Nov. 22 2012 05:00 AM

The drought drove corn prices up while product demand supports our milk price.

by Amanda Smith, Hoard's Dairyman Associate Editor

There are three simple truths when it comes to the milk market, noted Mike North, a senior hedge consultant with First Capitol Ag, at the ABA National Agricultural Bankers Conference. We are producing a highly perishable product in a volatile market that is incredibly sensitive (a small change can have a significant overall impact).

Class III prices spend the majority of their time between $11 and $13. A very small amount of time is spent with Class III prices nearing or greater than $20. "We have gotten to these market highs because of the drought this year. End-user supply concerns drove the market," noted North.

"Many dairymen want feed prices to drop back down. They want soybean meal prices less than $500 and corn under $4 to $5 per bushel. What they don't see though is that when the corn market makes its highs, the milk market is often doing the same," said North. "It's a necessary relationship."

The lack of rain through the Midwest not only caused a spike in corn prices, it led to a similar rise in milk price. These markets move hand-in-hand: When feed prices drop, producers need to be prepared for a concurrent drop in milk price. "Prices were not solely fueled by the U.S. drought. A drought throughout South America is pushing corn prices higher. If we experience another drought in the U.S. though it could be Armageddon.

Dairy cow slaughter, noted North, is up a bit but is not that far outside of what is considered normal. It is up, yes, but we have a massive replacement population we can lean into. Even with a rise in slaughter numbers, compare to 2009 averages for milk cows on farm, we are still ahead by 100,000. Additionally, even with September ration changes as new feeds were harvested, milk per cow remains high.

Product determines our milk prices, North went on to add. In 2009, the world did not want what we were producing and prices held at $9. Today, the market is holding at a high level. Whey is the second biggest factor in our Class III prices and the product that is holding the market up. Whey demand is part of the reason prices could average $18 next year.

One note North did make was that if we go to a supply system, we will shut ourselves out of the export market. Similar to the U.S., Canadian dairy prices ebb and flow, too. Every time they are in a low cycle, the industry contracts. At this point in time, Canada has lost more dairymen than the U.S. Producers who don't want to manage risk will not be in the market long; they must attend to risk.