Dairy Economist: 2022 Should Be Profitable for Milk Producers
Published: Friday, January 7, 2022
The following is from Lee Mielke, author of a dairy market column known as "Mielke Market Weekly."
We attempted to take a look at what lies ahead in the new year in the Jan. 3 "Dairy Radio Now" broadcast with Bill Brooks, dairy economist at Stoneheart Consulting in Deerborn, Mo.
Brooks predicted, "It should be a better profitability year for dairy farmers," but warned "that's contingent on the weather and how that impacts our main input prices as far as feed costs." Feed costs finished 2021 strong, he said, but milk prices finished 2021 fairly strong as well.
The Agriculture Department has made changes to the risk management Dairy Margin Coverage (DMC) program, with respect to previous year eligible milk marketings as well as the feed price calculation, which will now be based on 100 percent premium alfalfa hay, instead of the 50/50 hay blend.
Many of the changes will be retroactive, according to Brooks, and result in additional benefits to dairy producers, so it behooves them to check with their local Farm Service Agency office for complete details.
Brooks says international dairy prices look strong and that is helping firm U.S. prices, especially on butter, where $3 per pound plus is a global reality and could potentially move our price higher.
Cheese prices will hopefully remain strong, he said, as economies open more, so "We're looking at a better price year than what we experienced in 2021 and it should be a better profitability year for us."
Meanwhile, a higher November All-Milk Price offset higher corn and soybean prices to nudge the November milk feed ratio higher for the third month in a row. The USDA's latest Ag Prices report has the ratio at 1.94, up from 1.87 in October, but well below last year's 2.58.
The index is based on the current milk price in relationship to feed prices for a ration consisting of 51 percent corn, 8 percent soybeans and 41 percent alfalfa hay. In other words, 1 pound of milk would purchase 1.94 pounds of dairy feed of that blend.
The U.S. All-Milk Price averaged $20.80 per hundredweight, up $1.10 from October but was 30 cents below November 2020.
The national average corn price jumped 25 cents to $5.27 per bushel, after dropping 45 cents in October, and is $1.48 per bushel above November 2020. Soybeans averaged $12.20 per bushel, up 30 cents from October and $1.90 per bushel above November 2020.
Alfalfa hay averaged $210 per ton, down $3 from October, but is a hefty $46 per ton above a year ago.
Looking at the cow side of the ledger, the November cull price for beef and dairy combined averaged $69.20 per hundredweight, down $1.40 from October, $9.90 above November 2020, but is $2.40 below the 2011 base average of $71.60 per hundredweight.
Bill Brooks said, "A DMC payment is expected for the 11th time in 2021 and 12th straight month when the FSA announces the November 2021 milk margin above feed costs. The milk margin above feed costs is expected to be $9.14 per hundredweight for November, a gain of 60 cents over October's level and the highest since November 2020 when the margin was $11.64. Dairy producers with coverage at the $9.50 per hundredweight level would expect to see a payment on eligible November milk production," according to Brooks.
In the week ending Dec. 18, 61,700 dairy cows were sent to slaughter, down 600 from the previous week and 1,500 head, or 2.4 percent, below a year ago.
The StoneX Dairy Group stated in its Dec. 27 "Early Morning Update" that "the second half of 2021 was marked by an increased willingness, or need, for producers to cull animals. That said, the four-week rolling total of dairy cows slaughtered has been trending down over the last three months. Week-to-week the majority of slaughter levels have been higher than year-ago levels, but the surplus over last year has been declining. The contraction seems to be slowing down," StoneX concluded, "as higher milk prices encourage farmers to keep animals in the herd."
Cash dairy prices finished 2021, mostly higher and it was a full week of trading. The 40-pound Cheddar blocks closed the last day of the year at $1.98 per pound, up 10.75 cents on the week, highest since Nov. 12, 2020, 12.25 cents above where they were on Dec. 1, and 33 cents above that week a year ago.
The 500-pound Cheddar barrels finished last Friday at $1.71 per pound, up 6 cents on the week, highest since Nov. 1, 2021, 16.75 cents above a year ago, but a still too high 27 cents below the blocks.
There were seven sales of block on the week at the CME and 27 for the month of December, up from just 14 trades in November. Barrel sales totaled 30 for the week and 88 for the month, down from 98 in November.
Some Midwest cheesemakers were very busy during the holiday, according to Dairy Market News. Spot milk prices were falling at somewhat strong discounts and ranged from $4 to $2 under at mid New Year's Week. Although discounted, DMN says they were "somewhat pricey" compared to the final week in 2020, when milk prices reached $10 under Class III. Cheese demand maintained strength coming into the holiday season but questions have arisen as to how cheese stocks will hold up once customers come back to the table in early 2022. DMN says there are some near term bullish market undertones, according to market traders, despite the large block-barrel price gap.
