December 27, 2011

 

US dairy sees profitable turnaround in 2011

 

 

US dairy saw an improved and profitable turnaround in 2011 - the milk prices rose to near record levels and exports were also in strong pace.

 

Soaring feed expenses put a big dent in the year's strong milk prices. Volatility lies ahead. "2011 was a good year, but we need good years to make up for the hole created in 2009," California dairy producer Ben Slegers says.

 

High input costs, however, put a big dent in the profits that US$20-25 milk would typically bring.

 

"2011 is the highest for dairy feed costs since we began keeping records," says Jim Dunn, professor of agricultural economics at Pennsylvania State University.

 

Total operating costs for US dairies rose every month from January through November 2011, reaching US$17.06 per cwt. for October, according to USDA's Economic Research Service (ERS). Feed costs alone accounted for the largest operational expense, climbing in October to the year's highest level at US$14.41 per cwt.

 

Those costs mean 2011 likely will rival or even surpass 2008's high-water mark. Total feed costs in 2008 averaged US$12.54 per cwt., ERS figures show. That compares to USDA's feed-cost average of US$11.83 per cwt. for 2011's first 10 months. In 2010, total feed costs for US dairies averaged US$11.17 per cwt.

 

Dunn calculates this year's feed increase at 8.5% higher than in 2008. "One big difference this year, compared to previous years, is that corn prices have stayed high since January," says Dunn. "The average corn price for the first 11 months of this year is US$6.04 per bu."

 

Corn, a diet staple for dairy cows, rose to more than US$300 per tonne this year for many dairies. In the Texas High Plains, dairy producer Larry Hancock is paying up to US$315 per tonne for alfalfa hay, US$410 per tonne for cottonseed and US$260 per tonne for ground corn.

 

"One of the challenges we have had to deal with is feeding the cows," says Hancock, whose dairy milks 4200 cows. "Due to the growth in our area and severe drought the last few years, feed is in short supply. We have had to add acreage, learn to farm ourselves and buy feed from as far away as Montana."

 

Along with the Texas drought, several key dairy regions face increased feed challenges from weather problems. Hurricane Irene, tropical storms and flooding in several Northeast states downgraded the quality of home-grown feed. "Farmers will be running out of feed this spring and scrambling for supplies," says Dunn.

 

Like other dairy producers, Slegers is apprehensive about high feed costs in the coming year. California dairies must inventory hay for the winter months when it's not harvested. With alfalfa hay costing more than US$300 a tonne, many producers have had no choice but to lock in the forage at those high levels.

 

"If milk prices go down, we're looking at red numbers," Slegers says.

 

In fact, milk prices are projected to decline in the coming months, as rising per-cow output increases overall milk production. USDA forecasts the 2012 All-Milk price at US$18.10-18.90 per cwt., down from US$20.05-20.15 per cwt. in 2011.

 

Robert Matlick, a partner in the Frazer, LLP accounting firm, anticipates milk prices at US$17-17.25 per cwt. for 2012. He also pegs dairies' cost of production at US$16.50-18.50, depending on debt levels, management styles and other factors.

 

"From a numbers standpoint, a lot of producers are looking hard at getting more production out of the cow," says Matlick, whose firm has numerous dairy clients across the US. "They learned in 2009 that cutting costs is not the right thing to do to improve margins.

 

"We're very cautious about 2012," he adds. "Milk prices and feed costs remain volatile, and there's a lot of uncertainty in the global market."

 

A year ago, Matlick's firm budget the 2011 milk price at US$15.50 per cwt. "It went to US$19.00 [and higher] instead," he says. "That's volatility."

 

With exports now an important part of the US dairy industry's business, many are watching closely to see whether the world's economies move forward into recovery or slip back into recession. USDA believes dairy exports will likely decline next year as increased global milk production boosts competition for US exporters. In addition, Europe's debt crisis, China's slowdown and the MF Global bankruptcy have cast a shadow over the entire commodities futures market complex.

 

"If the economy stalls, exports will shrink and we'll have a dairy surplus," Matlick says.

 

Efforts to reform US dairy policy will continue to add to industry uncertainty in 2012. On a positive note, USDA expects prices for corn, soy meal and alfalfa hay to decline in the coming year.