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American experience shows volatile nature of dairy market

It is not just Europe which has seen milk production surge.

Ben   Briggs

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Ben   Briggs
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In the US, milk production increased 3.9 per cent in July this year compared to the same month in 2013.

 

For traders and analysts in America this, coupled with booming global milk production and demand issues from countries such as China, makes for a downward price trend for the coming year.

 

Ron O’Brien, market and derivatives strategist at dairy supplier Interfood, based in Miami, Florida, said despite there being challenges, the dairy sector over there was looking to grow.

 

He said: “Large dairy herds [1,000+ head] are averaging close to 80 pounds [of milk] per day.

 

“Milk production in the American West and throughout the nation is up for the most part because dairy producers are holding onto their low producing animals. This is because they are making money and because most producers can’t afford to buy cows in the open market.”

 

He claimed low yielding animals were being retained and while production was stable, there were several barriers to real growth.

 

“Producers are tight lipped about profit margins,” said Mr O’Brien. “Their main objective is vertically integrating their operations with cattle feeding and grain/silage production as well as paying down debt.

 

“Buying cows or building operations at current market prices is not feasible. Also, as of August 19, more than 58 per cent of California remained in exceptional drought, with many dairymen in the state more focused on diversifying into fruits, nuts, and produce.”

 

But with UK and Europe dairying struggling, as one analyst put it, to ‘digest’ the extra milk on the market, there were lessons to be learned from the US.

 

“California, our largest dairy-producing state, was in expansion mode five to seven years ago,” said Mr O’Brien. “Dairy farmers out West were buying cattle from broke Midwest dairies, expanding their operations fast.

 

“Sexed semen was brought in about eight to nine years ago and California producers were aggressively breeding heifers, resulting in an oversupply. This made it uneconomical for Midwest producers to raise their own heifer programs.

 

“Instead, they would buy their heifers from producers out West. By 2009 the market was saturated with extra heifers, milk prices dropped and feed costs were $5 to $7 higher. Cull rates were extremely high due to the high cost of feed and historically low milk prices,

yet the national herd increased despite the underlying economics due to oversupply of heifers.

 

“As dairymen in California were going broke they were liquidating their heifer programmes and heifers began to be sold aggressively to feed ranches. It is reported more than one million California Holstein heifers went to feed yards between 2009 and 2012 and a heifer shortage now looms across the West and Midwest.”

 

So as the US scrambles for capacity, the backdrop of rapid increases in global milk production and subsequent distressed milk sales have led to lower procurement costs and sales prices.

 

“This has created a perfect storm for collapsing prices during Q3,” he added.

 

“In the long run it is obvious more milk will be needed to support the growing demand from the Middle East, North Africa and Asia.

 

“Heavy supplies might make for weaker prices in Europe next year but it will likely stimulate a surge of manufacturing capabilities and internal markets/demand which otherwise might not have existed.

 

“Dairy is one of the only commodities which is produced in first world countries and exported to second or third world countries. The trade deficits between such nations are set up perfectly for both Europe and North America to take advantage of such a flow.”

 


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9.27 million

The number of milking cows in the US. There are about 1.8m cows in the UK.

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