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Despite mixed views on dairy production, feed millers optimistic

Low grain costs, strong margins lessen blow ofsoftening milk prices

The U.S. dairy industry is coming
off the highs of 2014, a year with positive milk-to-feed price ratios and high
export volumes and prices. According to the USDA’s Economic Research Report, U.S. milk
production grew by 2.4 percent over 2013.

However, the first quarter of
2015 has seen a drop in milk prices driven by reduced export demand and
increased production in other countries. In its North American Agribusiness Review, Rabobank analysts suggest that 2015 may “be a tough year for
dairy farmers.” The bank cites the popularity of the USDA’s new Margin
Protection Program
, a 2014 Farm Bill initiative that saw 50 percent of U.S.
dairy producers enroll in its first year, as proof of the industry’s interest
in finding hedging strategies to protect its margins.

Does the program’s popularity
hint at things to come? Not necessarily. While milk prices may continue to drop,
by all accounts, margins remain strong, meaning that it is unlikely producers
will cash in on these added protections this year.

While last year’s dairy boom increased
feed volumes, softening milk prices – and the prospect of dairy operators tightening
their belts — is causing feed millers to
approach 2015 production forecasts with caution.

“After farmers come off a good
year, they tend to milk any cow that can be profitable, a strategy which
includes keeping certain cows around longer than normal,” explains Dave Nuss, sales manager with U.S.-based dairy and
cattle feed producer J.D. Heiskell & Co. “We saw dairymen really dialing into their herds and feeding more aggressively, but now it’s back
to reality.”

The bright side: Low feed
prices. The cost and surplus of grain stocks should lessen the blow of reduced
prices – a trend that benefits both the producer and the feed

Nuss, who is based out of JDH’s
California location, remains optimistic: “Though dairy prices have come down a lot, I
expect that our volumes in the dairy industry will probably hold the steady,
maybe increase a little. For every cow in the industry, there is a calf – we want
to be part of that business.”

That optimism is widespread.
Based on my conversations with dairy feed producers, without any major disruptions (e.g. weather, drought), the sentiment is similar
across the board: Volumes may go up but, if nothing else, they may flatten.

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