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Margin over Feed Cost per Cow at Record High for June 2007

Aug 20, 2007

Margin over Feed Cost per Cow at Record High for June 2007

By John Rutherford, IDFA Senior Research Analyst

One factor in the increasing wholesale price of dairy products has been the perception that higher feed costs, due to increased demand for corn by ethanol distillers and other factors, would retard growth in farm production of milk. This is classic economic theory: As input costs rise, less will be produced. This would mean less milk available to make dairy products, hence the bidding up of their values at wholesale.

But one part of this story has not come to pass this year, because milk production has actually increased. According to the National Agricultural Statistics Service (NASS), total U.S. farm milk production for the first six months of 2007 is estimated to be 1.0% higher than for the same period in 2006. In fact, production in each month this year has exceeded the same month a year ago. In May and June 2007, this increase was accomplished with fewer cows than a year ago, meaning per-cow production is more than making up for fewer animals producing. This is not what you would expect as producers alter feed rations to reflect higher-cost feeds.

Production is increasing because farm level milk prices have risen more than enough to compensate producers for higher costs of feed. As Chart A shows, the margin a producer earned over the cost of feed in June 2007 reached its highest level since May 2004. In fact, the June amount is the highest margin since at least 1993.

Although other cost increases have beset farmers, the graph shows that the farm revenue stream is relatively flush when compared to recent years. Other costs of milk production, such as fuel and energy, have increased considerably in the past few years, but they are not as important to farm profitability as feed costs. According to U.S. Department of Agriculture (USDA) estimates, feed costs represented 44% of the operating costs on a U.S. dairy farm in 2005. In comparison, the total cost of fuel and energy represented about 11% of operating costs, even when counting the fuel and energy used in the production of feedstuffs.

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Posted August 20, 2007

Dairy Delivers