Dairy Replacement Heifer Supply Remains Tight
What’s Happened….
Strong prices for beef, due to a 50-year low supply of beef cattle, has encouraged dairy producers to breed cows and heifers to produce beef calves. The math is simple. Higher prices for beef calves compared to dairy calves is encouraging producers to follow the money trail for a better return. Ultimately, this will likely increase prices for dairy products due to a contracting herd. Heifer prices will likely climb. For now, they face an uphill battle. Sluggish dairy exports and slow cheese demand in the past six months have contributed to the current weak environment for dairy products.
Why is this important…
Estimated milk cows in the U.S. have contracted from 9.401 in January 2023 to 9.325 million in January 2024 according to the February 2024 USDA milk production report. The implication is a shrinking cow herd. Add an incentive for dairy farmers to produce beef calves, and we have a supply picture for future milk cows (and eventually products) to get even tighter. With current milk prices trading in a lethargic range of $16 to $17 per cwt, there is even more reason to expect further herd contraction, as current prices are keeping profit margins slim or in the red. Ultimately, the big picture implication (unless demand declines) is that it’s only a matter of time before milk prices will climb. The deferred futures contract months for the second half of 2024 are already trading at a premium to the front months, anticipating stronger cash markets in the future.
What can you do?
Dairy producers should stay vigilant for deferred pricing opportunities in milk, especially when prices rally. Expectations for tighter supplies do not have to correlate with prolonged higher prices in the future. Recent rallies have not lasted long. Big picture concerns are a rising U.S. dollar and continued poor economic growth in China. Economic concerns in the U.S. could also act as an anchor when prices recover.
In addition to selling rallies, managing feed prices when they are low is paramount. Both corn and soybean prices have dropped from late fall through the end of February. Now is not the time to be complacent. Using call options to protect corn and soymeal prices in addition to contracting ahead makes sense, since the most important weather for Brazil’s largest and exportable corn crop has yet to occur.
Keep in mind that nearly 65% of the world corn crop is produced in the Northern Hemisphere. As the weather goes, so may feed prices. Recent indicators suggest the current El Nino weather pattern could be flipping to La Nina, just in time to usher in potentially warmer and drier weather in the Midwest this summer. U.S. corn and soybean supplies are plentiful now, and adverse weather could quickly change that view.
Lastly, it might be time to forego breeding cows for beef calves and breed for dairy heifers, which are likely to be in tight supply in the foreseeable future.
There are many ways to protect your risk and take advantage of opportunities. Waiting could be your biggest risk. Visit with a professional to learn what will work best for your operation.
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Editor’s Note: If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.
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Bryan Doherty