Dairy situation better, but no celebrating yet

Hoard's Dairyman: 

Dairy situation better, but no celebrating yet

Date: 
Fri, 09/10/2010

Slowly, but surely, modest profitability is returning for U.S. dairy producers. Even so, few are relaxing just yet.

Both of the major financial barometers they watch – Class III milk and 40-pound Cheddar cheese blocks – rose strongly during August. The Class III price, announced in early September, jumped $1.44 per hundredweight, the biggest one-month gain in over two years, and block prices rose nearly 12 cents per pound. Both are encouraging and badly needed signs of short-term stability for milk producers, but at least two big signs of caution are still on the horizon.

First, although cheese prices are up, milk futures for 2011 are down. On August 2, Class III futures prices for January through July averaged $14.36. On September 7, the average was just $13.92 – slightly below the current cost of production we are hearing from producers.

Second, prices for corn, the benchmark reference point for all cattle feeds, are already up more than 50 percent from last year. In addition, many analysts predict they will go even higher this fall due to a global shortage of grain supplies caused by a halt of wheat exports by Russia.

The combination of these two factors has many dairy producers feeling uncomfortably similar to how they did in late 2008. That was when contracting large amounts of feed in the fall at record high corn prices proved to be disastrous when both corn and milk prices collapsed shortly afterward.

Then again, things are much different today since few producers have the borrowing power to be able to repeat that decision, even if they want to.