What is in this article?:
- The resulting heat stress from the U.S. drought and the escalation of feed costs will reduce milk production growth.
- While California has been hot and dry, as usual at this time of year, ample supply of irrigation water has limited direct impacts on dairy producers to date.
Drought will slow milk production in 2H
The US drought could slow US milk production in three ways: reducing cow comfort via heat stress; reducing feed growth on producer-owned land; and increasing prices for purchased feed.
Heat stress can quickly impact milk production. Yield per cow drops quickly when temperatures rise above 100˚F (37.8˚C), and recovery is not always quick. The impact is less on farms with good ventilation/cooling systems, but unfortunately, not all of the industry has these. Anecdotal evidence suggests that heat stress has been considerable in parts of the country in recent months. The Southwest was first impacted in late June, contributing to a 2 percent YOY decline in milk production in Texas and New Mexico in that month. Both the Southwest and Midwest regions are reported to have been heavily impacted in July.
Reduced feed growth
The impact of the drought on feed growth on producer-owned land will be moderate at the national level, but severe in some regions. Some regions have escaped the heat and crops are produced under irrigation in many key dairy areas. Although Wisconsin has been extremely hot and dry, corn and soybean crops in that state were planted later than other regions and received rain before pollination. However, other regions face almost complete crop failure, and it will be challenging for dairy farmers to obtain all the feed they would like.
Surging cost of purchased feed
The most lasting impact will be from the surge in the cost of purchased feed. December corn futures hit USD 7.80/bu in late July, 50 percent up on mid-June trading levels. Off a higher base, soymeal rallied 20 percent over the same period.
The surge in feed prices has devastated short-term margins. Based on USDA metrics, producer income over feed costs (IOFC) is expected to come in at just USD 3.96/cwt in July, less than half the indicative breakeven level and as bad as anything seen in 2009 following the global financial crisis.
While the futures curve (at 25 July) suggested some improvement in IOFC (based on some improvement in local milk prices) it implies that margins will remain negative over the balance of 2012. At this time the prospects for a better result for producers than suggested by the current futures curve appear slim. The recent rally in US wholesale dairy commodity markets has already pushed US spot cheese prices above prevailing world prices, something that has proved unsustainable for all but a few months since 2005. Traditional discounts for US nonfat dry milk (NFDM) have also all but dried up.