By Tony C. Dreibus - Jan 26, 2011 12:50 AM ET

Milk may jump 22 percent by June as higher feed costs drive producers to slaughter dairy cows

Milk may jump 22 percent by June as higher feed costs drive producers to slaughter dairy cows, said Shawn Hackett, president of Hackett Financial Advisors, who correctly forecast in October that prices would advance. The 80 percent gain in corn and 31 percent advance in soymeal in a year increased feed costs and outpaced the 13 percent advance in milk prices. U.S. cattle slaughter rose 6
percent in December from a year earlier, in part because dairy farmers sent more cows to meatpacking plants, Hackett said.

“When you look at the price of milk in the U.S. and what it costs to produce, dairy farmers are not making a profit,”
said Hackett, forecasting $20 per 100 pounds in the next four months. “The producer has gotten into a situation where he’s
leveraged as much as possible. Banks won’t lend any more. If prices remain uneconomical, he will no longer be able to draw
loans with the hope that prices will eventually rebound.” Dairy farmers have missed out on the booming U.S. farm
economy as higher feed costs and surplus production cut profit. Producers expanded herds following the jump in milk prices to a
record in 2007, just before the U.S. began its longest recession since before World War II and unemployment rose to the highest
level in a quarter century.

Hackett, who called milk an “amazing buying opportunity” in October, said rising milk futures will mean higher prices at
grocery stores. Dairy farmers have borrowed as much money as banks will allow and, because of rising input costs, are being
forced to sell their animals to slaughterhouses, said Hackett, from Boynton Beach, Florida.

Liquidate Positions

Milk for February delivery gained 11 cents to $16.41 per 100 pounds on the Chicago Mercantile Exchange at 10:16 a.m. The
price has increased 24 percent this month. It may decline in February as investors liquidate positions to capitalize on gains
before resuming its rally, Hackett said.

U.S. cattle slaughter in December totaled 2.92 million head, the Department of Agriculture said on Jan. 21, up 6 percent from a year earlier. Red-meat output in the U.S. touched 4.36 billion pounds, the second-straight month production reached a record, USDA data show. Beef output rose to 2.27 billion pounds, also up 6 percent year-on-year, the government
said.

“Culling is extremely high for this time of the year,” Hackett said. Reductions in the herd “really started in December. That’s when dairy farmers realized they were in deep trouble. They know that they can raise capital by selling their herds so they’ve been doing that because they have no other option.”