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Nuts & Bolts

October 11, 2012

Rising feed cost seen driving milk production down

(Continued)

CHICAGO —

U.S. cows produced 1,776 pounds of milk each on average in August, 0.5 percent less than a year earlier, government data show. That's the first decline in 13 months and the biggest year-on-year drop since February 2004, according to Bill Brooks, an economist at INTL FCStone Inc. in Kansas City. Productivity probably slipped because of the heat waves and changes in feed rations, said Brooks, who grew up on a Missouri dairy farm and has covered the industry for two decades.

Almost 2.04 million dairy cows were slaughtered in the first eight months of the year, 6.7 percent more than in 2011 and the most for that period since 1986, government data show. The U.S. dairy herd will shrink 1.1 percent to 9.11 million head in 2013, the smallest since 2005, according to the USDA.

While slaughter rates are rising, farmers tend to cull their least-efficient animals and replace them with younger, more-productive cows, said Robert Chesler, a Chicago-based vice president in the foods division of INTL FCStone Inc., which handled $75 billion of physical commodities in 2011.

Production per cow will rise 0.6 percent to 21,830 pounds next year, from an estimated 21,690 pounds this year, the USDA forecasts. A more-productive herd may mean an increase in total supplies rather than the decline the government is predicting, Chesler said.

Higher prices may crimp demand, with cheddar traded on the CME rallying 26 percent to $2.075 a pound in the third quarter. The increase in wholesale prices may be passed along to retailers, Chesler said.

"We're hitting levels where buyers are getting concerned," he said. Commercial milk consumption next year may slide 0.5 percent to 192.2 billion pounds, compared with a 2.1 percent increase this year, the USDA forecasts.

Food prices measured by the U.N. index may climb to a record 243 by June 2013, from a six-month high of 215.76 in September, Nick Higgins, an analyst at Rabobank in London, said in a report Sept. 19. The U.N.'s gauge of 55 food items, which gained 7.7 percent since June, peaked at 237.92 in February 2011.

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