Speaker: Market Needs Fewer Cows
Published: Friday, November 16, 2018
Indiana dairy farmers, eager to hear good news, were told last week that they hold the key to higher milk prices. The catch is, they and their fellow U.S. milk producers need to continue downsizing their herds.
"Looking back in history, what you'll notice is that when cow numbers are high, prices are low," said Matt Tranel, a dairy market expert and keynote speaker at last Wednesday's "Partners in Success" luncheon at Fair Oaks Farms in Newton County. "When prices are high, cow numbers are low."
Using a slide presentation, the commodity risk management specialist pointed to a graph showing the strong correlation between cow numbers and milk prices. In 2003, 150,000 cows came out of the market and prices jumped $10 per hundredweight. In 2005, the opposite occurred; cow numbers jumped by 150,000 and prices responded by falling $3 per hundredweight.
Typically, cow numbers fall within 2 to 6 months after a price correction, Tranel said, but in 2015 and 2016 cow numbers continued to build even after milk prices were in a freefall. Cow numbers have not come down, except in the last couple of months.
At the same time, milk production across the 23 major dairy states has increased at a rate of 1 percent to 1.5 percent, year over year, over the past five years.
"We're seeing that exact same thing in 2018," said Tranel, who works for CRMG (Commodity Risk Management Group), based in Platteville, Wis. "We are seeing some of the highest milk production that we have seen since before 2014. Part of that is because cow numbers right now are sitting very close to 9.4 million. That's the highest number we have seen since 1994."
With new efficiencies at work, dairy farms can produce more milk per cow. The result is that there is "too much milk for this market to absorb."
Current prices are averaging around $15 per hundredweight.
For milk prices to move higher ($17 per hundredweight), Tranel said 150,000 cows need to come out of service.
"That's really what this market needs and ultimately what should have been done in 2016," he said.
Because that didn't happen, dairy farms, on average, lost $1.47 per hundredweight on milk sold in the second quarter, Tranel said.
"Talk about dairy liquidation – it is very real," he said. "I think anybody in the room who has banking exposure right now would agree."
On a positive note, U.S. dairy exports are sizzling, especially to Southeast Asia. Shipments to South Africa are up 40 percent.
But those gains are muted by a buildup of cheese and butter stocks. This is occurring at a time when, historically, there is a drawdown in those inventories.
"We need to find some buying in this market," Tranel said.
Overall, Tranel said he is bullish as he looks toward next year and beyond. If the current trend of declining cow numbers continues, then producers can expect to see milk prices move higher in the last few months of 2019.
"We think that one more drawdown in the price could ultimately be what we need in order to see long-term better prices," he said.
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