Why higher grain prices might be no bad thing Irish dairy farmers
High grain prices may in the past have been seen by dairy farmers as universally a negative, however in the context of the current dairy market higher feed costs may be no bad thing.
Off late the common mantra among dairy market commentators has been that the ongoing decline in global dairy markets is due to a combination of three different factors namely increased production, a fall-off in Chinese demand and the Russian ban.
However, the men that sell Irish dairy products in markets across the world would say to you that it’s all about the grain price stupid!
They would tell you that as much as 85% of world dairy production takes place on the back of grain diets and it is the current low price of grain that is fuelling high production all over the world, particularly in the US.
The overall good cereal harvest, combined with ample stocks and a general bearish market for commodities, led to a decreasing price path for all cereals during 2015. At the world level, maize and wheat prices lost about 10% of their value during the year.
Indeed, it is US production that is seen by many in the dairy trading community as the key factor weighing on global dairy markets at present.
US milk production in March was up 1.8% from the corresponding month last year, according to figures released by the USDA last week and it attributes the increase to relatively low prices for corn, soybean meal and alfalfa hay.
Milk production in the 23 major States during March totalled 17.2 billion pounds, which is an increase of 1.8% from March 2015.
Production per cow in the 23 major States averaged 1,993lbs (879.7L) for March, 31lbs above March 2015 which indicates that the ratio of milk production to feed cost is still on the farmers side in the US.
According to the USDA, production per cow for the month of March was the highest since the 23 State series began in 2003.
Milk production in the US is also being spurred on by the high price of butter on the domestic US market. This is important as many of the by-products of cheese production in the US namely skimmed milk powder are now being pushed onto the international dairy market depressing the market for these products significantly.
It is for this reason that many in the dairy trading sector are looking to forecasts for US grain production this year as an important cue as to where the dairy market might be heading.
Unfortunately for Irish dairy farmers, in the short-term, there are no fundamental reasons for price levels to change. Stocks worldwide are ample and the moderate effect of El Niño on markets is already incorporated in price expectations.
Unless new weather events change the crop development progress, most believe there is no reason for higher cereal prices in the short term.