Tweet Post to Your Wall.

Drought May Bring Early Dairy Price Recovery

It's no secret that the drought has swallowed up a majority of the United States this summer. With more than half of all U.S. counties designated as disaster areas, the dry conditions and heat have many worried about commodity and food prices.

As farmers everywhere struggle to procure feed and hay for the coming winter, escalating costs of those inputs are expected to rise and strain milk output.

Due to current conditions, a Rabobank-forecasted rally for milk prices will likely come earlier than expected, according to their most recent industry note.

The report says that weather patterns have affected milk output, finding that a mild winter increased yields, while a warm spring was less positive for yields. Combined, these factors resulted in culling, switches to lower quality feeds and overall decline in yield growth.

Of the three, heat stress can quickly affect milk production and make it slow to rebound in temperatures above 100 degrees. Rabobank estimates that the July heat has adversely affected producers in the Midwest and Southwest regions.

Spotty impact of reduced feed growth will also affect milk production. In some areas, corn and soybeans have survived the heat, but other regions face almost complete crop failure, which will create a challenge for dairy feed procurement.

Further, worsening crop conditions will likely drive feed costs up. Based on USDA metrics, the report notes that producer income over feed costs is expected to come in at just $3.96/cwt in July, which is less than half the indicative breakeven level. This compares to the IOFC seen in 2009 following the global financial crisis, the report says.

Though a previous forecast of 0.8% growth in U.S. milk production was estimated in June, Rabobank revised their forecast to 0% growth. Bottom line, the report says, an earlier than expected price rally is the bottom line for markets. The group estimates that a recovery in world prices will bring a fourth quarter rally into contention. Globally, a rally in the fourth quarter will make the strength of the coming New Zealand production season very influential, the report says.