Dick Groves
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A Hot Summer Could Definitely Heat Up Dairy Prices

One of the more thought-provoking speakers at the annual ADPI/ABI convention in Chicago in recent years hasn’t actually been from the dairy industry. Jon Davis of Riskpulse (not to be confused with the Jon Davis of Davisco, a business unit of Agropur), is a meteorologist by trade, and his talks at the ADPI/ABI meeting are fascinating and obviously a bit different than most other dairy meeting presentations, to say the least.

During his ADPI/ABI presentation on Monday, Davis offered one key takeaway (that was his description): that there’s a “significant” risk of a hot summer in the Lower 48 states this year.

What will that mean for the dairy industry? As Davis pointed out, much of the US dairy industry had an ideal summer last year; weather in the central and eastern parts of the US were very favorable for both animals and for crops.

So what happened? Among some of the leading milk-producing states in those two regions last year, compared to 2014, Wisconsin’s milk production was up 4.4 percent, Michigan’s output was up 6.7 percent, Minnesota’s production was up 3.7 percent, New York’s output was up 2.7 percent, and Pennsylvania’s production was up 1.3 percent.

In short, ideal summer weather meant ideal weather for producing milk. And the only two states among the top 10 milk-producing states to post milk production declines last year, California and New Mexico, are located in the Southwest US.

But Davis said we’re probably heading into a La Nina this year, which raises the risk for a hot summer in the central and eastern regions of the US. And that, we think, could mean higher dairy prices, perhaps much higher prices, before the year is over.

To try to put this into perspective, we went back to 2011, which we seem to recall was a pretty hot summer in the Midwest and elsewhere. Indeed, here’s how USDA’s Dairy Market News began its summary of the fluid milk situation in its report for the week of July 25-29, 2011: “Heat and humidity are the buzzwords across most of the United States this week. High temperatures have stressed cows and production declines of 10% and up are common.”

Oh, and California and the Pacific Northwest were the exception from the hot weather and milk production declines in 2011.

About three weeks later, USDA’s National Ag Statistics Service released its “Milk Production” report for July, and the impact of the hot and humid weather was very clear in some key dairy states, particularly in the Upper Midwest.

Specifically, compared with July of 2010, milk production in July of 2011 looked like this: Wisconsin’s output was down 3.5 percent, with production per cow down 65 pounds (the state actually had 1,000 more milk cows); Minnesota’s output was down 6.6 percent, with production per cow down 115 pounds (Minnesota also had 1,000 more milk cows); and Michigan’s production was down 1.5 percent, with production per cow down 75 pounds (the state had 8,000 more milk cows).

Milk production for the 23 reporting states back in July of 2011 was up 0.8 percent from July of 2010, thanks in large part to some impressive gains in the states not impacted by the heat and humidity. Specifically, compared with July of 2010, California’s July 2011 milk production was up 4.4 percent, Idaho’s output was up 4.8 percent, New Mexico’s production was up 2.4 percent, and Washington’s output was up 6.6 percent.
All four states had both more milk cows and higher output per cow than a year earlier.
And what was the impact of those Upper Midwest milk production declines back in the summer of 2011?

Well, at the beginning of May that year, CME cash market prices for both 40-pound Cheddar blocks and 500-pound barrels were in the mid-$1.60s; specifically, blocks during the first week of May averaged $1.6390 per pound, while barrels averaged $1.6375 per pound.

By the first week of August, the weekly block price average was over $2.14 per pound, while the weekly barrel price average was over $2.13 per pound.

That brings us to 2016, and the potential for hot weather once again for the central and eastern portions of the US. And that’s kind of an eye-opening possibility, for at least one key reason.

As noted earlier, much of the US got hit by hot and humid weather back in the summer of 2011, and had the milk production declines to show for it. But for the US as a whole, milk production was still up, thanks primarily to the key western dairy states.

But at least one of those key western dairy states has been struggling lately. Indeed, the most important US dairy state — California, which produces around 20 percent of all the milk in the US — has posted 15 consecutive monthly milk production declines dating back to the beginning of 2015, and just last month reported a drop of 2.4 percent compared to March of 2015, due both to fewer milk cows and less milk per cow.

Certainly the prospect of lower milk production in the central and eastern regions of the US, along with California’s continuing declines, could have an impact on cheese and other dairy product and milk prices before 2016 is over.

It’s worth noting that cheese prices haven’t been above $2.00 per pound since November of 2014. Also, current settling prices for cheese futures at the CME are under $1.70 per pound for at least another year.

Hot and humid weather in key dairy regions in the US this summer could be one of the biggest things to hit the dairy industry since, well, since hot and humid weather hit key dairy regions in the US back in 2011.

Cheese Reporter welcomes letters to the editor. Comments should be sent to: Dick Groves by Fax at (608) 246-8431; or e-mail your comments to dgroves @cheesereporter.com.

 

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