News reports of drought have quieted down, but not the consequences. Dairy Profit Weekly’s (DPW) Dave Natzke talked about it in Friday’s DairyLine, reporting that higher feed and fuel prices pushed U.S. dairy farmer average milk production costs to another record high in August. 

USDA economists said total production costs per cwt., of milk sold were up about 4 percent from July and up 17 percent from August a year ago, with feed prices making up a bulk of the increase. Through the first eight months of 2012, average costs are up about 9 percent from the same period last year.

“The higher costs are impacting dairy cow culling, but the numbers are a bit deceiving,” Natzke warned. “USDA announced more than 2 million cows had been sent to slaughter through the first eight months of 2012, or about 128,000 more than a year earlier. However, during the same period, the U.S. milking herd declined by just 22,000 cows, an indication a large number of replacement heifers became milk producers.”

Dairy farmers who were forced to sell cattle due to drought are getting a break from the Internal Revenue Service (IRS), he said. The IRS announced it will extend the period in which producers forced to sell cattle due to the drought can defer taxes on those sales in counties listed as suffering from extreme or severe drought by the National Drought Mitigation Center.

“While dairy farmers are keenly aware of the impact of higher feed prices,” Natzke concluded. “Consumers will feel it in 2013.”

World entering “agflation”

Researchers with Rabobank, the world’s largest bank, warn that skyrocketing agricultural commodity prices are causing the world to re-enter a period of “agflation,” with food prices forecast to reach record highs well into 2013, and rise as much as 15 percent by next June. Rabobank also published a new report looking at the global dairy industry in the third quarter of 2012, predicting “renewed supply scarcity” in the next year.

USDA’s latest milk-feed price ratio confirms that margins are improving, reports the Sept. 27 Daily Dairy Report (DDR). USDA estimates September 2012’s milk-feed price ratio at 1.46, up from August’s near record low of 1.36. The milk-feed price ratio represents the pounds of 16 percent mixed dairy feed equal in value to 1 pound of milk at test. In general, a milk-feed ratio less than 2.0 indicates financial stress for dairy farms. The last time the ratio exceeded 2.0 was in March 2011, according to the DDR.

The preliminary September all-milk price was $19.10 per cwt., up $1 from last month, but $2 below a year ago. 

The September national average corn price of $7.35 per bushel was down from $7.63 in August, but up from $6.38 a year ago. The preliminary September average price for soybeans is $16.30 per bushel, up from $16.20 in August and $12.20 a year ago. Baled alfalfa averaged $205 per ton, up from $203 in August and $198 a year ago.

Checking the cupboard, the USDA’s latest Cold Storage report show dairy product stocks are dropping seasonally, but at a faster-than-average rate. August butter stocks totaled 204.5 million pounds, according to preliminary data, down 13 percent from July, but were 23 percent more than August 2011. 

American cheese, at 615.1 million pounds, was down 3 percent from July and 5 percent below a year ago. The total cheese inventory came to just over 1 billion pounds, down 4 percent from July and 6 percent below those year ago.

The DDR’s Mary Ledman said in her website’s Daily Dairy Discussion that the Cold Storage data and the latest Livestock Slaughter report were “fairly favorable” for the dairy markets, in particular cheese. August saw the strongest cheese drawdown since 2006, according to Ledman, who reminded us these stocks are expected to be held more than 30 days so none of the 615 million pounds is eligible to be sold on the Chicago Mercantile Exchange.

“It’s still an indicator of supply and demand and is bullish or at least supportive to the current cheese market,” she said, but added, “If people really thought this market was tight they wouldn’t have brought as much product to the market.”  
 

Butter is a different situation, she said, and saw a stronger drawdown than last year by 7.8 million pounds but butter stocks are at the highest August level since 2009 and the market at that time was trading at about $1.20. 

The following year we hit $2 a pound, she said, so she thinks end users learned their lesson, “when the butter market gets low they buy in and I think that’s been supportive of the market although today’s butter market at $1.89 is a fairly stout price level given the stocks situation.” It closed Sept. 28 at $1.95.

The views and opinions expressed in this column are those of the author and not necessarily those of Farm World. Readers with questions or comments for Lee Mielke may write to him in care of this publication.