. USDA estimated milk output this year to reach 228.5 billion pounds, increasing their estimate by 600 million pounds over May. They also estimated milk output for 2022 to be up another 2.6 billion pounds from this year with potential production at 231.1 billion pounds. They may not be too far off when comparing what took place to last time corn prices reached these levels or higher.
Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.
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