Higher Feed Costs Will Be A Drag On Production
With corn getting into the ground late this year, grain yields are forecast lower which are already pushing up commodity prices. That means feed prices will go up as well.
“Every $1 change in corn directly adds $0.50 per cwt to the cost of producing milk,” says Nate Donnay, director of dairy insight with INTL FCStone. “And since feed ingredient prices are typically correlated, a $1 increase in corn prices probably adds about $1 total to the cost of producing milk.”
While producers can take action to ward off some of the impact of higher feed costs on margins, Donnay says the higher costs will have an impact on milk production.
Growth in production has been slow compared to last year due to a drop in cow numbers and lower production per cow, which has led to a recent positive milk price movement. Rising feed costs will have another impact on production going forward.
When feed costs go up, rations fed to dairy cows change. History shows that every $1 increase in the price of corn, Donnay says, can reduce milk production six months out by 0.25%. The longer term impact is greater, as a rise in feed costs can drop and production a year later by 0.5%, he adds.
The lower production will have a positive impact on milk price.
“On $17 milk, [the lower milk production] would be a $0.28/cwt increase in milk prices at six months forward and a $0.56/cwt impact at 12 months out,” Donnay says. That translates to a 3 to 5-cent increase in cheese prices which Donnay says isn’t monumental, but it is significant.