The situation in the dairy sector

(Dairy Herd Network) – U.S. dairy cow slaughter totaled approximately 220,000 head during June, falling below the comparable year-ago figure for the first time since March. The following chart puts that figure in perspective, showing the latest figure was actually the smallest since early 2012. The 10-year average on the chart indicates such a low result is not terribly surprising, since milk cow culling usually reaches its lowest levels of the year during the May-July period. By the same token, the disparity between recent totals and the long-term average certainly suggests producers are reducing their herds.

The decline in the cow slaughter data for June may be deceiving. This year June had just 20 workdays, which was one less than last year. When viewed on a per-day basis, the June result slightly exceeded the year-ago rate. That offers additional evidence supporting the general belief that high feed costs and tight production margins are causing the domestic dairy industry to trim herds.

Those considerations make the latest USDA Milk Production report that much more surprising, since it stated U.S. milk production for June at 16.93 billion pounds. This represents a 1.5% year-over-year increase. Moreover, that stunning expansion followed on the heels of a 0.1% rise in April and a 1.0% surge in May. The following chart puts these results in context. A portion of the general upward trend can be credited to the dairy industry’s increasing efficiency, but it seems unlikely that the underlying factors would account for the indicated second-quarter surge. Unfortunately, the monthly dairy report was a victim of the federal government spending sequester, as was the July Cattle inventory report. As a result, we do not have a good handle on the current size of the U.S. dairy herd. We seriously doubt dairymen have been building their herds, but we won’t see a fresh cow population estimate until September.

Actually, we believe contrasting weather conditions are affecting milk output and will continue to do so during the weeks and months ahead. Remember that the 2012 drought started very early last year, with pastures in many areas already burning up in late April and early May. Thus, cows weren’t eating very well at that time, and were probably suffering from soaring temperatures as well. In contrast, spring 2013 was cool and wet, thereby implying cows around the country were “happy cows.” That would seemingly account for the production surge. In addition, if we make the seemingly safe assumption that forthcoming conditions will remain relatively mild, output per cow might easily remain above year-ago levels. Prospects for much cheaper feed, including corn, soybean meal and hay, also point in the direction of industry expansion down the road, so production will almost surely rise in late 2013 and 2014.

U.S. dairy product exports are expected to remain strong through summer, especially with the Southern Hemisphere’s spring flush unlikely to arrive before the fourth quarter. That is creating considerable optimism about the second-half outlook for the dairy sector. We certainly expect a significant seasonal advance in milk prices. However, the persistent weakness experienced by CME futures and anticipated production increases create concern about the prce outlook, especially when viewed in light of huge swings in the past. As a consequence, we believe dairymen should seek to build protection against substantial price declines during the weeks and months ahead.