12-month dairy outlook anticipates Northwest farmers break-even returns in 2019
Northwest FCS’ 12-month dairy outlook anticipates break-even returns in 2019. Futures markets suggest unprofitable prices through the first half of 2019 with increasing prices for both Class III and Class IV milk from August through December 2019.
Mild weather in Southern Idaho favored milk production in January and February. The USDA milk production reports a year-over-year increase of 15 pounds per head in February. This comes as the state added 8,000 head over last year. Likewise, Washington added 3,000 head year-over-year, notwithstanding winter storms that ravaged producers in Yakima County, one of the largest dairy counties in the U.S. Officials estimate 1,800 cows died in the Feb. 8 blizzard. This loss is reflected in a month-over-month change in the USDA reports.
However, animals injured or sickened during the storm are not reflected in the estimate and cull rates increased as those animals were identified. The total loss from the storm is likely to tally between 3,600 and 3,800 head.
Absent the extreme weather event, Washington would have added 5,000 head year-over-year While adding cows increases milk supply in an already flooded market, heifer inventory remains elevated regardless of the milk price.
Dairy Cow Replacement
The USDA reports Idaho replacement heifer inventory reached a record 340,000 head. Heifers as a percent of cows in milk reached 55.3 percent. This is the second highest since 1983, second only to 2008. Heifer prices are well below the cost to raise them. As such, dairies would rather absorb the heifer into their herd instead of realizing an accounting loss. Instead, producers have increased culling rates on older cows. Dairy cow slaughter rates are higher year over year.
There is some hope as dairies reduce the number of heifers raised by breeding with beef semen. As beef semen is less expensive than sexed dairy semen, producers reduce breeding costs. Revenue also increases because crossbred calves are more valuable than purebred dairy calves. This trend gained popularity in early 2018. As producers increase cull rates and breed more cows to beef, the replacement heifer herd should right-size. In the interim, milk production will continue to grow. The heifers entering the milking herd are better, more efficient cows. This is compounded by a larger portion of the herd close to peak milk. This will partially correct as the clump of early lactation cows become a clump of late lactation cows.
Idaho milk producers continue to report a surplus of about 2 million pounds of milk per day. Gem State Dairy Products, LLC, plans to build a large processing plant in Twin Falls, which would provide some relief to the milk surplus. Construction on the plant is planned to begin in summer 2019 according to an article by DairyFoods.com. Currently, Magic Valley Quality Milk Producers transports 3 million pounds per day of raw milk to processors in and around Idaho. The company is in the process of expanding its processing capabilities by building a condenser that can process about 1 million pounds of milk per day.
The University of Idaho has obtained approval, funding and 540+ acres of land to build a new dairy research facility near Rupert, Idaho. The proposed $45 million project would create the Idaho Center for Agriculture Food and the Environment (CAFE), which would be the largest dairy research facility in the nation.
Dairy Margin Coverage (DMC)
The USDA announced the January DMC calculation of $7.99 income over feed cost. This means producers who cover the first 5 million pounds of production at the $9.50 coverage level can expect to cover their premium for the entire year with the January payment. Enrollment is expected to begin June 17 and is retroactive to January 2019. Dairies up to 3,500 head should inquire about covering the first 5 million pounds of their production history with FSA. Production above 5 million pounds is subject to a higher schedule of premiums and returns remain questionable until more data is available. The USDA will release half of the 2019 data before an enrollment decision must be made.
Milk production in the U.S. totaled 217.5 billion pounds in 2018, a 0.9 percent increase from 2017. This represents a lower-than-normal annual increase as 1.5 percent is typical. The increase in production was driven by an additional 250 pounds of milk per cow in 2018, which offset a decrease of 49,000 cows from the national herd.
Extreme winter conditions and storms in the Northwest and Upper Midwest created regional challenges to milk production in the first quarter of 2019. Heavy loads of snow collapsed barn roofs in Minnesota and impacted the ability of milk trucks to make pickups at many farms. This came in addition to the Northwest storm that killed over 1,800 cows.
A slower growth rate in milk production translates into less excess milk being dried into powder. Production of nonfat dry milk (NDM) and skim milk powder (SMP) were down a combined 3.3 percent in 2018 compared to 2017. Powder production in the EU is down as well. What had been significant intervention stocks of SMP are being sold rapidly. There is still some uncertainty about where it has gone and where it might reappear.
The reduced supply supports prices, which climbed above $1 per pound of NDM early in the year. This higher price level has been met with resistance on the demand side and exports to Mexico are slowing.
Cheese production fell slightly in December compared to a year earlier. Prices for 40-pound block cheddar are currently in the $1.60 per pound range. Cheese prices spent most of last year in this range until falling into the $1.30s in December amid national media coverage of record-high inventory. Inventory at the beginning of 2019 is about 5 percent higher than last year, but domestic demand is strong. Still, strong exports are necessary to drive inventories lower and give prices hope of breaking out of the current range.
Relatively low cheese and whey prices, which drive the Class III milk price, will be offset somewhat by higher powder prices and stable butter prices, which drive Class IV.
If tariffs and trade disruptions are resolved and exports increase, there is optimism that the second half of the year could show some improvement. The net result should be prices about $1 to $1.50 per hundredweight higher in 2019 than they were in 2018.
An unusually hot and dry summer is expected to hamper milk production in New Zealand, especially on the South Island. Some farmers have reportedly reduced their milking frequency and/or sold heifers. Cull rates are on the rise to combat higher feed costs resulting from the dry weather.
European milk production is slipping with January milk production 1.25 percent below last year. In January, SMP production fell 8.7 percent and whole milk powder production fell 6.4 percent year over year.
The USDA 2019 forecast price for all milk is $17 to $17.60 per cwt, around $1 per cwt higher than 2018. Nonfat dry milk and whey provide a bright spot in the market. Prices hit an 18-month high in December and U.S. and EU exports were 25 percent higher than in 2017. No breakout moves beyond the current range of $16 to $18 per cwt are expected in the all-milk price.