Author: Michael Ferrari, PhD
VP, Applied Technology & Research

We’ve been discussing how the La Nina driven pattern has exerted a positive influence on  US dairy production in 2010, limiting seasonal heat stress in California while at the same time contributing to a pattern that supported a strong grazing season in nearly all producing regions.  As the transition to 2011 commences and the La Nina (potentially) starts to move towards a neutral state, this sets up the possibility for a warmer start to the  2011 high-volume months, which again will be good for production through 2Q next year.  However, we are becoming more concerned about the potential for a very strong  reaction on the feed side in 2011, which could be a significant catalyst for a very constructive market for milk (& byproduct) prices next year. 

Healthy production weather notwithstanding, we have seen a $1.00-$1.50 price swing to the upside in Class-III Milk since early September, but we still are not at the levels reached in the market one year ago.  At the start of 4Q10, there are now a few very important factors to keep a close eye on: first, USDA decreased their corn estimate for the US crop dramatically in their recent estimate.  We have maintained all season that the USDA was far too optimistic in their production outlook, and the release of their production and yield numbers last week was a significant correction, which supported the grains complex.  Second, as a result of this revision, projected carry-over stockpiles will be tight, and the stocks-to-use ratios for corn and wheat will support higher prices though Feb2011.  Third, with the recent spike in the cotton market, there is already talk of corn and wheat shifting acres to cotton next year, so 2011 production acres may see a net decrease.  Finally, our long range view is hinting at extended dryness in much of the US corn/soy belts (shaded, above right), which will again set the stage for higher grains prices, translating to higher feed costs, reducing the margins of producers and supporting higher prices through summer 2011.