By Elizabeth Campbell - October 09, 2012
Drought Culling Accelerates as Prices Jump
Oct. 9 (Bloomberg) -- 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 (90.2
million metric tons) 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 may advance at least another 18 percent to a record $25 per 100
pounds by June, said Shawn Hackett. The president of Boynton Beach,
Florida-based Hackett Financial Advisers Inc. correctly predicted the rally 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 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, Rabobank
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, thereve been some
foreclosures and some sell-off of cows quite heavily. Youre going to see that
in other parts of the country.
III milk, used to make cheese, jumped 22 percent to $21.10 on the Chicago
Mercantile Exchange this year. Thats more than 21 of the 24 commodities in the
Standard & Poors GSCI Spot Index, which rose 2.4 percent. The MSCI
All-Country World Index of equities climbed 12 percent, and Treasuries returned
1.8 percent, a Bank of America Corp. index shows.
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, 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 banks team of 11 dairy analysts estimate.
produced 1,776 pounds of milk each on average in August, 0.5 percent less than
a year earlier, government data show. Thats 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.
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.
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.
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 may mean an
increase in total supplies rather than the decline the government is
predicting, Chesler said.
may 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.
levels where buyers are getting concerned, he said. Commercial milk consumption
next year may slide 0.5 percent to 192.2 billion pounds, compared with a 2.1
percent increase this year, the USDA forecasts.
measured by the UN index may climb to a record 243 by June 2013, from a
six-month high of 215.76 in September, Nick Higgins, an analyst at Rabobank in
London, said in a report Sept. 19. The UNs gauge of 55 food items, which gained
7.7 percent since June, peaked at 237.92 in February 2011.
for dairy products and lower production in the U.S. and New Zealand probably
will keep prices rising into next year, said Hackett. China is the worlds
biggest buyer of whole-milk powder and will import four times more this year
than a decade ago, USDA data show.
of cheese, whey, lactose and other dairy products reached records last year,
valued at $4.82 billion, or 30 percent more than in 2010, according to the
Arlington, Virginia-based U.S. Dairy Export Council. The total amount of U.S.
dairy products shipped will increase 2 percent to 5 percent this year from
2011, the council forecasts.
will be meaningfully higher for Starbucks Corp., the worlds largest coffee-shop
chain, in its fiscal year that began Oct. 1, Chief Financial Officer Troy
Alstead said on a conference call with analysts July 26. Starbucks has said
dairy accounts for about 5 percent to 10 percent of its cost of goods, while
coffee makes up 15 percent to 20 percent. Arabica- coffee futures are down 25
percent in the past year. Shares of the Seattle-based company gained 6 percent
prices probably will climb next year as the cost of feed increases, Michael
Schlotman, chief financial officer for Cincinnati-based Kroger Co., the biggest
U.S. grocer, said on a conference call with analysts Sept. 7.
lost the Milk Income
Loss Contract Program, which protects producers from high feed costs, when it
expired Sept. 30. The end of the subsidy may have a limited impact for now
because feed prices typically decline at the end of the harvest, said Vincent
Smith, an agriculture economics professor at Montana State University in
in California, which produced 41.46 billion pounds of milk last year, may be
suffering more than in other states partly because they are reliant on imports
of corn, soybeans and alfalfa hay, said Michael Marsh, the Chief Executive
Officer of Western United Dairymen, a Modesto, California-based trade
U.S. corn and
wheat inventories before next years harvests probably will be smaller than the
government forecast in September after the worst drought in 56 years hurt
crops, according to the average of as many as 30 analyst estimates in a
Bloomberg survey. The USDA is scheduled to update its estimates on Oct. 11.
California farmers about $18.22 to produce 100 pounds of milk in the second
quarter, and the average price was about $13.91, Marsh estimates. There were
1,675 dairies in California last year, government data show, and about 100 may
close in 2012, he said.
California are not part of a federal system that sets minimum returns for
farmers, so they tend to get lower prices than in other states, according to Ed
Jesse, a professor emeritus in the department of agriculture and applied
economics at the University of Wisconsin in Madison. Dairies got $16.42 per 100
pounds in August, 9.3 percent less than the national average, USDA data show.
an agricultural bankruptcy lawyer in Fresno, California, said hes had 58 cases
of dairies in some kind of financial difficulty over the past year and half,
including bankruptcy filings, out-of-court liquidations and moving operations
through cycles, and Ive hit every one of them since 1979, but nothing like
this, Walter said. The recent spike in feed prices due to the drought and
ethanol policies really put a nail in the coffin of a lot of people.
this year, 49 bankruptcy cases have been filed by family farms in California,
up from 43 cases filed last year in the same period, according to federal court
records. The cases include dairy and other family-run farms that are eligible
to use Chapter 12 of the U.S. Bankruptcy Code to try to reorganize their debt.
hemorrhaging hard financially, said Jim Wilson, 44, whose dairy in Riverdale,
California, milks about 3,000 cows and is losing about $200,000 a month. Were
all on the brink of going under and just culling herds harder because we cant
afford to feed them.