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Expect milk price uncertainty in 2013

By Jean Caspers-Simmet
simmet@agrinews.com

Date Modified: 03/05/2013 9:02 AM

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WAVERLY, Iowa —The story of milk prices is the story of the little boy and the little girl, or translated into Spanish, El Nino and La Nina, said Marin Bozic, dairy foods marketing economist at the University of Minnesota.

Bozic's position is funded by Midwest Dairy Association through the dairy checkoff. He spoke at last week's annual meeting of the Iowa State Dairy Association in Waverly.

El Nino and La Nina, weather phenomena that affect ocean temperatures in the equatorial Pacific, impact agriculture worldwide.

During an El Nino event, ample rain occurs in the U.S. Corn Belt and drought in New Zealand, which accounts for half the world's dairy exports. The Oceania drought in 2007 helped lift milk prices here, Bozic said.

During a La Nina event, it's dry in the U.S. Corn Belt and there is plentiful rain in New Zealand. La Nina has brought drought to the United States the past two summers.

When there is rain, New Zealand dairy production increases sharply and forces world prices down. During a drought, New Zealand production drops and prices go up.

"The volatility we've experienced the past 12 years has been huge," Bozic said.

U.S. dairy production generally increases at a fairly stable rate of 2.5 percent per year. In New Zealand production can go up or down by 10 percent in one year. Because U.S. demand is fairly inelastic, increased production in New Zealand, which results in less demand for U.S. dairy exports, can cause prices to drop sharply.

"The United States is now a major world player," Bozic said. "One day's milk production each week goes to exports. When New Zealand has a 10 percent bump in cheese production, U.S. milk stays home."

The U.S. drought has meant price uncertainty as well. High prices for corn, soybean meal and hay have impacted dairy production nationwide.

While the most recent drought monitor shows conditions have improved slightly in eastern Iowa, it is still dry throughout the state.

"The drought has changed the economics of dairy," Bozic said. "Dairy ration prices have more than doubled."

When corn prices spiked in 2007 to 2008, it was driven by high oil prices. With more corn used for ethanol production, the price of corn is now tied to the price of oil. When the drought hit in 2011 and 2012, corn prices rose to $7.

Bozic said milk yield per cow, which generally increases each year, dropped in 2012. With 60 percent of large dairies buying their grain and feeding high-energy rations they lost money. They culled cows and fed less expensive feeds. For farmers who had corn, it was lower quality and dairy herds suffered from heat stress.

Once feed prices return to a more reasonable level, milk yield is likely to shoot up rapidly because genetic potential has continued to improve, Bozic said.

Milk cow numbers have dropped by 75,000 cows with the heaviest culling in California, Texas and New Mexico, areas that had previously been growing. In the upper Midwest, especially South Dakota and Wisconsin, dairy cow numbers are increasing.

Bozic sees Midwest dairy expansion continuing because dairies here traditionally grow their forages.

"Our region will be the hot spot for milk production," Bozic said. "I think it's our time, and we need to exploit it."

There is uncertainty surrounding 2013 prices, Bozic said. Futures currently project prices will soften until March bottoming out at $17.50. Prices will go up through summer to $18.50 to $18.75 before declining through December, but there is a one in four chance summer prices could go to $20 to $20.50. There is a 25 percent chance prices could drop below $16 by fall.

"But it's not just the milk price, it's also what's happening in the feed market that drives the situation," Bozic said. "If we have another drought, corn prices could be $7.50 to $8 per bushel. If there's a bumper crop, we may see $4.50 corn."