Western cheese demand is steady in retail markets while food service sales are declining. Rising COVID cases and winter school closures are contributing to a decline in food service purchasing. However, international demand remains strong. The ongoing shortage of truck drivers was exacerbated by the holidays and poor weather, increasing delays to deliveries. Export loads of cheese face further delays due to port congestion. Milk is available for cheese production in the region but difficult in areas hit with bad weather. End-of-year holidays, staffing shortages and shipping delays are contributing to reduced cheese production throughout the West, according to DMN.
Butter had a great week after jumping 15.75 cents the previous week, and soared to a Friday close at $2.4525 per pound, 20.25 cents higher on the week, highest since Sept. 21, 2017, 47.25 cents above its Dec. 1 perch, and $1.0325 above a year ago when it dropped 10.50 cents to $1.42. The U.S. price is narrowing the gap to global levels. There were 30 trades reported on the week and 149 for the month, up from 62 in November.
Butter producers are running churns as much as possible, says DMN. Bulk butter is very tight as the final weeks of 2021 brought increasing interest from customers in all varieties of butter from salted 80 percent to unsalted 82 percent butterfat.
Cream is available in the West, though some contacts reported that severe weather and a shortage of truck drivers was limiting their ability to deliver loads to production facilities. Cream demand is steady to lower as some Class II producers in the region were running lighter year-end holiday schedules. Steady demand is present for butter in both retail and food service markets.
Grade A nonfat dry milk fell to $1.6475 per pound last Wednesday, then reversed direction but closed last Friday at $1.6550, down 1.50 cents on the week, up 10.75 cents on the month, and 51.25 cents above a year ago. There were 12 sales on the week and 60 for the month, down from 67 in November.
Dry whey stayed frozen at its new record high, 75 cents per pound, all week, up 7 cents on the month and 28.75 cents above a year ago. There were no sales for the week and four for the month of December, down from eight in November.
High Feed Costs Ahead
Looking ahead to the first Global Dairy Trade auction of 2022, HighGround Dairy stated in its pre-GDT analysis: "High feed costs, strong global demand, a lack of production growth and general commodity inflation are the key drivers that will likely keep global dairy product prices elevated into the first half of 2022. While dairy producers in key exporting regions are being given signals to expand (raw milk prices are quickly on the rise in the U.S. and Europe), the first high feed cost environment since 2013-14 may prevent farmers from aggressive growth plans for the coming months."
The National Milk Producers Federation's final Market Report of 2021 stated, "The rapid evaporation of growth in dairy cows, milk and milk solids production dropped all three into negative territory during October. These supply-side effects have dominated the dairy situation recently and will continue to do so well into the coming year. Domestic consumption growth of all milk and dairy products has been somewhat sluggish in recent months, but U.S. dairy exports during the first 10 months of 2021 have set a new volume record of 17.6 percent of U.S. milk solids production, well above this measure's second-highest year, 2020 at 16.3 percent."
"The drop in production is being felt most in dry skim milk products, and to a lesser extent in butter and dry whey production. Cheese production remains the preferred channel for available milk. Product stocks are being drawn down and prices rising, as production trends change," the report stated.
Dairy imports into Japan in November were not as positive as those to China but still moving. Japan imported 50.5 million pounds of cheese, down 5.5 percent from November 2020, and year to date imports were off 1.3 percent.
HighGround Dairy blamed a loss of volumes from the EU, and reported that Germany posted the largest decrease in volumes out of all suppliers. The U.S. market share, at 11.8 percent, was up from 10.5 percent a year ago.
Butter imports totaled just 1.9 million pounds, down 30.7 percent from a year ago, with YTD down 38 percent.
Last of all as I finish my final column of 2021, I'm not sure that I can remember the last time we had a white Christmas here in Whatcom County, Wash., but we sure did this year. Unfortunately, it also brought us frigid temperatures that got down to single digits in some cases. Strong gusty winds served to bring those temperatures even lower, considering wind chill factor, all of which brought back many memories of my growing up days in Wisconsin.
I have often reminisced of days it was so cold, I'd stand in front of an open refrigerator just to warm my hands. (This is where you laugh and snicker.)
The frigid cold was no laughing matter for those who had to be out in it, especially dairy farmers, emergency services personnel, line workers and furnace repair people. Guess it was a fitting end to 2021. My hope and prayer is that we all have a less dramatic and happier 2022.
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