Dairy-cow kill to double US milk price after slump

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Dairy-cow kill to double US milk price after slump

Dino Giacomazzi, whose great- grandfather started the Giacomazzi Dairy in Hanford, California, in 1893, said he had no choice but to sell 100 cows, or 11 per cent of his herd, in the past four months. Rising feed prices and a world surplus meant it cost as much as $US17 to produce $US10 of milk.

"Producers are in an absolute state of panic," said Giacomazzi, 40. "To spend 100 years building a dairy business and see much of that equity disappear in a year is very troubling."

Farmers plan to shift the pain to consumers. The National Milk Producers Federation in Arlington, Virginia, will pay dairies to slaughter 103,000 U.S. cows in coming months. Milk futures prices will double next year to a record $US23 per 100 pounds (43.5 kilograms) as the herd shrinks by 171,000 head, the most since 1989, said Michael Swanson, a senior economist at Wells Fargo & Co., the largest lender to US farmers.

The cuts will lead to the first two-year drop in output in four decades and higher prices in 2010 for butter, cheese, milk and the non-fat dry powder that's a benchmark for global exports, according to US Department of Agriculture forecasts. Futures for delivery in September 2010 trade 56 percent above today's prices on the Chicago Mercantile Exchange.

Retail butter prices may rise above the record of $US3.937 a pound and cheddar cheese may top $US5.097 a pound, according to Jerry Dryer, 65, the editor of the industry newsletter Dairy & Food Market Analyst in Delray Beach, Florida.

'Big Spike Up'

"We could easily see $US20 milk again next year," said Richard Bradfield, a vice president of the dairy business at International Ingredient Corp., a manufacturer of specialty feed products in Fenton, Missouri. "The longer these low prices last, the greater the potential for a big spike up in prices as dairies make larger cuts."

Farmers are culling herds because exports plunged 26 percent in the first four months of the year, supplies rose and the cost of corn, the primary feed ingredient, averaged almost $US4 a bushel.

Sold for Beef

At Tulare County Stockyard Inc. in Dinuba, California, more than three fourths of the cows Giacomazzi sold were purchased by beef processors including Cargill Inc., owner Jon Dolieslager said. Many smaller dairies that bought animals at auctions last year are out of business, he said.

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"The Giacomazzi dairy is unique because of its reputation for taking care of its animals and the long history of superior genetics," said Dolieslager, who also auctions hogs, beef cattle, goats, sheep and horses. "Less than 2 per cent of dairy cows we sell will go out to other dairies."

"No one is making money producing milk," Wells Fargo's Swanson said by telephone from Minneapolis. "The milk price remains well below the total cost of production."

US output increased to a record 16.73 billion pounds in May as cows on average produced 1804 pounds each, the most ever, the USDA said June 18. A gallon weighs 8.6 pounds.

Wholesale milk fell 51 per cent in the past year and reached $US9.93 per 100 pounds on June 19 on the CME. The USDA forecasts average cash prices this year will drop 34 percent, the most since the agency began keeping the data in 1980. While corn fell to $US4.195 last week from a record $US7.9925 a bushel in June 2008, it's still 54 per cent above the decade average.

Dairy Losses

In California, the largest milk-producing state, dairies lost $US1.07 per 100 pounds in April, compared with profit of $US11.23 in July 2007, based on feed costs and milk prices, USDA data show. In January, the state was the most unprofitable in at least six years of record-keeping.

"We're all in survival mode," said John Gailey, 35, the general manager and a part owner of the 4000-cow the Milky Way Dairy near Visalia, California. Gailey cut his herd by 400 head, or 9.1 per cent, since March. "I'm surprised we are not hearing about more people filing for bankruptcy."

It takes about 24 months and $1600 to feed and care for a dairy heifer before it starts producing milk, Gailey said. The price of a young cow ready for milking has dropped by half in the past year to $1200, he said.

Farmers spent most of the past decade expanding to meet rising global demand.

Futures peaked at a record $22.45 in June 2007 as a drought in Australia and New Zealand, the biggest exporters, curbed supplies. Demand increased in Asia as economic growth allowed consumers to switch to more protein-based diets.

Export Gains

US exports jumped to a record 2.55 million metric tons last year (653.7 million gallons), up 16 per cent from 2005, and the value of the shipments rose 25 per cent, according to the US Dairy Export Council in Arlington, Virginia. Overseas sales accounted for 11 per cent of U.S. production, more than twice the share of 2002, the council said.

