Will perfect dairy storm repeat again in 2013?

Will perfect dairy storm repeat again in 2013?

The likelihood of another perfect storm challenge to the dairy industry from Mother Nature – particularly in the drought arena – is unlikely to be repeated. But at the same time, recovery for a troubled industry, shredded by the drought and high costs for feed, isn’t likely to come any time soon.

An analyst on milk pricing and feed costs delivered a rapid-fire look in a Tulare seminar on the challenge facing the dairy industry — especially in California — and pondered whether the perfect storm that has driven feed costs through the roof can repeat itself this year.

His arguable conclusion: The likelihood of another such challenge from Mother Nature – particularly in the drought arena – is unlikely to be repeated. But at the same time, recovery for a troubled industry, shredded by the drought and high costs for feed, isn’t likely to come any time soon.

Those were the observations from Joel Karlin, market analyst for Western Milling in Goshen, who produces a weekly newsletter on feed and dairy markets.

“With Western Milling, I trade; I sell feed to dairies; and I do research and have had a front row seat to the turmoil that has affected dairies the past few years – taking a financial, emotional and personal toll — an industry turning upside down.”

Karlin said troubling signs for the dairy industry include the fact that in the United States per capita consumption of milk is declining.

“Consumption of fluid milk is falling,” Karlin said.

Karlin’s observations came during a seminar he presented at the World Ag Expo on the milk price outlook, looking at the drought and how it continues to impact the price of feed and milk.

Karlin said California milk producers are faring worse than their cousins elsewhere because they have milk prices in that state that are below average, especially for cheese and whey milk, and they face higher feed costs.

“California dairies have the lowest milk prices in the country and the highest feed costs, a very unenviable combination,” Karlin said, adding that milk production is still too high for “level demand that at best has tapered off.”

He said there is some positive news on the export front, showing increased demand and positive signs from new products like Greek yogurt.

Also positive is that the U.S. Department of Agriculture is forecasting a drop in U.S. milk production, something that hasn’t happened since 2001. Other key milk producing regions worldwide are showing signs of decreased production.

On the down side, Karlin said, efforts to cull the nation’s dairy herd may have fallen short because cow numbers remain high because of the addition of replacement heifers that result in a younger, more productive, more healthy herd.

Survival of the fittest

Even with extensive culling of herds last year, “there are still a lot of cows out there,” he said.

Milk per cow continues to rise, Karlin said.

Despite pleas from some California producers, he said, the California Department of Food and Agriculture has been unwilling to alter the milk pricing formula. Some producers, he said, “feel let the chips fall where they may, it’s survival of the fittest.”

Consumers are unlikely to sympathize with the dairy operators, he said, partially because they’re facing tough economic times as well.

And there is intense competition from foreign competitors, he said, including Australia, New Zealand and the European Union “with the Ukraine and Brazil waiting in the wings that are going to be powerhouses in a few short years.”

Karlin said any hope of enhanced profitability is going to come “on the heels of much lower feed costs as opposed to any sustained increase in milk prices.”

Corn prices remain a volatile concern, Karlin said, noting they could range — depending upon weather conditions — from $4 to $9 for a bushel.

Karlin drew some comparisons between human, crop and cow comfort when it comes to heat.

“Does anyone like to go out and have sex when it’s 110 outside?” Karlin asked.

“Sure,” said one audience member to a round of laughter.

“Freak,” Karlin joked.

His point: “People don’t want to go out and have sex when it’s super hot. Neither do cows. Neither do corn plants. And last year during pollination in the Midwest, temperatures were 100 to 110 degrees the first week in July. Basically corn stops growing at 86 degrees. So there was no pollination. It just burned the silk right off those plants.”

While rainfall is important, he said, temperatures are key.

Among the effects: smaller-sized ears.

“If you went out to the Midwest,” Karlin said, “you’d see smaller ears. Something you’d see in a Thai restaurant.”

Last year, for only the fourth time since 1866, U.S. corn yields fell for the third year in a row, Karlin said. The last time that happened was 1928-30. In those three years ending 2012, the U.S. lost close to 5.4 billion bushels of corn

Timely rains would be needed to push soil moisture to desired levels, Karlin said.

During the recent drought years, Karlin said, corn acreage has moved north and west. States where production increased include North and South Dakota and Kansas. Soybean plantings are also moving north and west, he said.

Fettuccini alfredo Monday

South America, Karlin said, has stepped up its production of both corn and soybeans at the same time that China has increased its consumption of both.

Demand for U.S. corn is on the decline, he said, as exports drop and prices rise due to low stocks. He believes ethanol production has topped out based on economics and is close to mandated levels.

All three of the top soybean producers — the United States, Argentina and Brazil — were also “whacked” by drought conditions, Karlin said.

On the bearish side, Karlin said, it’s expected that U.S. soybean plantings will reach record levels and the U.S. could be looking at its highest corn acreage since 1936.

Karlin said other “animal groups” have responded to record high prices in a “rational fashion; they’ve reduced production. For beef, poultry and pork the trend is down. Milk has been up and steady every single year. What do dairy producers see that other people don’t?”

A chart that Karlin flashed on U.S. per capita fluid milk and cream consumption is striking. It shows a dramatic drop over the years from 1975 to 2011. But cheese consumption is rising, while butter consumption is flat.

Karlin said retail prices for pork, beef and poultry are reaching new highs, but milk prices are not rising.

California’s dairy producers have been especially hurt by higher feed costs because a lot of what they feed their animals is procured “off farm,” Karlin said. It’s imported from out of state or even out of country.

Increased air and water regulations, along with difficulties in finding qualified labor, have further challenged the dairy industry in California.

Karlin said milk prices are already being forecast at record highs, but that’s partially predicated on expected declines in producing countries, something that may or may not happen.

A better economy could foster more demand in the restaurant sector and elsewhere, he said.

Tongue firmly in cheek, Karlin proposed a solution to the dairy crisis: “Instead of meatless Monday — Fettuccini Alfredo Monday  — cardiologists be damned.”

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