Monday, October 19, 2009

How Many Cows will the U.S. Reduce?

The first chart below compares Class III milk prices with the number of lactating cows in the U.S. It appears to be an inverse relationship - when the prices go down, the number of cows goes up! Obviously, this is not the case.

In the next chart, the number of cows is compared to the Class III milk prices when the prices are moved 12 months forward. In other words, when the milk prices change, how does that compare to the number of cows one year later?

A correlation now begins to show. The data indicates that the milk prices are an indicator of the number of lactating cows one year later. This makes sense, in that, as prices rise, producers begin considering expansion. By the time they execute their plans and get fresh heifers ready to milk, a year has passed. When prices drop, no one knows how long it will last or how deep the prices will fall, so there is a delay in reducing herd size. When there is a long and deep period of low milk prices, the ability to stay in the dairy business comes into play and some producers may not be able to finance refreshing their herds with new heifers.

This 12 month difference between milk prices and herd size was tested vs. other lead times ranging from 10 months to 14 months. Statistically, the closest relationship between milk prices and the number of cows occurs at 12 months. With this in mind, below is a graph which could be used to predict the future cow inventory in the U.S. If the falling milk prices experienced in the last 12 months are used as an indicator of herd size in the next 12 months, we can expect very sizable herd reductions lasting well into 2010.

Supporting this prediction, the current USDA forecast indicates a very drastic reduction in cow numbers lasting through the second quarter of 2010. While cow numbers are currently down approximately 165,000 head from their 2008 highs, the current USDA forecast will bring the number of lactating cows down nearly 400,000 from those 2008 peaks.

We are now exiting the period of too many cows and exchange rates that were unfavorable to cheese exports. It would appear that we are now entering a period of too few cows and very favorable exchange rates for exports. This is occurring at a time when grain and oilseed prices are also moderating.

The history of the dairy business is one of boom and bust cycles. It looks like we're heading into a boom period that may match or exceed the extremes of the bust we're exiting.

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