By Chad Van Hofwegen, Agribusiness Consultant
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Despite a recent promising futures curve for both corn and milk, California dairy producers are waiting to see what happens with the corn crop in the Midwest. If a strong corn crop is harvested, historically high feed costs are expected to slowly ease, which would improve dairy margins through the remainder of 2013. However, producers' expectations of profitability have been tempered as the Class III milk futures market has softened. The July 2013 California Overbase milk price was $16.85 which is at or near break-even for most dairies in California. We continue to see herd liquidations throughout California, mostly from smaller dairies, indicating persistent cash flow problems for the higher cost producers.
Dairy Margins 2012-2014

Milk price

The California Overbase monthly milk price has ranged between $16.50-17.50/cwt through the first half of 2013. The rolling 12 month basis (difference between the Federal Class III price and the California Overbase price) through July 2013 has averaged $1.34/cwt. This negative basis is driven by the large amount of low value product (butter and non-fat dry milk) produced in California. When comparing the milk price California producers receive with the milk price paid in other regions of the U.S. it is clear that, for now, California is at a distinct disadvantage. Producers in other regions, such as the Midwest and Southeast, regularly report a positive Class III basis because they primarily produce higher value products such as cheese, yogurt, and fluid milk. Until California processors either re-tool their plants to produce a higher value product, or the products they produce become more valuable, they will continue to receive a lower milk price than their counterparts in other regions of the country.
CA overbase vs. III Milk Price
It is projected that the California Class III basis will average $1.25 over the next 12 months. If this basis is applied to the current Class III futures market, the California Overbase price will average nearly $16/cwt through 2013. The average California dairy needs to receive $16.50-$18.50/cwt for its milk in order to break even under current conditions. This range is projected to decrease to $16-$18/cwt as feed costs soften (see Feed Costs section below)

Milk production

California milk dropped 0.8% year-over-year for the month of June, and 2.9% year-over-year through the first six months of the year. This comes on the heels of three straight years of annual increases in production (2010-2012). Any production that is lost in CA is being made up by the rest of the country. The USDA's June milk production numbers show an increase of 1.6% over a year ago for the 23 top reporting states and an estimated increase of 1.5% nationwide
Monthly YOY June 2013
The continued production increases in the rest of the U.S. are the result of better margins (see Dairy Margins 2012-2014 graph). Producers will continue to increase production in regions where it is profitable to do so. In the near term, increased production throughout the rest of the country will continue to place downward pressure on the California milk price regardless of the production decreases in California.

Feed costs

Grain and forage costs have increased since 2011 and commodity prices continue to remain volatile. Fundamentals (planting acres, limited reserves, and a strong export market) will continue to lead to stable/strong forage prices through 2013 and into 2014. Dairy producers are able to insulate themselves from historically high feed costs through extensive farming programs. However, it has become increasingly difficult to obtain additional farm ground due to the competition for acres from specialty crops and permanent plantings.
Prices Received for Alfalfa Hay by Month - United States
Some relief for historically high feed costs may come in the form of reduced grain corn prices. According to the corn futures market, prices are projected to soften to $4.50-$5.00/bushel in Q4 of 2013 vs $7.00-$7.50/bushel in Q1-Q3 of 2013. Spot rolled corn is currently $249/ton and $235/ton delivered in Oct/Nov/Dec.
Corn Prices 2012 - P2013/14


Looking forward into 2014, it appears that California dairy producers will continue to face compressed margins driven by high feed costs and a milk price that trails the rest of the nation. Producers must continue to closely monitor input costs to ensure maximum efficiency, especially during periods of negative cash flow.
Chad Van Hofwegen
Chad Van Hofwegen Chad Van Hofwegen is a Vice President and Agricultural Consultant for Wells Fargo, the largest commercial agricultural lender in the United States. His responsibilities include analyzing the unique risks faced by food and agribusiness enterprises with a particular focus on dairy.
Additionally, he evaluates operational and risk strategies in order to assess competitive conditions and positioning within the landscape of an increasingly global food sector.
Chad received a bachelor of arts in Agri-Business from Dordt College and is in the process of completing a Global MBA from Fresno Pacific University.

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Wells Fargo Agricultural Industries presents this analysis as a complimentary service to its employees and customers. It cannot guarantee the accuracy of all the sources of data. And, commodity prices are extremely volatile based on unforeseeable changes. These estimates will change with all new market changes.