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Accounting for Profits: An optimistic view of supply and demand


 

By Ralph Lizardo

 

Are you a glass half-full or half-empty type of person? As for me, I try to be optimistic when I can and hope for better situations to come rather than dwell in the past.

By the time this article is published, the first half of 2012 will be over and so far, it has been another dismal period for the industry, and it’s looking like we’re not going to get a tremendous bounce for the second half of the year.  With the milk prices at relatively low levels coupled with high feed prices, most dairymen showed red figures on their bottom line.  

According to our latest Dairy Farm Operating Trends, during the last three years, milk prices ranged from $12/cwt to $20/cwt, while feed costs ranged from $7/cwt to $12/cwt. 

What’s causing all of these fluctuations in the industry?  

It’s the concept of production, supply and both domestic and international demand.

The largest components of any dairy operations are milk production, herd health, feed costs and securing a talented labor force.  Mastering these components in our industry is a challenge since they are made up of factors that a producer can generally control and factors that are difficult to master as far as milk prices, feed costs and immigration issues.  But brighter data for us appears to be on the horizon.

For milk supply, according to the USDA, total milk production for 2012 is estimated to be 202 billion lbs, approximately a 2.9% increase from 2011, which is one of the reasons why milk prices in 2012 are much lower than in 2011.  The USDA projects milk production for 2013 to be 202.6 billion lbs., a modest increase of only 0.3% from 2012.  For milk demand, the USDA increased it export projections on both fat-basis and skim-solid basis for 2012 and 2013.  This is due to the higher than expected cheese and nonfat dry milk exports.  In addition, in 2011, China purchased a considerable amount of whole milk powder.  This is mainly due to their increasing population, decline in their milk production and food safety issues.  In 2012, the USDA expects China to increase its whole milk powder purchases by 7% and this trend is expected to continue in 2013.  In terms of domestic sales, as the US economy continues to recover, the need for additional dairy products will continue to rise which is an optimistic outlook.  

These forecasted statistics are good indications for rising milk prices.  We have an increasing demand while the supply is staying somewhat constant.  As a result, the USDA has projected that Class III milk price will range between $15.80-$16.30/cwt in 2012 and increase to $16.20-$17.20/cwt in 2013.  Class IV milk price is estimated to be $14.50-$15.10/cwt in 2012 and increase to $15.40-$16.50/cwt in 2013.  All milk price is expected to be $16.90-$17.40/cwt in 2012 and increase to $17.25-$18.25/cwt in 2013.

With bad weather and drought in 2011 that hit certain parts of the country, along with increased international demand and a weakening U.S. dollar, the supply of feed decreased which resulted in higher feed prices. As we see improvements in the weather during the early part of 2012, increased acreage of corn plantings, and the strengthening of our domestic economy which has raised the value of our dollar, we have seen a decrease in feed prices.  In fact, the USDA projects corn production at 14.8 billion bushels during 2012/2013, an increase of almost 20% from 2011/2012.  This resulted in a significant decrease in corn prices from approximately $5.95-$6.25/bushel during 2011/2012 to $4.20-$5.00/bushel in 2012/2013.  The USDA also projected an increase production in soybeans.    

With the higher beef prices we’ve seen this past year, the trend is obvious whereby dairymen are assessing their herds closely and culling their less productive animals.  Not only are the dairymen receiving top dollars for their beefed animals, but we all hope that the ultimate effect of this culling action will decrease the supply of milk and help lower feed prices domestically for all. 

As we wait for this downturn to pass, we all hope that the industry’s actual results will exceed the USDA’s forecasts, and for profitable times to return for all producers.

 

FYI

  Ralph Lizardo, CPA partner, Frazer, LLP, Brea, Calif. Contact him by e-mail at: rlizardo@frazerllp.com or call, 714-990-1040 Ext. 178. 

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