Dairy producers guarding returns

Dairy producers guarding returns

Dairy producers exercise caution over higher prices; hog markets experience wide price swings due to uncertainty over supply and demand.

CAUTIOUSLY optimistic best described the moods of dairy producers at the start of 2014: Although strong milk prices are carrying over from 2013, many dairy producers are nonetheless showing expansion restraint as past negative profit margins are still a recent memory.

Katelyn McCullock, dairy and forage economist for the Livestock Marketing Information Center, told Feedstuffs that dairy prices have been extremely high in the first quarter of 2014 but are likely to decrease for the remainder of the year. Still, the lower prices will be relatively higher compared to previous years, and a year-over-year decline in overall prices is not anticipated.

Robust global demand and a low inventory of dairy cows are the primary drivers for the increase in prices for all dairy products, McCullock said.

In general, the strength in milk prices has been attributed to exports, but the international marketplace could be the game changer in 2014.

In 2013, U.S. dairy exports reached a fresh level of $5.1 billion. That growth was a result of rising demand in China coupled with low milk production in New Zealand and Europe.

In February 2014, U.S. dairy exports remained strong, but Europe gained market share more quickly than the U.S. Although dairy producers in Europe and the U.S. are both experiencing positive margins, a mild winter in Europe has boosted milk production, while the U.S. dairy sector battled the polar vortex. Global competition will dictate the future direction of milk prices.

Domestic demand for dairy products, on the whole, has not grown at the same pace as global demand. In fact, fluid milk demand has been declining for decades. Nevertheless, as U.S. consumers recover from the recession, growth is occurring in value-added dairy products like Greek yogurt and higher-valued cheeses.

Producers did not respond as expected when milk prices hit $24/cwt. Still, as milk prices remain strong, producers should slowly expand their herds, which will increase milk production and pressure prices lower in the second half of 2014.

Lower feed costs on the whole, with the exception of California, are benefiting dairy producers' profit margins. According to The Pennsylvania State University, income over feed costs in February rose 73 cents to a value of $12.02 per cow per day. Improved prices and declining feed costs should set the stage for expansion.

Herd expansion will not be on the minds of California dairy producers, however, as drought conditions will push expenses higher and profit margins lower compared to the rest of the nation.

McCullock said, at this point, no increase in dairy cow slaughter has occurred nor is expected, although cows potentially could be moved to other states that are not under drought conditions.

For the week ending March 22, dairy producers culled 58,252 head, 9.5% lower than last year.

Furthermore, in the U.S. Department of Agriculture's "World Agricultural Supply & Demand Estimates" (WASDE) for April, the total milk production forecast for 2014 was increased to 206.1 billion lb. as strong returns should encourage an expansion in cow numbers and an increase in milk per cow (Table 1).

In addition, the WASDE price projections for cheese, butter and whey rose, and the all-milk price is estimated to be $22.55-23.05/cwt. (Table 2).

Slightly more price volatility than last year in the dairy market and possibly the hay market will be the biggest challenge for producers in 2014.

Furthermore, a long-anticipated drop in the spot cheese market occurred two weeks ago. At market close last Thursday, block prices dropped nearly 25.75 cents since their April 3 peak to $2.165/lb., and barrel prices declined 17.5 cents since their April 2 high to $2.075/lb. Spot butter prices held steady last week at $1.97/lb.

 

Grilling season

The lingering cooler temperatures are making consumers hesitant to fire up the grill. Still, the opening day of baseball season usually signals the start to the grilling season, which will soon test the waters of consumers' response to high beef and pork prices.

U.S. agricultural trade data released recently by USDA's Foreign Agricultural Trade of the United States showed that meat and poultry performed well in the first two months of 2014. Pork demand is still strong, while beef and chicken rebounded in February.

Still, as indicated in the "Daily Livestock Report," meat and poultry prices are rising faster than the general inflation rate, which will negatively affect future meat demand (Table 3).

In February, real per capita expenditures (RPCE) for the four major proteins rose 3.4% over last year. Pork was the leader, gaining 7.2%. Beef's RPCE was up 2%, and chicken's RPCE was 3.4% higher year over year.

