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Nuts & Bolts

October 11, 2012

Rising feed cost seen driving milk production down

CHICAGO — U.S. milk production is headed for the biggest contraction in 12 years as a drought-fueled surge in feed costs drives more cows to slaughter.

Output will drop 0.5 percent to 198.9 billion pounds (90.2 million metric tons) in 2013 as the herd shrinks to an eight- year low, the U.S. Department of Agriculture estimates. Milk futures rose 45 percent since mid-April and may advance at least another 18 percent to a record $25 per 100 pounds by June, said Shawn Hackett. The president of Boynton Beach, Fla.-based Hackett Financial Advisers Inc. correctly predicted the rally in March.

Dairies in California, the top milk-producing state, are filing for bankruptcy, and cows are being slaughtered at the fastest rate in more than a quarter century. Corn surged to a record in August as the USDA forecast the smallest crop in six years because of drought across the U.S. Global dairy prices tracked by the United Nations rose 6.9 percent last month, the most among the five food groups monitored, and that will probably mean record costs next year, Rabobank estimates.

"Farmers can't afford to buy as much grain and protein, and that affects milk production," said Bob Cropp, an economist at the University of Wisconsin in Madison who has been following the industry since 1966. "In California, there've been some foreclosures and some sell-off of cows quite heavily. You're going to see that in other parts of the country."

Class III milk, used to make cheese, jumped 22 percent to $21.10 on the Chicago Mercantile Exchange this year. That's more than 21 of the 24 commodities in the Standard & Poor's GSCI Spot Index, which rose 2.2 percent. The MSCI All-Country World Index of equities climbed 12 percent, and Treasuries returned 1.8 percent, a Bank of America Corp. index shows.

The global dairy market is facing a scarcity of supply in the next 12 months as output slows in the United States and Europe and demand keeps expanding, Rabobank said in a Sept. 27 report. Surplus milk available for shipment from the seven biggest exporting regions will decline for the first time in four years, and there is little excess inventory, the bank's team of 11 dairy analysts estimate.

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