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Strong Margins Usually Trigger an Expansion in Cow Numbers

by Lee Mielke

Published: Friday, October 16, 2020

The following is from Lee Mielke, author of a dairy market column known as "Mielke Market Weekly."

The Agriculture Department issued its annual "Milk Cost of Production" report Oct. 1. Total feed costs averaged $10.59 per hundredweight, up 63 cents, or 6.3 percent, from 2018. Purchased feed, at $7.20 per hundredweight, were up 44 cents, or 6.5 percent, from 2018. Total operating costs, including feed, bedding, marketing, fuel, electricity, repairs, etc., averaged $13.92 per hundredweight, up 71 cents, or 5.4 percent, from 2018. Feed costs made up 76.1 percent of total costs in 2019, up from 75.4 percent in 2018.

Looking at present conditions, the Oct. 2 Dairy and Food Market Analyst reported that "farm-level margins are holding up. Average revenue over feed cost totaled $10.97 per hundredweight in the USA during August, up 92 cents per hundredweight year over year." But the authors warned, "When average margins are above $8 per hundredweight for six months or more, it has historically triggered expansions. Margins have exceeded that level since June after falling to a low of $5.59 per hundredweight in May. Keep in mind, these calculations do not include government payments, which have totaled an additional dollar per hundredweight or more this year."

The DFMA added, "We are still hearing more reports of cooperatives moving to make milk supply management programs permanent, particularly in the West."

Regional differences remain dramatic, according to the DFMA. "Revenue-over-feed-cost in Arizona was the lowest in the country, at $8.14 per hundredweight during August, according to our estimates. New Mexico was close behind at $8.18. In comparison, cheese-heavy South Dakota had the highest revenue-over-feed cost during August, estimated at $14.08, which was above Florida's at $13.93."

Referencing the COP report, the DFMA said, "California was the lowest-cost-of-production state in 2019. Total operating costs, including feed, labor and taxes, hit $14.85 per hundredweight. Wisconsin was second at $15.26, and Ohio was third at $15.60. The highest-cost-of-production states in the report were Maine at $22.53; Vermont, at $21.05; and Illinois at $20.41," according to the DFMA.

The Agriculture Department again raised its 2020 and 2021 milk production forecasts from last month's estimate, in last Friday's World Agriculture Supply and Demand Estimates report. The department cited slightly higher cow numbers and a more rapid pace of growth in milk per cow for 2020 and raised the 2021 projection due to a larger dairy herd and higher milk per cow.

2020 production and marketings were estimated at 222.3 and 221.3 billion pounds, respectively, up 300 million pounds on both from September's estimate. If realized, 2020 production would be up 3.9 billion pounds, or 1.8 percent, from 2019.

2021 production and marketings were estimated at 225.5 and 224.5 billion pounds, respectively, up 100 million pounds on both. If realized, 2021 production would be up 3.2 billion pounds, or 1.4 percent, from 2020.

The Class III milk price forecast was raised on a higher cheese price forecast. The Class III is now expected to average around $18 per hundredweight, up 75 cents from last month's estimate. The 2021 average was projected at $17, up $1 from last month's estimate.

The Class IV price forecast was also raised as a higher expected nonfat dry milk price more than offsets the lower expected butter price forecast. It will average around $13.50, up a dime from last month's projection. The 2021 average was projected at $14.10, up 50 cents from a month ago.

In the week ending Sept. 26, 58,800 dairy cows were sent to slaughter, down 1,000 from the week before and 1,500 head, or 2.5 percent, below a year ago.

In politics, the National Milk Producers Federation, in a letter to FDA Commissioner Stephen Hahn, pleaded for him to "enforce labeling standards that reserve dairy terms for real dairy products, not the plant-based imposters." The federation reminded Hahn of a promise he made to deal with it at his FDA confirmation hearing in November when Sen. Tammy Baldwin asked whether and when FDA under his leadership would start enforcing labeling standards.

FDA has "kicked fake dairy deception down the road for decades," NMPF charged, "but the problem is growing," and stated, "It isn't a heavy lift for the FDA to do what's not only true to its mission but also what's legally required."

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