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May 17, 2017

Margins Up After Dismal April

 |  By: Fran Howard

April 2017 was not kind to dairy producers. Milk prices were disappointingly low, dairy product supplies continued to be burdensome, and premiums were eroding, but May is starting to look quite a bit better, according to Sarina Sharp, agricultural economist with the Daily Dairy Report.

 

“National average dairy producer margins looked healthy on paper in April, but non-feed expenses—including labor, regulatory costs, and interest rates—continued to climb while revenue withered,” Sharp says. “After years of fleeting profits, many dairy producers with small herds and a few with big operations have decided to look for steadier sources of income.”

 

While U.S. dairy cow slaughter started to slow in early 2017, year-to-date slaughter is now running 1.5% ahead of 2016’s pace. For the first time since January, weekly dairy cull cow prices climbed above prior-year levels for the week ending April 29.

 

Meanwhile, live cattle futures have been soaring. “Beef demand is excellent, and packers are harvesting cattle in large volumes, dipping into younger supplies that haven’t had an opportunity to put on much fat,” Sharp says. “This is creating a shortage of marbled steaks as Memorial Day approaches.”

 

Beef prices often peak in late-May, but China recently agreed to begin allowing U.S. beef imports into the country by mid-July, which have not been allowed into the Chinese market since 2003. The move could support U.S. beef prices if China’s imported volumes are significant. However, Sharp says that “some in the industry believe China will use the limited traceability in the U.S. beef market to eschew imports of any size, so the impact of this trade deal remains to be seen.”

 

The strength in cattle prices is also starting to pull the value of Holstein bull calves higher. “Bull calf values are an important source of dairy producer income, and prices have been in the doldrums for more than a year,” she says.  

 

Despite strong beef demand and heavy culling by dairy producers, milk continues to flow, dairy product supplies remain excessive, and non-feed costs are likely to continue to climb. But prices are still improving.

 

The most obvious boon for dairy producers in May has been the recent sharp increases in dairy product prices. “Expected future prices are high enough to keep most dairy producers in the black without forcing consumers to look for less-pricey dairy alternatives,” notes Sharp. “Demand for whey products and butterfat remains robust, and sales of U.S. dairy products to foreign markets have been respectable.”

 

U.S. dairy products are also becoming more competitive in world markets, due to increasing prices in Europe and Oceania, output growth in Europe that has not been as strong as originally expected, and a weakening U.S. dollar. “While each of these factors alone is small, particularly in a market heavy with product, together they add up to a much cheerier outlook for dairy producers,” says Sharp. That said, world markets are increasingly volatile, so dairy producers should proceed with caution, she adds.

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