U.S. milk production is headed for the biggest contraction in 12 years as a drought- fueled surge in feed costs drives more cows to slaughter.
Output will drop 0.5 percent to 198.9 billion pounds in 2013 as the herd shrinks to an eight-year low, the U.S. Department of Agriculture estimates. Milk futures rose 45 percent since mid-April and could advance at least an additional 19 percent to a record $25 per 100 pounds by June, said Shawn Hackett, the president of Boynton Beach, Fla.-based Hackett Financial Advisers Inc. He correctly predicted the rally in March.
Dairies in California, the top milk-producing state, are filing for bankruptcy, and U.S. cows are being slaughtered at the fastest rate in more than a quarter century. Corn surged to a record price in August as the USDA forecast the smallest crop in six years because of drought across the U.S. Global dairy prices tracked by the United Nations rose 6.9 percent last month, the most among the five food groups monitored, and that will probably mean record costs next year, according to industry estimates.
“Farmers can’t afford to buy as much grain and protein, and that affects milk production,” said Bob Cropp, an economist at the University of Wisconsin in Madison who has been following the industry since 1966. “In California, there’ve been some foreclosures and some sell-off of cows quite heavily. You’re going to see that in other parts of the country.”
Class III milk, used to make cheese, jumped 22 percent to $21 on the Chicago Mercantile Exchange this year. That’s more than 21 of the 24 commodities in the Standard & Poor’s GSCI Spot Index, which rose 3.6 percent. The MSCI All-Country World Index of equities climbed 11 percent, and Treasuries returned 1.8 percent, a Bank of America Corp. index shows.
The global dairy market is facing a scarcity of supply in the next 12 months as output slows in the U.S. and Europe and demand keeps expanding, researcher Rabobank said in a Sept. 27 report. Surplus milk available for shipment from the seven biggest exporting regions will decline for the first time in four years, and there is little excess inventory, the bank’s team of 11 dairy analysts estimate.
U.S. cows produced 1,776 pounds of milk each on average in August, 0.5 percent less than a year earlier, government data show. That’s the first decline in 13 months and the biggest year-on-year drop since February 2004, according to Bill Brooks, an economist at INTL FCStone Inc. in Kansas City. Productivity probably slipped because of the heat waves and changes in feed rations, said Brooks, who grew up on a Missouri dairy farm and has covered the industry for two decades.
Almost 2.04 million dairy cows were slaughtered in the first eight months of the year, 6.7 percent more than in 2011 and the most for that period since 1986, government data show. The U.S. dairy herd will shrink 1.1 percent to 9.11 million head in 2013, the smallest since 2005, according to the USDA.
While slaughter rates are rising, farmers tend to cull their least-efficient animals and replace them with younger, more productive cows, said Robert Chesler, a Chicago-based vice president in the foods division of INTL FCStone Inc., which handled $75 billion of physical commodities in 2011.
Production per cow will rise 0.6 percent to 21,830 pounds next year, from an estimated 21,690 pounds this year, the USDA forecasts. A more productive herd might mean an increase in total supplies rather than the decline the government is predicting, Chesler said.
Higher prices could crimp demand, with cheddar traded on the CME rallying 26 percent to $2.075 a pound in the third quarter. The increase in wholesale prices may be passed along to retailers, Chesler said.