By Elizabeth Campbell -
March 13, 2012 3:31 PM ET
Souring as Record Profit Spurs Expansion of Herds
Declining milk prices and rising cattle-feed costs may
require farmers to cull herds, reducing supply.
dairy profits and milder weather are leading to a surge
in milk supplies from Auckland to California, turning
last year’s best-performing commodity contract into
one of the worst of 2012.
Output in the U.S., the world’s largest producer, will
advance 1.8 percent to a record 199.7 billion pounds
(90.6 million metric tons) in 2012, the Department of
Agriculture estimates. Futures traded on the Chicago
Mercantile Exchange already fell 29 percent from a four-year
high in August and may drop another 8 percent to $14.25
per 100 pounds by July, the median of six analyst estimates
compiled by Bloomberg shows.
estimated 30 percent jump in U.S. dairy exports led
to the most profitable year ever for farmers, who expanded
herds that now are the biggest since May 2009, USDA
data show. Yields reached a record during an unusually
mild winter. Supply is also rising in Australia and
New Zealand, the largest exporter, and dairy was the
only food cost tracked by the United Nations to decline
“This blasted weather that most people have enjoyed,
the dairy cows have really enjoyed it,” said Bill Brooks,
an economist for INTL FCStone Inc. in Kansas City, who
grew up on a dairy farm in Missouri and has covered
the industry for two decades. “We’re going to see more
futures that jumped 31 percent last year, more than
any of the 24 commodities in the Standard & Poor’s
GSCI Spot Index, dropped 10 percent since Dec. 30 to
close at $15.49 at 1:10 p.m. in Chicago. Only natural
gas and arabica coffee fell more. The S&P GSCI Agriculture
Index advanced 1.4 percent this year, as the MSCI All-Country
World Index of equities rose 11 percent. Treasuries
lost 0.5 percent, a Bank of America Corp. index shows.
U.S. dairy farmers had 9.236 million cows in January,
the 14th herd expansion in 16 months, USDA data show.
Each animal produced a record 21,345 pounds (9.7 metric
tons) of milk last year. Fonterra Cooperative Group
Ltd., the largest dairy exporter, shipped 246,000 tons
in December, the most ever. Deliveries to its plants
rose 9.8 percent in the eight months ended Jan. 31,
the Auckland-based company said last month.
Rising supply may meet weaker gains in demand. China,
the biggest buyer of U.S. agricultural products, is
targeting economic growth of 7.5 percent, the lowest
since 2004, Premier Wen Jiabao said March 5. The economy
gained 8.9 percent in the fourth quarter, the slowest
pace in 10 quarters.
milk prices and rising cattle-feed costs may require
farmers to cull herds, reducing supply, said Chip Whalen,
a vice president of education and research at Chicago-
based Commodity & Ingredient Hedging LLC, which
advises clients on managing commodity price swings.
Corn futures averaged $6.78 a bushel in Chicago last
year, the most in at least a half century. Record beef
prices also may encourage more slaughtering.
“We’re going to go through another one of these cycles
where we’re going to cull the herd,” said Shawn Hackett,
the president of Hackett Financial Advisers Inc., a
brokerage and consultant based in Boynton Beach, Florida.
“We’re setting a stage for a significant slowdown in
production growth, starting in the later part of this
year,” said Hackett, who anticipates a rally to $18
in the second half of 2012.
While China may slow this year, the U.S. will expand
2.2 percent from 1.7 percent in 2011, according to the
median of 79 economist estimates compiled by Bloomberg.
U.S. consumption of fluid milk will reach 28.61 million
tons this year, the highest since at least 1964, and
cheese demand will advance to 4.83 million tons, the
most since at least 1965, USDA data show. The U.S.,
with 4.5 percent of the global population, eats 32 percent
of the world’s cheese production and drinks 6.2 percent
of its milk, the department estimates.
may be reluctant to cull herds. While losses this year
may hurt some dairies, most are in better financial
shape than in 2009 and 2010, so there won’t be a “wholesale
decrease in cow numbers,” said Jon Spainhour, a broker
and partner at Rice Dairy LLC in Chicago.
In 2009, the average for milk futures slumped to $11.56,
a six-year low, before rebounding in 2011 to $18.55.
Last year, the average dairy farm had net cash income
of $239,800, the most ever, the USDA estimated Feb.
13, up from $158,100 in 2010 and $70,100 in 2009.
Exports were the “key factor” in last year’s rally,
said Bob Cropp, an economist at the University of Wisconsin
in Madison who has been studying the industry since
1966. U.S. dairy exports totaled $4.78 billion in 2011,
up from $3.69 billion in 2010, according to the USDA’s
Foreign Agricultural Service. Shipments will drop 2.2
percent in 2012, according to a report by USDA economist
Milton Madison at a Feb. 24 forum in Washington.
industry is now facing more competition in export markets,
said Brooks of INTL FCStone. Output in New Zealand,
curbed by drought last year, may rise 8 percent to 10
percent this season, according to Southbank, Australia-based
Dairy Australia, which raises levies from farmers to
fund industry projects.
Production in Australia may rise 1.4 percent to 9.55
billion liters (2.5 billion gallons) in the year beginning
July 1, the Australian Bureau of Agricultural and Resource
Economics and Sciences said in a report March 6. Flooding
last year limited output and disrupted transportation.
U.S. output is also rising on improving weather. The
three- month period ended in January was the sixth-warmest-ever
for that time of year, according to Brad Rippey, a meteorologist
with the USDA. The four warmest all happened since 1998
and the other was in 1933-1934, the dust bowl era.
production in California, the largest producing state,
climbed 6.6 percent in January from a year earlier to
3.615 billion pounds, the highest on record for that
month, USDA data show. There’s “milk coming out of our
ears,” said Bill Schiek, an economist at the Dairy Institute
of California in Sacramento, which represents processors
in the state.
The drop in prices is no incentive to cut production
for Ray Souza, who has 900 Holstein cows on his farm
in Turlock, California. Farmers tend to react by increasing
output because their costs remain similar, he said.
“We’ve never produced at this level before,” said the
65- year-old, who has been in the dairy business since
1973. “Cows produce more milk in the springtime than
they do in any other part of the year. This spring seems
to have started around the first of December.”