Declining Milk Production, Strong Demand Create a Perfect Storm
Published: Friday, January 28, 2022
The following is from Lee Mielke, author of a dairy market column known as "Mielke Market Weekly."
The latest Margin Watch from Chicago-based Commodity and Ingredient Hedging LLC said, "Dairy margins strengthened sharply to start the year as a continued surge in milk prices combined with a mild correction in the feed markets to boost projected profitability."
"The milk market has caught fire from a perfect storm of declining global production at the same time as demand for dairy products soar," the MW stated. "USDA's Foreign Agriculture Service reported record November monthly exports, with 492.1 million pounds of dairy product shipped during the month, up 17.3 percent from 2020 and 60 million above the previous November record set in 2017. NDM exports of 168.5 million pounds were up 24.7 percent from 2020, with strong demand from Mexico, the Philippines, Colombia and Vietnam pacing gains. NDM stocks have been declining after reaching a high of 349 million pounds in June, dropping to 196.5 million pounds in November," the MW reported.
"More milk being diverted away for cheese has caused NDM production to decline since mid-2021, trailing 2020 by 54 million pounds between July and November. November's production of 155.4 million pounds was down 2.4 percent from 2020. This helped support Class IV prices, with the USDA announced price in December of $19.88 per hundredweight up $6.46 from 2020 and the highest announced price in seven years."
"Class IV futures are trading above $22 per hundredweight in each of the next four months," according to the MW, "and Fonterra is now forecasting their highest pay price ever as production declines in New Zealand. Feed prices meanwhile have corrected as much-needed rain is forecast for parched areas of Argentina and Southern Brazil while the USDA's January WASDE report was considered neutral for corn and soybeans," the MW concluded.
Meanwhile, the National Milk Producers Federation says the Pandemic Market Volatility Assistance Program will provide up to $350 million in pandemic assistance payments to dairy farmers early this year. "This initiative will partially reimburse producers for unanticipated losses created during the COVID-19 pandemic when federal dairy food box purchases weighted heavily toward cheese, combined with a change to the Class I mover formula created the unintended consequence of significant financial losses."
Payments will reimburse qualified dairy farmers for 80 percent of the revenue difference per month on up to 5 million pounds of milk marketed and on fluid milk sales from July through December 2020. The payment rate will vary by region based on actual losses on pooled milk related to price volatility. As part of the program handlers also will provide virtual or in-person education to dairy farmers. More details are posted at the NMPF website.
Dairy cow culling increased from the previous month but fell below that of a year ago in December, according to USDA's latest Livestock Slaughter report.
An estimated 267,800 head were sent to slaughter under federal inspection in December, up 22,500 from November but 5,700 head, or 2.1 percent, below December 2020. Culling for the year totaled 3.1 million, up 42,900, or 1.4 percent, from a year ago.
In the week ending Jan. 8, 63,000 dairy cows were sent to slaughter, up 10,600 from the previous week, but 4,500 head, or 6.7 percent, below a year ago.
The Agriculture Department's latest Livestock, Dairy, and Poultry Outlook, issued Jan. 19, mirrored milk price and production projections in the Jan. 12 World Agricultural Supply and Demand Estimates report.
The outlook also reported that the number of milk cows is projected to continue decreasing in the first part of 2022. For the first half of the year, milk cows are projected to average 9.38 million head. However, in the second half of the year, they are projected to increase to 9.385 million. The estimated number of cows for the year 2022 is 9.385 million, unchanged from last month's projection. Average yield per cow is projected to be 24,265 pounds, unchanged from last month's projection.
The December publication of "Dairy: World Markets and Trade," by USDA's Foreign Agricultural Service, projects that milk production for the top five major exporters will total 647.1 billion pounds in 2022, a modest increase of .7 percent from the total expected for 2021. Milk production totals for the European Union and New Zealand are expected to grow by .7 percent and .5 percent, respectively, says USDA.
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