Click on chart to enlarge

Here is a chart Xcheque.com readers have been chasing for a while now. This shows the margin from Class III milk after allowance for feed costs. The slide in milk price has taken margins back to the critical level of $5 / cwt. If the futures market can be believed it is only going to get worse from here.

Whilst we are normally sceptical of futures prices as a market prediction, they may have got it right this time. There is no longer a strong international market to pull surplus stocks out of the US at good prices (as occurred in early 2011). This situation is completely unsustainable for US farmers, which translates to: “TURN DOWN MILK PRODUCTION!”.

Further reading from Xcheque.com:

"Global milk production 7 - Global climate 1”, Dr Jon Hauser, Xcheque.com 21 February 2011

“US milk production – Shouting down the supply chain”, Dr Jon Hauser, Xcheque.com, 1 April 2011

“US milk production - leading global growth“, Dr Jon Hauser, Xcheque.com, 4th July 2011

“US milk production climbs back above the line”, Dr Jon Hauser, Xcheque.com, 7 October 2011

The latest US milk production figures show a continuation of increasing cow numbers and high milk production per cow. March data reveals an increase of 4.2% on the prior year, a similar result to the first two months of 2012. After correction for seasonal factors, milk production is 2.4% above the long term trend – giving an underlying growth rate of 2.5 – 3.5% since August 2011.  The lift in production has been achieved by pushing milk per cow to the top end of expectations for genetic potential as well as increases in cow numbers. The price signals of falling export prices, reducing domestic milk prices and a weak futures price outlook are now starting to bite. This however might come too late to prevent the pain of a margin over feed cost approaching the level of $5 / cwt.