Water shortages add to trend of higher prices

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By Ching Lee

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After a robust corn harvest last year that lowered feed prices for livestock producers, new government projections that U.S. farmers intend to plant fewer acres of corn this spring have dimmed the outlook for further price softening.

Forecasts released by the U.S. Department of Agriculture last week estimate prospective plantings of U.S. corn at 91.7 million acres, down 4 percent from last year and the lowest level since 2010. At the same time, USDA revealed that grain inventories as of March 1 were lower than expected.

With the California drought decimating rangeland and historically low water deliveries that are expected to reduce production of key feed crops in the state, the latest USDA estimates are “not the best of news,” said Joel Karlin, commodity manager and market analyst for Western Milling in Goshen.

He noted that livestock producers are already paying very high prices for hay and silage, and the price of corn and soybean meal has been on an upswing since the start of the year. Despite the lowest U.S. cattle herd since 1951 and the deadly porcine epidemic diarrhea virus that has trimmed the nation’s hog population, corn usage has been high throughout the country, Karlin added.

“Certainly nothing in USDA’s report would suggest that the uptrend (in feed prices) would not continue,” he said.

Coming off of record-high prices in 2012, corn is now one of the cheapest feed ingredients for livestock, and lower prices generate strong worldwide demand, Karlin said. While prices probably won’t return to the high range of $8 a bushel, he said, they could stay at elevated levels of $5 to $5.50 a bushel until the market has a better sense of what the 2014 crop will be. A good growing season could ease prices back to $4.25 to $4.50 a bushel, he added.

Prospective plantings of corn in California are expected to shrink to 430,000 acres this year, down 28 percent from the 600,000 acres in 2013, according to USDA.

California farmers also intend to plant 30 percent less cotton this year, with acres projected at 195,000. However, U.S. planted acreage is expected to rise by 7 percent. Cotton provides cottonseed, an ingredient in dairy rations.

Karlin said there is also debate among California wheat growers about how much recent rains have helped their crop. USDA projected the state’s planted wheat acreage to be down 15 percent from 685,000 last year. If growers get additional rains during the next month or so, some may consider letting their crop grow to grain rather than cutting it for hay or silage, Karlin said.

What was surprising, said Michael Marsh, CEO of Western United Dairymen, were USDA projections for California hay acreage—1.45 million, up slightly from 1.44 million in 2013. With the effects of water shortages and some fields not being irrigated, Marsh said the USDA estimate may not tell the whole story.

Glenn Nader, a University of California Cooperative Extension natural resources advisor, said he expected hay acreage in the state to be down due to limited water supplies, especially in the San Joaquin Valley. He noted that even in the Intermountain areas where some of the state’s hay is grown, production will likely fall short because of limited snowmelt.

“It’s going to be tough for us to make even our normal hay production, given short water supplies. I just can’t see us making our average, let alone above average,” Nader said.

USDA also projected national hay acreage to remain virtually unchanged from last year, with a slight increase. Marsh said if there are more acres being planted in other states to compensate for what California could be losing, dairy farmers here would still have to pay hefty prices to haul it into the state—on top of the already-high prices they’re paying now.

Nader said while beef cattle ranchers do not normally buy substantial amounts of hay, they’ve been forced to this year because of poor grass production on the range. He noted many ranchers are trying to make tough decisions about how much to downsize their herds, based on what forage resources there are and how much hay they could afford to feed.

Karlin said one factor that may be contributing to slightly higher hay acreage in the state is the improving financial standing of dairy farmers, as the rebounding dairy market has raised milk prices and producers’ profit levels.

“That may have emboldened some producers to plant hay, confident that they’d be able to get paid,” he said.

The price of soybean meal, another important feed for dairies, probably will not weaken much from current historic highs until the second half of the year, Karlin said, despite USDA projections of record-high soybean plantings.

Marsh said he expects milk prices will remain fairly strong for most of the year, but dairy farmers’ net earnings will diminish due to high feed costs, especially for alfalfa. Milk prices will probably slide a bit as Midwestern dairies start producing more milk during their seasonal “spring flush,” which has been delayed due to lingering winter weather there.

Also, with import tariffs into China—whose dairy imports have reached all-time highs—going up after the second quarter, Marsh said he expects China will back off on some of its buying.

“At the same time, global demand for dairy products just keeps expanding, and that’s great news for us,” he said.

Credit to the California Farm Bureau Federation