Dairy producers have learned that although being current with what is happening in the industry is important, what is critical is to anticipate what’s going to happen in the not-so-distant future regarding income and expenses. This is the main reason why dairy producers choose to contract futures for milk and feed. Companies that help manage risk by forward contracting milk seem to agree that 2013 prices don’t paint a very good picture for U.S. dairy producers. Milk prices during the summer are projected to be at best in the mid $18’s/cwt. Add roughly a dollar for premiums and producers will see a mailbox price that could reach $19+/cwt.
The average operating cost for a U.S. dairy, including labor, during 2012 was $18.9/cwt. The cost of production jumped almost $3/cwt between April and August ($17.5 to $20.6, respectively). This was a reflection of feed prices increasing dramatically as a result of the 2012 drought. The impact on the cost of production was actually 18% instead of 60%, as was suggested in some reports. When one looks at the record low milk prices in the $12’s for 2002 ($12.1), 2003 ($12.5), 2006 ($12.9) or even 2009 ($12.8), an outsider to the dairy industry would speculate that prices in the mid $18’s for 2013 seem to be fairly decent. Nothing is further from the truth, when considering the cost of production has increased to $18.9/cwt. During 2013 most dairy producers might break even during mid to late summer when the best input:output ratio will take place. Then again, this is not even taking into account the possibility of a drier than normal harvest season.
This year, more than ever, is about risk reduction. Producers need to make sure they can protect their milk check and most, if not all, of their feed bills. During 2013, nearly 66% of the operating cost of production (including labor) was attributed to feed, and nearly 70% of this was purchased feed. Thus, it is extremely important during 2013 to find every opportunity for the dairy to reduce feed purchases in favor of home-grown feeds. Corn and soybeans are among the best candidates in this group.
Corn prices were strong the first week of February with prices topping $7/bushel in parts of the Midwest. In addition, corn futures during the same week looked high at close to $6. Aside from the uncertainty of how the weather is going to be this growing season, the Environmental Protection Agency (EPA) plans to increase the renewable fuels mandate by 8.9%, thereby increasing the need for corn ethanol from 13.2 billion gallons in 2012 to 13.8 billion gallons in 2013. The basic law of supply and demand is an important aspect of modern economic theory. As demand for an item increases, its price rises — it works for corn grain, corn distillers grains, ethanol, and so on.
The corn-ethanol interface is in a very delicate equilibrium that, when influenced by an increased supply or demand, immediately results in a modification of the corn price per-bushel. We saw it in the recent past when, in spite of an unprecedented surge in ethanol production from 6.94 to 10.94 billion gallons from 2008 to 2009, corn prices actually dropped from $4.06 to $3.55 per-bushel, because corn yields were 7% higher than the previous high at 164.7 bushels/acre. When in the following two seasons (2010 and 2011) the corn yields were closer to “average” at 152.80 and 147.20 bushels/acre. The result was that corn prices jumped again to $5.18 (2010) and $6.20 (2011) per-bushel. What this shows again is that the corn-ethanol interface is in a very delicate equilibrium that, once influenced by increased supply (i.e. more bushels per acre) or demand (i.e. lower crop yields due to weather), immediately results in a modification of the price per-bushel. Looking forward, unless the 2013 U.S. corn crop exceeds an average of 160 bushels/acre, corn prices will again be above $7 per-bushel.
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