dairy rotary
February 26, 2018

Will Low Milk Prices Slow Milk Production?

 |  By: Robin Schmahl

A decrease in the nation’s dairy herd was anticipated with the release of the January Milk Production report due to heavy sales activity at dairy auctions as well as heavy culling. Some farms were exiting the business due to the outlook of another year. Some banks are pulling the plug on some farms as well. However, there was no evidence of a slowdown of milk production or the reduction on the national dairy herd in January. The opposite was true. Milk production increased 1.8 percent from the previous year with the addition of 5,000 cows. This is the largest increase of milk production since September.

Increasing cow numbers were quite a surprise. Dairy cattle slaughter was the highest for the month of January and the highest monthly slaughter since my records back to 1999. One would have anticipated a decline of cow numbers, but there are plenty of replacements waiting in the wings.

This is only the beginning of the year and a few months down the road we may see some real impact of low milk prices, but this does get the attention of the industry. Many milk plants have indicated they do not anticipate a reduction in milk receipts moving through spring flush. The recent increase of Class III milk futures might have been enough slow some of the liquidation or plans for liquidation due to a more positive price outlook. This may not necessarily move milk prices to new lows, but it may limit upside price potential.

What this means is that it takes quite a bit more in the way of lower milk prices or lower income over feed prices in order to reduce milk production. The majority of farmers in the business are in it to stay if at all possible and will do what they can to survive during low milk prices in order to be there when prices again increase. We know prices will increase and possibly record highs will be reached again due to historical patterns and the general workings of the market. The key is to survive the low milk price periods and be in business when milk prices rise.  Management is fine-tuned and costs are cut in areas that they can be without impacting milk production or performance. Risk management does need to be a part of the dairy business. It is better to be proactive and protect a profitable price when one is available rather than hope that bills can be paid.

In 2017, there were no states showing gains of licensed dairy herds. There were 18 states showing no change in dairy herd numbers. The rest of the states showed declines in dairy herds. Wisconsin showed the greatest loss of 430 licensed dairy herds with currently 9,090 herds remaining. Ohio showed the next largest loss of 180 herds followed by New York with a decline of 160 herds. Although it is devastating to see the decline of licensed dairy herd or farm number, it has not affected cow numbers very much. Wisconsin showed a decrease of only 1,000 head from 2016. Ohio declined 4,000 head. New York increased 4,000 head. Cow numbers are just being shifted rather than reduced. This leaves plenty of milk available to the market despite the loss of farms.

It may be another difficult year ahead with lower milk prices. However, each day moves closer to a rally of milk prices as the market will continue to do its job and that is to balance supply and demand.

Upcoming reports:

  • December Agricultural Prices report on February 27
  • Federal Order class prices for February on February 28
  • December Dairy Products report on March 1
  • California February Class 4a & 4b prices on March 1
  • World Agricultural Supply and Demand report on March 9

 

The thoughts expressed and the basic data from which they are drawn are believed to be reliable but cannot be guaranteed.  Any opinions expressed herein are subject to change without notice.  Hypothetical or simulated performance results have certain inherent limitations.  Simulated results do not represent actual trading.  Simulated trading programs are subject to the benefit of hindsight.  No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.  There is risk of loss in commodity trading may not be suitable for recipients of this publication. This material has been prepared by an employee or agent of AgDairy LLC and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions.