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Weather patterns part of the mix in dairy sector outlook

May 9, 2013 | 0 comments

World-wide weather patterns are having a significant impact on milk production, dairy prices, and operating margins, University of Wisconsin dairy market specialist and Center for Dairy Profitability director Mark Stephenson said.

He spoke to attendees at the Extension Service's semi-annual farm management update for agricultural professionals.

What's known as the "southern oscillation" continues to have a direct effect on the weather in the United States and Oceania (New Zealand and Australia), which are two of the three world's major milk production areas serving international markets, Stephenson pointed out.

This refers to the Pacific Ocean water flow patterns and temperatures in phenomena described as LaNina and El Nino, he noted.

The LaNina pattern (cold water in the eastern Pacific), which persisted for an unusually long period of two years, was closely associated with the drought that gripped large portions of the United States during that period, Stephenson indicated.

He said the latest observations put the Pacific pattern at a neutral between the two identifiable phenomena.

Some results that can be attributed in large part to the weather patterns have been a near doubling of the costs of basic rations for dairy cows within the past decade and a few periodic slippages in average milk per cow as rations were cut back.

Another result includes slight drops in dairy cow numbers (50,000 over the past year) in the United States as attractive prices for slaughter cows have encouraged more culling, Stephenson explained.

Dairy Trend Reversals

There has also been somewhat of a fallout effect in the number of dairy replacements being raised, Stephenson observed.

Before the crunch on dairy farm operating margins in 2009 and again in 2012, the ratio of replacements had risen from 44-50 per 100 cows in the current milking herd but that ratio has been retreating a bit lately, he pointed out.

In some cases, dairy heifers are being sold for beef instead of being brought into the milking herd, Stephenson reported.

In other instances, dairy operators calculated that they cannot afford to raise and feed heifers, deciding to buy replacements as needed, often at somewhat lower costs, he indicated.

While those happenings are based on a national perspective, Wisconsin's dairy sector stands in contrast by showing very strong growth (many monthly milk increases of two to three percent compared to the month in the previous year), Stephenson remarked.

He attributed this in large part to a still fairly common practice in the state of growing a large portion of the basic dairy ration feeds on the home farm rather than buying them.

Whatever the source of dairy ration feeds, Stephenson noted that annual milk increases of about two percent per cow have been common.

This is due to genetics and to management upgrades such as cow comfort but, as recent history has shown, cutbacks on feed quality in order to protect the bottom line have interrupted that pattern of increases, he suggested.


Consumption Outlook

Changes in the dairy sector are not confined to the production end, Stephenson pointed out. There is also the market demand for dairy products - a subject on which he urged observers to look at the total picture.

There is some bemoaning about the gradual decline in per capita and total consumption of fluid milk but Stephenson does not embrace that concern.

He did, however, list the numbers - annual per capita consumption of less than 20 gallons in the United States after once being at 30 gallons and daily fluid milk sales of 144.5 million pounds today compared to 152 million pounds as recently as 2010 (an annual drop of about 2.7 billion pounds).

Stephenson is encouraged by the modest across-the-board increase in dairy product consumption.

As part of the larger picture, he noted how "the world is on a tear" for increases in the consumption of yogurt and how the per capita consumption of cheese in the United States has nearly doubled in the past four decades.

Restaurant Preview

Up to one-third of dairy products are consumed at restaurants, Stephenson pointed out. For that reason, he said that the Restaurant Performance Index (RPI) is an important gauge of the strength of the retail economy.

Stephenson views the RPI as "a leading economic indicator" that has been proven to be quite accurate. He cited the overall slowdown in the economy by late 2008 and throughout most of 2009 as one example of that.

At the moment, the RPI is hovering at just above and below neutral, Stephenson noted.

During its most recent low point four years ago, one effect was a brief rebound in fluid milk consumption because of an increase in meals eaten at home, he observed.

Dairy Export Market

The export market is another important underlying factor for the U.S. dairy sector, Stephenson stressed.

He noted that dairy product exports by this country didn't take off until 2007 but since then they have accounted for "a significant number" - as much as 13-14 percent of the national milk production.

On that point, "milk supply elsewhere in the world matters a lot," Stephenson remarked.

With Oceania exporting a major portion of its production, how the weather affects the dairy sector in that part of the southern hemisphere has a direct carryover to the U.S. sector, he explained.

Regarding dairy exports, Stephenson said the Cooperatives Working Together export program, which provides financial reimbursement to member cooperatives on their commodity exports, is useful in terms of introducing those products to buyers in other countries.

He does not, however, see it as an adequate long-term strategy for maintaining an export program.

World Dairy Prices

Stephenson sketched the world price structure for milk with Canada continuing to sit at the top in equivalent per hundred prices, followed by the European Union (though subsidies are being phased out), the United States, and with Australia and New Zealand at the bottom.

When those prices were unusually close to one another in 2007, one result was a boost in the dairy export market for the U.S., Stephenson stated.

Today, U.S. dairy commodities are selling at somewhat of a discount to those from Oceania (coming off low production at the end of its current season), he noted.

The 23-cent per pound spread between Cheddar cheese block and barrel prices in the spot market on the Chicago Mercantile Exchange in early May (since closed to 18 cents) was an unusual phenomenon that could be traced to a shortage on block supplies, Stephenson suggested.

He predicted that manufacturers would adjust practices and that barrel prices would move toward blocks (an upside move).

For 2013, Stephenson expects all-milk prices in Wisconsin to average about $1.30 more per hundred than in 2012.

What's equally or even more important will be the operating costs, which depend greatly on the feed costs that are being affected by the lingering drought in parts of the country and perhaps, quite recently, by how the delay in the 2013 growing season and alfalfa stand losses will affect crop production.

Farm Bill Outlook

Regarding the possibility that Congress will agree on a new Farm Bill this year, Stephenson's answer is that it is "probable."

He noted that an earlier estimate by the Congressional Budget Office that the Senate's previously approved version of a Farm Bill would cut spending by $23 billion has been reduced to $18 billion while the House is aiming for a reduction of $35 billion.

House agriculture committee chair Frank Lucas (R-OK) hopes to cut Farm Bill spending by $38 billion, Stephenson reported.

But because 80 percent of the Farm Bill spending is for food and nutrition support programs rather than for agriculture production, $18 billion of that $38 billion would have to come from the latter, he explained.

Also standing in the way, however, is the philosophical objection by House Speaker John Boehner (R-OH) to the Dairy Security Act, which is being pushed by the National Milk Producers Federation (a group of leading cooperatives) but opposed by other dairy and food sector entities, Stephenson pointed out.

In his presentation here, Stephenson highlighted the differences between the competing proposals on federal dairy policy - one of which would impose price penalties on a portion of milk production if operating margins fell below certain targets while the other would not.

He said both approaches, which include margin insurance, carry the possibility of providing good returns for dairy producers and even of inducing more milk production despite a proposed price penalty for exceeding certain production limits.

Even if those disagreements are settled, any new Farm Bill will have to navigate a Washington, DC landscape on which "politics has gotten so brutally ugly," Stephenson indicated.

Polarization and bi-modality have resulted in an impasse with not much being accomplished other than "lobbing shells between camps," he commented. "We're poised for a real struggle."

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