“Hesitant Optimism for Dairy in ‘09”
Rick Kment, DTN Dairy Analyst
Progressive Dairyman
– June Issue
Word Count:
As unfavorable economic conditions continue to plague the nation, diary producers are certainly not immune to the effects of the slowdown in consumer spending. As a result, the first half of 2009 has been a struggle for dairy producers in every region of the country. Many of the difficulties from 2008 have continued into the current year, including increased feed costs, lower milk prices and decreased consumer spending on dairy products. Although the current situation looks bleak, if the right factors fall into place, the dairy industry is positioning itself for a possible rebound in the second half of 2009.
Production
Coming off of the second half of 2008, dairy producers saw record corn and soybean meal prices, which led to record feed price levels. The higher feed costs have had a significant impact on overall dairy producer profit margins late in 2008. Although prices have fallen from the record highs during the summer of last year, feed prices are still above the five-year average.
Despite higher feed prices, production levels for milk in the United States continued to be strong. Milk production has steadily increased over the last three years, as cow numbers have continued to climb across the nation. Milk per cow also has continued to increase as production and management efforts by producers have become better. Unfortunately, due to the economic slowdown, overall demand reduction for dairy products significantly weakened the price. Lackluster demand for dairy products during the 2008 holiday season contributed to a sizable drop in dairy future prices – as low as $9.26 in the February 09 market.
The lower diary future prices have continued to fall during the first part of 2009, dropping approximately 50 percent from a $20.30 per hundredweight level to $9.26 per hundredweight. The lack of revenue and income that dairy producers are seeing is significantly impacting, not only profit margins, but their net worth and bottom line. As a result, some dairy producers have begun culling their herds and decreasing production, while others have quit producing all together.
The majority of producers have chosen to continue production but doing so with methods to more aggressively manage their herds. The strategy includes keeping the highest-producing cows and selling off the others to break even or make a profit. These profit-saving measures are expected to reduce the overall milk supply in the third and fourth quarters of 2009. The decrease in herd numbers and its affects on the overall production rate is a relatively long cycle. It typically takes three to six months before this evidence is really seen in the market.
Consumer Buying
With the first half of the year now behind dairy producers, the second half might hold signs of optimism. June, after all, is National Dairy Month and dairy marketing historically experiences a seasonal rally during the third and fourth quarters of the year with a strong boost in dairy product sales due to the change in consumption habits. The summer months typically bring higher ice cream production, which ramp up through May and June, hitting a peak in July and into August. Also, grilling and vacation seasons generate an increase in the production and consumption of cheese? Similarly, the fourth quarter is historically driven by increased diary sales through the holiday season.
Although seasonal trends historically bring about higher dairy costs, the real challenge in 2009 continues to be its trend of not being a “typical” year. Given changing consumer spending patterns, no one can anticipate what the true effect of reduced discretionary spending and a negative economic perception is going to have on consumers’ buying dairy products.
From a long-term perspective, dairy production is decreasing as producers look for ways to remain profitable. As a result, dairy inventories are reducing in size as consumer demand lags with the tougher economic times, pushing milk prices lower. If historical market trends remain true in 2009, an increase in consumer demand during the second half of the year will likely to have a strong effect in boosting milk prices. As demand grows, the lower inventory of milk available will create a shift in the supply versus demand structure to effectively raise diary prices moderately higher through the fourth quarter of 2009.
Go back to the articles page
