Dairy surprises

Dairy surprises

- Milk cow herd and production up just as most observers talk culls and reduction. - Lambs a "classic" example of more animals than demand.

SOMETIMES, writing a column like this -- which is published Monday morning but is due on the previous Friday before the Friday round of data reports -- requires a leap of judgment, and occasionally, the leap misses.

No sooner was the Dec. 24 column done and on the presses reporting that dairy farmers continue to cull herds and decrease milk production than reports started coming out saying producers are expanding herds and milk production.

"Almost everyone was surprised," Feedstuffs sources said in their defense, pointing to a fairly sharp decline in cow numbers since early in the year and declining milk production this fall.

However, the drop in cow numbers and production spurred milk payments over $20/cwt. in October, and producers promptly added 7,000 cows to the herd in November (Figure 1), which just as promptly increased milk production 1% in November over year ago.

December's reports likely will provide similar data, sources said, pointing to a cow herd that's young and producing good-quality milk with the best butterfat and protein content in years, which will keep the milk payments up.

Current forecasts peg milk payments in 2013 to be larger than in 2012 and possibly record high, according to an analysis by the Livestock Marketing Information Center (LMIC). As a result, the cull rate probably will moderate, especially if the 2013 corn crop gets in the ground and grows as expected, i.e., the drought ends, LMIC said.

The cow herd in 2013 is likely to average slightly less than or more than the 2012 herd, but those who peg it to be lower see improved productivity, while those who have it higher see flat productivity. Accordingly, milk production should be about unchanged from 2012, which will be supportive to milk prices.

Such a scenario does point to higher consumer-level prices for milk, butter, cheese and other dairy products in 2013 -- dairy prices are expected to rise 4.0% -- but a gallon of milk in the retail store is not going to double to $8 or more, as many news reports and broadcasts have alarmingly suggested in recent weeks.

Those suggestions are based on a rigid interpretation of what would happen if Congress fails to pass a new farm bill, which would force the dairy industry and government to abide by 1949 farm law, when the Commodity Credit Corp. (CCC) had to buy milk from any producer who wanted to sell it to CCC at prices that, today, would come out to about $38/cwt., or a little more than twice the market price in 2012.

Therefore, according to the rigid interpretation, today's $4/gal. milk in the retail store would cost $8/gal.

This story line overlooks a number of factors, including the possibility of attaching the farm bill to fiscal cliff legislation, extending the current farm bill or outright passing a new farm bill -- all of which, in reality, there is time to do in January, according to dairy market analysts.

Also, the cost to process and ship milk to stores is about half the cost of milk in the stores, and these costs would not double, analysts said. Processors also could decide to continue doing business with hard-won customers rather than deal with the government, analysts said.

Higher prices, yes, but not prices that go over some cliff.

In the dairy markets last week, butter prices continued to slip, dropping 5.25 cents to $1.4975/lb. in cash trading at the Chicago Mercantile Exchange last Thursday, prices that were 6.1% less than year ago.

Barrel cheese increased 6 cents to $1.71/lb., and block cheese stayed unchanged at $1.74/lb., 9.6% and 11.4% more than year ago.

Just as the situation surrounding $8 milk needs to be clarified, so does the situation surrounding $276 lambs.

The lamb markets have struggled this year, averaging $276/cwt., 22.3% less than the $355/cwt. lambs commanded last year. That lower price has some lamb producers convinced of a packer conspiracy.

That lower price also has Sens. Max Baucus (D., Mont.) and Jon Tester (D., Mont.) just as convinced of such a conspiracy, to the point that they called on the U.S. Department of Agriculture to conduct an investigation under the Packers & Stockyards Act.

Montana is a major lamb production state, and Baucus said he can't stand by while large meat packers "stack the deck against our sheep producers."

Tester added that the meat packers are deploying market power "to manipulate prices."

Senators in North Dakota, South Dakota and Wyoming -- also major lamb production states -- have joined Baucus and Tester in their call.

However, an analysis by LMIC clearly shows that lamb producers themselves, not packers, brought on the situation.

In late 2011, LMIC explained, lamb prices soared, causing consumer resistance to high retail prices and retailer resistance to high wholesale prices that "shifted down" to plants and then producers, leading to "a classical backup" of inventory on feedlots and to over-finished lambs and the accompanying "off-type product," further hurting consumer demand.

Lamb prices fell significantly (Figure 2), LMIC said, emphasizing, though, that 2012 lamb prices still were the second highest on record.

Now, higher costs related to drought-damaged forage and lower lamb prices have started a liquidation, and the consequent tightening in lamb supplies will support stronger lamb prices in 2013, especially in the second half of the year, if consumer demand has not been damaged too much, LMIC said.

LMIC's conclusion is supported by some lamb producers, including Mike Harper, who runs 200,000 head near Eaton, Colo., and said the current situation will improve once lamb inventories return to normal.

 

Market roundup

In the cattle markets last week, cattle did not trade in sufficient volume to establish prices, although there were a few transactions in Nebraska at $127/cwt., $1 higher than the week before and 3.7% higher than the year before.

Cattle fundamentals remain very bullish, as evidenced in the feedlot inventory report issued Dec. 21 that confirmed that considerably fewer cattle will be available for marketing in the first half of 2013 (Table), according to Feedstuffs sources.

November placements were the lightest in three years and were below year ago for the sixth straight month, and the Dec. 1 inventory was the smallest Dec. 1 number in three years.

Supplies point to cattle prices that will be record high in 2013, which means that beef demand will be critical, said Bob Price at North America Risk Management Services Inc.

He noted that the current market -- cattle at $127/cwt. and the Choice cutout at $194/cwt. -- and April futures at $137 suggest that April Choice beef needs to be $215 in order for packers to maintain margins and pay for April cattle. If this scenario is to come true, consumers will need to "dig deep" to buy beef, he said.

 

Feedlot inventory report, Dec. 1

 

2010

2011

2012

2012 as %

Category

-Million head-

of 2011

Nov. 1 inventory

11.497

11.889

11.254

94.7

November marketings

1.774

1.774

1.761

99.3

November placements

1.959

2.037

1.923

94.4

Dec. 1 inventory

11.620

12.055

11.328

94.0

120-day-plus inventory

2.647

3.152

3.505

111.2

Source: National Agricultural Statistics Service.

 

The hog markets were down 75 cents to up $1.55 to $80.63-81.06/cwt. on a lean carcass basis east to west across the Corn Belt last Thursday, prices that were equivalent to a $61 live cash hog market and 4.0% more than year ago.

Like in the cattle markets, hog fundamentals also remain very bullish, sources said.

Pork production is projected to decrease in 2013, as is chicken production, and beef production is projected to decrease sharply, Dennis Smith at Archer Financials said in a morning wire. Pork exports are and should stay strong, he added.

Furthermore, if feed prices start to decline as expected, it will encourage gilt retention, and this will create even fewer market hog supplies and even less pork production, he said.

The chicken markets were steady on holiday- and storm-related supply reductions that will continue this week, sources said. Chickens established new record highs at 99 cents to $1.02/lb. and 93 cents to $1.03/lb. in the eastern and midwestern regions last Thursday, prices that were 28.0% more than year ago.

The egg markets were down 10 cents to $1.18-1.22/doz. and $1.12-1.14/doz. for large-sized eggs delivered to eastern and midwestern store doors last Thursday, 22.6% under year ago. Sources said producers had inventoried too many eggs for the holidays, and the excess inventory offset good demand.

The turkey markets were unchanged to down 3 cents.

Volume:84 Issue:54

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