Dairy Margins Erode in December
Published: Friday, December 27, 2019
The following is from Lee Mielke, author of a dairy market column known as "Mielke Market Weekly."
The Agriculture Department announced the first Federal Order Class I base milk price of 2020 this week at $19.01 per hundredweight, down 32 cents from December, $3.89 above January 2019, and the highest January Class I price since 2014. It equates to $1.63 per gallon, up from $1.30 a year ago.
Dairy margins deteriorated over the first half of December as a sharp drop in milk prices combined with increased feed costs, particularly in nearby marketing periods, according to the latest Margin Watch from Chicago-based Commodity and Ingredient Hedging LLC.
"Forward margins are still projected over the 80th percentile of the past 10 years however throughout 2020, with first quarter margins above the 90th percentile of historical profitability," according to the MW, and "there is still reason for optimism heading into 2020."
The MW listed the USMCA and the U.S.-China Phase One agreement, stating that it will "reduce U.S. tariffs on Chinese goods in exchange for their commitment to boost U.S. agricultural purchases by $40 billion the next two years," and "should provide a big boost for the U.S. dairy industry and whey shipments in particular."
The MW stated that the USMCA "includes significant concessions from Canada to open up their dairy market to the U.S., and will gradually phase out Class 6 and 7 milk, which has given the country an advantage in global powder markets and shut out U.S. ultra-filtered milk from Canada. Tariffs on cheese exports to Mexico will also be removed which should help boost trade to that country as well."
The MW concluded, stating that corn and soybean meal prices have moved higher in response to optimism for increased ethanol and soybean trade to China.
The Agriculture Department's monthly Livestock, Dairy and Poultry Outlook, issued Dec. 16, mirrored milk price and production projections in the Dec. 10 World Agricultural Supply and Demand Estimates report.
It stated that, based on recent data for milk cow numbers, the 2019 fourth-quarter forecast is for 9.325 million head, 10,000 higher than last month's forecast. The fourth-quarter forecast for yield per cow was unchanged at 5,805 pounds. The annual forecast for average size of the milking herd was 9.330 million head, 5,000 higher than last month's forecast. The 2019 forecast for yield per cow was 23,435 pounds. The annual milk production forecast for 2019 rounds to 218.6 billion pounds, unchanged from last month's forecast.
The 2020 annual forecast for milk production was unchanged from last month at 222.4 billion pounds. Milk cows are forecast to average 9.335 million head, and milk per cow is forecast at 23,830 pounds.
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