What Will Dictate Milk Prices?
Spring is finally coming in the northern part of the nation. Planting delays are being seen, but it is too early to be of much concern. We know how quickly crops can be planted. The current pattern in some ways is similar to last spring. Crops were planted and weather was good in most areas. Yes, there were some areas which experienced drought, but an exceptional crop was harvested and grain prices declined. The current expectation is for 90.0 million acres of corn and 89.5 million acres of soybeans to be planted. It average weather is seen this year, supplies could increase again keeping grain prices low.
There is a correlation between corn price and milk price. Generally, low corn prices result in low milk prices. High corn prices result in high milk prices. These swings may not impact the milk/feed ratio very much, but there are variations that have been seen throughout history. The bottom line is that current feed prices and milk prices are encouraging expansion. This expansion may not be necessarily in new facilities or additions, but may be in cow numbers within existing facilities. This is taking place as seen on the March Milk Production report as cow number increased 15,000 head from the previous month with the nation’s dairy herd totaling 9.38 million head. This is now the largest dairy herd since the first quarter of 1996. The rate of growth of the dairy herd in March is an indicator of the desire of dairy producers to produce milk. That desire is not going to change as long as milk prices are at this level or higher. The questions then is, How long can this be maintained without consequences?
I do not want to be too bearish on the market, but the continual increase of cow numbers as well as record cheese inventories cannot continue without a correction. What I mean by correction is difficult to define as it could come in various forms. Weather could impact milk output significantly either way, but hot and humid weather could curtail milk production and reduce the amount available for bottling and manufacturing. It would also affect breeding which could result in extended lactations and later calving that desired. Of course, this would take awhile to impact cheese and butter inventory as demand will need to begin reducing inventory to levels that would begin to tighten supply. Or the correction could come in the form of low milk prices for an extended period of time which would eventually reduce cow numbers. This also would not take place overnight, but would take time to unfold.
One thing we do know is that the current trend of increasing cow numbers, increasing milk production, and increasing inventory cannot be sustained indefinitely. Export demand is steadily improving which is very positive, but the growth has not been sufficient to keep inventory from building. However, we must remember that inventory generally builds during the first half of the year and then decreases during the second half of the year. The market is following along seasonal lines right now. This issue is that cheese inventory has been concluding each year at a higher level than the previous year.
The hope for a substantially better year of milk prices has dimmed, but yet there is hope seasonality will allow for better prices during the second half of the year. However, seasonality does not dictate milk prices. Supply and demand will dictate milk prices.