Sometimes you can go out on the limb too far and last month's article about US milk production was testing the strength of the Xcheque's analysis. A series of conversations in the past month have put forward the suggestion that the US market is not as responsive as our modelling shows it to be. The USDA have also been very bullish with the US milk production forecast for 2012 - as recently as a month ago increasing their 2012 forecast to 201.9 billion pounds or about 3% above 2011.
I have re-run the analysis and taken an even more rigorous approach to seasonality modelling ... and I get the same answer. The US milk production growth rate did fall in April and it has almost always done so when faced with the margin squeeze that farmers are feeling right now.
It is always a good policy to let the numbers do the talking and in that vein here is the most recent US production data for May:
This is where I get to say I told you so. In seasonally adjusted terms US milk production production per cow has collapsed in the past two months. There is now a very clear impact on overall milk production. This fall was aided by a slight reduction in cow numbers. History tells us that production / cow is now close to the bottom end of the normal range and from here further reductions need to come from a drop in cow numbers. History also tells us that cow numbers will drop if actual milk prices and the futures market stay at current levels.
And what does this analysis say about the USDA's production forecast for 2012? I'm not about to suggest that Xcheque has a clearer crystal ball but our forecast for 2012 is something like 200.5 - 200.8 billion pounds. That represents a 2.1 - 2.3% growth increase on 2011. More importantly 2013 would start from a lower production base and that means a stronger faster rally in milk prices and the futures market.
In a global sense all eyes should now turn to Europe. Unlike the US there is very limited data to predict the milk production response from a commodity and milk price downturn. It will be fascinating to see the effect of the lower milk price signals that are just starting to flow through to farmers in that region.