Moreover, U.S. beef and pork exports also were healthy in February, even with worries over tight supplies driving prices higher.

According to the U.S. Meat Export Federation (USMEF), using USDA statistics, export growth to Mexico boosted the volume for all U.S. red meat exports.

The February beef export volume was down marginally from a year ago, at 85,876 metric tons, while the value was up 12% to $480.3 million. Total U.S. beef exports in February equated to 14% of total beef production and 11% of muscle cut production, USMEF noted.

Likewise, U.S. pork exports rose 2% in both volume and value over 2013 to 182,412 mt and $506.4 million, respectively. February pork exports represented 27.5% of total pork production and 23% of muscle cut production.

The spring rally for the hog and cattle markets will begin with tight supplies, which is no surprise to market or industry participants.

In response to data in the March 1 "Quarterly Hogs & Pigs" report, USDA adjusted 2014 pork production lower to 1.9% below a year ago. In addition, beef production was actually adjusted higher to reflect a 4.5% decrease from 2013 versus the December forecast for a 6% decrease.

Volatile was the best way to describe the hog markets last week. In fact, last Thursday, hog prices went from limit down to limit up by 10 a.m., according to market observers. The drastic price swing highlights the uncertainty over the supply and demand for pork.

Hog futures rose last week as anxieties over supplies resurfaced. Lean hog futures climbed $2.025 last week to settle at $125.175/cwt.

Concerns over sustaining pork demand gave packers little incentive to bid up for hogs in negotiated markets, with prices last Thursday standing at $120.54/cwt. delivered to the eastern Corn Belt and $120.01/cwt. to the western Corn Belt.

Pork cutout values were also weaker, slipping $6.52 throughout last week. At midweek, ham and bellies broke the upward trend: Ham prices settled at $100.82/lb. last Thursday, while bellies tumbled to $190.08/lb. after reaching a record high of $202.94.

The cattle markets were mixed last week as futures settled higher, wholesale cutout values declined and the cash fed trade was inactive.

April fed cattle repeated the previous week's declines to finish at $144.00/cwt. last Thursday.

Wholesale beef cutouts continued to fall in search of an appealing level to consumers. Sources reported that the magic level is below $220. Last week, the Choice cutout settled at $225.00/cwt. and the Select cutout at $214.30/cwt.

 

1. Dairy, meat and poultry production

 

 

 

Total

 

 

Total

Total meat/

 

 

 

Beef

Pork

meat

Chicken

Turkey

poultry

poultry

Milk

Eggs,

Year

-Billion lb.-

bil. doz.

2012

25.913

23.253

49.439

37.039

5.967

43.523

92.963

200.5

7.786

2013

25.717

23.198

49.183

37.830

44.159

44.159

93.341

201.2

7.946

2014

24.565

22.760

47.576

38.500

44.710

44.710

92.286

206.1

8.06

Note: Eggs are table eggs as reported by the Economic Research Service.

 

2. Meat, poultry, milk and egg prices

 

Steers

Hogs

Chickens

Turkeys

Milk,

Eggs,

Year

-$/cwt.-

-Cents/lb.-

$/cwt.

$/doz.

2012

122.86

60.88

86.6

105.6

18.53

1.174

2013

125.89

64.05

99.7

99.8

20.01

1.247

2014

144-151

72-75

100-104

103-108

22.55-23.05

1.26-1.32

Note: Steers are average of all grades.  Hog are liveweight basis. Prices for 2014 are projected.

 

3. Meat and poultry per capita consumption (supply)

 

 

 

Total

 

 

Total

Total meat/

 

 

Beef

Pork

meat

Chicken

Turkey

poultry

poultry

Eggs,

Year

-Lb.-

number

2012

57.4

45.9

104.5

80.4

16.0

97.8

202.3

251.0

2013

56.4

46.8

104.4

81.9

16.0

99.1

203.6

251.5

2014

53.8

45.9

100.9

82.7

15.6

99.7

200.6

255.1

Note: Meat and poultry consumption is retail-weight basis.

Source for Tables: U.S. Department of Agriculture.

 

Volume:86 Issue:15

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