Author: Michael Ferrari, PhD
VP, Applied Technology & Research
(excerpt from our weekly dairy report)
As we discussed last week, WTI is focusing on the current El Nino as one of the primary supply drivers for the dairy market in 2010/11. As seen on our SST anomaly map (contact Weather Trends for details), the major El Nino indicators have strengthened slightly since last week; noted increases in surface water warmth across the Pacific and now also the Atlantic are evident. Further, as of December 2009, the Southern Oscillation Index is now in negative phase for three consecutive months, which makes an El Nino designation ‘official’ according to most standard meteorological classifications. The persistence of these El Nino conditions will continue to support a drier pattern for the ANZ region, which may be slightly wetter than some production regions experienced last year, but still drier than normal.
The El Nino will also exert some influence on the US pattern, with implications for production/yields in California. As March is typically a strong production month for the CA herd, El Nino has a strong relationship with a wetter March, which will reduce grazing activity and curtail production and yield numbers. As such, we are looking at potential y/y decreases in yields in the US for Mar and possibly Apr 2010. As y/y Class III prices for all of 2009 vs. 2008 were lower, this may start to reverse in 2010. We are not anticipating a return to the prices seen in 2008 & 2009 where total US milk prices averaged $19.13 and $18.29 per cwt respectively, we are looking at a rebound off of the prices seen in 2009. In addition, anticipated higher feed costs for the front end months will contribute to the upside support in this market (pls. refer to our grains/oilseeds analysis). We are not sure at this point if higher feed costs will cause managers to limit production activities, but at a minimum, the higher input costs will start to dig into the margins of producers.