By the end of 2008, with the global economy in the first recession since World War II, US milk production had grown to a record 190 billion pounds and the dairy herd was at a 12-year high of 9.315 million cows, according to the USDA.

When global prices sagged, European farmers sought government aid and disrupted food supplies. Eight hundred producers from across Europe protested in Brussels last month, and in parts of France grocers ran out of cheese and yogurt because of farmer protests.

UK Receivership

Dairy Farmers of Britain, the UK cooperative, filed for receivership this month after firing workers and closing dairies. Dairy Crest Group, the biggest UK producer, lowered its milk price in April to 26.28 euro cents per litre ($US1.40 a gallon), reflecting a 32 per cent drop since October, according to the Web site of the Dutch farmers' organization LTO-Nederland.

US dairies are trimming the herd. The kill in the week ended June 6 rose to 60,800 head, 35 per cent higher than a year earlier, according to USDA data. This year's cull is up 13 percent from 2008.

Reductions may accelerate because government payments to small and medium-sized farmers begin to run out this month, said Sherman Toone, 58, a third-generation producer with 350 cows and 1,800 acres of wheat, barley and alfalfa near Grace, Idaho.

"This is the worst I've ever seen the imbalance" between feed costs and milk revenue, said Toone, whose grandfather started with 25 cows in 1923.

Output to Drop

US milk production will fall 1.3 per cent to 187.5 billion pounds this year from last year's record, and to 186.4 billion in 2010, the first back-to-back decline since 1969, the USDA said June 20.

Prices probably will rise at least 25 per cent by the second half of 2010 as production slows and consumption rebounds with an improving economy next year, said Kelvin Wickham, the managing director of global trade at Auckland, New Zealand-based Fonterra Cooperative Group, the world's largest dairy exporter.

"We do expect prices to trend higher toward the back half of the year," Jack Callahan, the chief financial officer at Dallas-based Dean Foods Inc., the biggest US processor, said June 2 at a New York conference. Shares of Dean Foods rose 3.5 percent so far this year, beating the Standard & Poor's 500 Index's 2 percent gain.

Roadblocks to Rally

Fonterra's Wickham cautioned that even a smaller herd may not be enough to turn the market around as rising subsidies and government stockpiling in the European Union and the U.S. delay the recovery.

"People haven't been buying the stuff, that's the problem," said Lloyd Downing, 61, who farms 560 cows on 187 hectares southwest of Morrinsville, on New Zealand's North Island. "It's not until the American economy comes right that we'll start doing any good."

The US economy contracted three straight quarters, including 5.7 per cent in the first quarter. Economists expect a 2.7 per cent contraction in 2009 before growth resumes in 2010, based on the median of 62 estimates in a Bloomberg News survey. In the European Union, where growth was 0.63 per cent last year, the economy will shrink 4.2 per cent in 2009, a Bloomberg survey of 17 economists shows.

Global milk-production growth will likely slow to 0.5 per cent to 0.7 per cent in 2009, in line with the increase in consumption, Fonterra's Wickham said.

Chinese Demand

China, the world's third-largest fluid-milk consumer after India and the US, is recovering after melamine contamination last September slashed domestic output. Consumption growth that averaged 13 percent the past three years will likely return to pre-melamine levels by the end of 2009, Lausanne, Switzerland- based Tetra Pak Group, the biggest maker of milk and juice cartons, said in a June 1 report.

China increased imports of milk powder and other dairy products after the government shut 19 per cent of the nation's 20,393 milk-collection stations between November and April, the official Xinhua New Agency reported June 3.

"It only takes a relatively small amount of difference in production and we're going to have a significant affect on international prices," said Lachlan McKenzie, who owns a 600- cow dairy northeast of Rotorua on New Zealand's North Island and is chairman of Federated Farmers' Dairy Section.

New Zealand Exports

New Zealand exported 50.8 million kilograms of milk powder to China in the three months ended March 31, more than four times as much as the same period a year earlier, according to Statistics New Zealand. Dairies are the country's biggest export earner, accounting for about 20 percent of trade receipts, government data show.

Whatever happens with demand, a recovery won't be possible without a cull in the industry, said the Milky Way Dairy's Gailey.

"We are in a depression right now," he said. "I have to be an optimist that the dairy farmers can get together and find a way to reduce the cow herd about 5 percent so that prices can recover quickly."

Bloomberg

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