For three consecutive months, U.S. dairy cow slaughter in 2013 fell behind 2012’s pace, according to USDA’s latest Livestock Slaughter report. December 2013 dairy cow slaughter slowed to 256,700 head, down 0.8% vs. the prior year and 0.3% less than November on a daily average basis. This represents the lowest December slaughter since 2009. Given the strong milk prices at the end of 2013 and into 2014, the pace of slaughter will likely moderate as dairy producers look to boost milk production and reap the benefits of high prices.
During the first two weeks of this year, dairy cow slaughter averaged 55,300 head compared to 61,800 in 2013, a 10.5% decline. USDA is once again providing data for region 5, which encompasses Illinois, Indiana, Michigan, Minnesota, Ohio, and Wisconsin. Combining, region 5 with region 7 (Iowa, Kansas, Missouri, and Nebraska) and region 8 (Colorado, Montana, North Dakota, South Dakota, Utah and Wyoming), slaughter declined 8,000 head for the week ending Jan. 11 vs. the same period a year ago. With all USDA regions slowing their slaughter pace, January 2014’s total could come in well below year-ago levels.
Given current markets, surging U.S. beef prices may have less impact on dairies’ culling decisions. When feed prices are high and milk prices are low, dairy producers are more likely to send low-producing cows to slaughter. That said, with feed prices lower than last year and milk prices substantially higher, a low-producing cow could contribute to positive margins. In fact, most cows should pencil out under current market conditions, but those conditions could be short lived.
Yesterday’s Milk Production report pegged the U.S. dairy herd at 9.2 million head in December, fractionally higher than November 2013 and 12,000 head lower than the prior year. After a year of aggressive culling, heifer supplies are tight and dairy producers will have to slow culling to expand the herd. Heifer prices are rising. So while cull cow prices continue to also increase, the net cost to replace a cow is much higher today than six months ago. That said, if weekly slaughter activity continues to moderate vs. 2013 levels, the January milking herd should expand vs. December and could top January 2013’s level of 9.222 million head.
Uncharted Territory
After stumbling yesterday, first-quarter Class III futures recouped most of Thursday’s losses and moved into positive territory, and open interest expanded in the holiday-shortened week vs. the previous week. Expanding open interest indicates new money has entered the market with expectations the current price trend will persist.
U.S. dairy products are in uncharted territory. Just three short weeks ago, the FEB 2014 Class III contract was $19.12/ cwt. Today it closed at $22.45, a gain of $3.33. Yesterday’s Milk Production report confirmed a tight supply situation, especially in Cheddar cheese-producing states. While December Class III prices were high, logic suggests that prices needed to move higher to encourage more production. With slaughter slowing, it appears producers are starting to mobilize to provide much-needed milk to the system.
Demand is murkier. Orders continue to flow into manufacturers, but questions abound as to whether it’s new demand or simply restocking. Given the strength of markets and the longevity of the price climbs, some buyers reluctantly could be refilling coffers, assuming prices will move even higher. However, new demand at these lofty levels is less clear, particularly since price increases have not yet reached consumers. Because supply takes time to turn off and demand is equally difficult to regain once lost, it’s important to remember that at some point demand could wane just when milk supplies are flowing throughout the country.
CME spot Cheddar blocks and barrels markets continued higher as bidders again searched for cheese. For the first time in several weeks two loads of block cheese traded. Nonfat dry milk and butter slipped as sellers aggressively took the lead in the spot session.