Feed costs, weather will drive dairy profits in 2013, says MU economist at dairy expo

SPRINGFIELD, Mo. – For dairy farmers, feed costs will be the big driver on profits in 2013, says a University of Missouri dairy economist.

Those feed costs will depend on planted corn acres and the weather, which affects yield per acre.

Meeting with dairy farmers who have been through a tough year, Scott Brown said, “A big corn crop can make your bottom line look a lot better.” He spoke at the Heart of America Dairy Expo in Springfield.

Better profits will depend more on cutting costs than on getting a lift from higher milk prices in 2013, he said.

With weather uncertainty, Brown warned producers to prepare for volatility in the feed costs. “I can see a corn price with a $4 in front of it, but over $8 is possible with another dry year. With current tight corn stocks, any weather change will affect feed prices.

“There are signs of hope. We will see some margin recovery in 2013, but don’t look for anything like those record margins of 2008.”

International markets will help domestic prices. “It is important to pay attention to production in Australia and New Zealand,” Brown said. “Profits depend on producing milk at lower costs than your neighbors. Now your neighbors are in Oceania and the rest of the exporting world.

“We live in a world market. That will keep U.S. prices aligned with world prices.”

A bright spot is that there are tighter milk supplies in the world market, Brown said. Milk supplies aren’t growing by leaps and bounds anywhere in the world.

World trading depends a lot on the strength of the dollar and global economy. “Those are big wild cards,” Brown added. “The good news is that the United States has become a large net exporter.”

Turning to domestic milk, Brown said much depends on cow numbers.

Producers have kept more cows than the economic conditions would indicate. This becomes tricky for producers, Brown said. “If you pay $7 for corn, do you keep milking or get out? If you look ahead and see a big corn crop coming, do you stay to see if feed costs drop?”

When producers making milk with expensive feeds leave the business, their facilities are often bought by someone who continues to milk, Brown continued. “That’s happening, so milk supply has not dropped as much as many expected.”

Cow numbers did drop, with the help of EQIP, the dairy buyout program.

“We’re not getting rid of cows as fast as we thought,” Brown said.

However, he doesn’t look for much increase in milk production in 2013.

This winter, milk production per cow is not a lot higher than one year ago. “Just think back to the mild weather last winter. It’s tough to match that yield pace,” Brown said.

“Commercial disappearance shows stronger growth. If you tell me what the general economic recovery will be, then I can tell you about stronger prices. Cheese demand has grown. Fluid milk sees weaker prices.

“We can’t sustain U.S. cheese prices above the world prices for very long. World demand drives us, long term.”

Considering all, Brown projects an all-milk price in 2013 at $19.40 per hundredweight. That’s up from $18.63 in 2012.

With low price gain, profits depend on keeping cost of production under control. That comes back to decisions down on the farm.