Current economics sharpen focus on feed strategies

FOX LAKE

Hold onto your hats.

John Kappelman, a commodity trader and dairy farm owner experienced in international dairy development, suspects that the U.S. dairy industry may be challenged for some time.

'I'm a little concerned. This year won't be as bad as 2009, but it will be as close to that as we have been,' he told listeners on March 23 during the first segment of 'Feed Quality To Ensure Production,' a three-part World Class Webinar being presented by Professional Dairy Producers of Wisconsin.

Over the past six years, there's been a fair bit of creep in operating costs. 'Both large and small dairies are experiencing this. Regardless of size, cost control is a real key,' Kappelman said.

Milk futures prices

Dairy producers can't talk about feed strategies without talking about milk prices. 'We're talking about managing margins. We're in a commodity business and that's what we do,' Kappelman observed.

Since early December, the milk futures market has collapsed in a slide Kappelman does not believe is over. 'I think we're in for one of those years that is going to challenge us, but if it's any solace, there are a lot of unhappy dairyman in Europe right now,' he said. 'In Belgium, they're dumping milk in protest of low prices. The EU is having a 2009 type of event.'

Between 2012 and 2015, as U.S. milk production increased by 7.8 billion pounds, EU milk production ramped up by 26.5 billion pounds as quotas came to an end. 'That's a tremendous add-on in that period of time and it is now hitting the market. That's why we see the horrible prices Europe is dealing with right now,' Kappelman explained.

The pain has been amplified by Russia, the world's second largest dairy importing nation and the world's largest importer of butter and cheese, closing off its borders, while China's GNP hit its weakest point since 1990.

The gist of it is American dairy farmers are caught in the midst of a global production glut with a very strong US dollar limiting exports. 'It is a bad 1-2 punch,' Kappelman said. 'If the trend continues, near-term recovery for U.S. dairy becomes less and less likely.'

Feed production and costs

Current estimates call for 90 billion acres of corn to be planted in the U.S. this year, similar to the past two years, with an expected yield of 168 bushels per acre. 'Assuming the yields and acres hold, you are looking at $3.45 estimated per bushel, considerably lower than the past several years,' Kappelman said. 'If that is correct, it will be the lowest corn prices since 2007.'

Soybean projections for 2016 are close to last year with yields of 46.7 bushel per acre similar to 2014's 47.5, translating to an average price forecast for this season of $8.50.

Kappelman sees ending stocks as a another concern. 'Over the past 20 years, the size of the crop has grown tremendously, yet we seem to think the same ending stocks is okay,' he said. 'With the global market, I think carry out means more than it may be used to and we need to think more about it.'

Weather factors

Weather to a dairy man is like a woman to a man, Kappelman observed: unpredictable and eternally interesting.

Thanks to El Niño, Wisconsin temperatures are clearly above normal and precipitation is below the trend line. History, in terms of the Pacific Oceanic Niño Index from 1960 to January 2016, suggests an possible dive into droughty conditions, Kappelman said.

The transition from El Niño into La Niña, which is underway, could cut the national average corn yield by anywhere from 5.3 to 10 bushels per acre, depending on the timing.

Exports

With the expensive U.S. dollar, overall corn export sales are down by roughly 20 percent. The bright side of that is it will keep a little more corn at home and available to American farmers, Kappelman noted.

Soybean exports are down about 10 percent overall. China, a huge customer, finds it cheaper to ship beans from the U.S. to its coastal consumers than from its interior, Kappelman said, although there is now some effort to build storage and use more domestic supplies, rather than let the goods literally rot.

Best buys list

Distillers grains are a very popular ingredient in dairy diets, fed to the tune of a little over 10 million short tons each and every year. 'This tells me dairy producers recognize the benefits of distillers grains and max out what they can put into the diets,' Kappelman said, given the 'tremendous stability' of production, domestic usage and exports.

Distillers grains can replace some corn and protein meal and are very palatable. They are typically a 'best buy' feed and work well with higher corn silage diets, all of which makes them an easy choice for Wisconsin dairymen, Kappelman said.

If the projected 2016 crops materialize, dried distillers grains will likely go for $100 a ton or less, delivered. 'That's a great value,' he pointed out.

Cows like wet distillers grains, which is good because it tends to increase dry matter intakes. If corn yields match projections, wet distillers will sell 'very, very cheaply' and deserve a place in every diet, Kappelman said.

In addition, a dairyman can contract for distillers grains and pay as he uses it, with no storage or inventory to carry or finance. 'When something is selling at this kind of discount and we don't have to store it, it's worth it,' Kappelman said.

Cotton is not king

Cottonseed is a different story. 'I don't know if there are any more lug nuts to fall off the cottonseed bus this year,' he observed.

For starters, there was a really big reduction in cotton plantings. In 2015, just over 8 million acres of cotton was harvested. Compared to 20 years ago, that's a reduction of more than 80 million acres.

'We have lost a tremendous amount of the cotton industry that will likely never come back,' Kappelman said. 'Cotton's share of fiber consumption has dropped dramatically. We just plain aren't using as much cotton.'

To top it off, the feed had significant quality issues in 2015/2016. When last fall's big Atlantic storm soaked the cotton, the seed sprouted in the bolls and the resulting lint got wet and stinky.

'It's the equivalent of smelly gym socks,' Kappelman said. 'We've had numerous loads where you open the door and the smell just plain hits you, and cows don't like smelly gym socks any better than we do.'

Go for gluten

Corn gluten feed is a by-product of making corn syrup, starch and alcohol, but sales of starch and corn syrup are off and manufacturers are not grinding as much, which affects supply and prices.

If projected 2016 crops materialize, wet gluten feed could sell in the $40s per ton, delivered, with dry in the low $100s per ton. 'This is a tremendous buy,' Kappelman said. 'Figure out a way to get it into your diet.'

It is very palatable, works well with higher corn silage diets and is an easy choice for Wisconsin dairies. Along with DDGs, it is usually a 'best feed' buy and more versatile because of its lower fat percentages. 'It really stimulates appetite,' Kappelman noted.

Another noteworthy feed stuff, from the production standpoint, is corn starch, a by-product off the food lines of the wet milling industry. It can be used to fortify poor quality corn and forage, and is easy to add to a TMR. Cows will respond in production immediately if they're short on starch, Kappelman noted.

Looking ahead

Clearly, low cost dairy producers can survive in the current environment, Kappelman said.

Work at getting good margins and feed all the discount feeds that fit in your ration, he advised. Cost out home-grown feeds and replace or shift production, if necessary. Watch inventories and manage for consistent performance.

It is also critical to avoid trying to hit the absolute bottom or top of the market. 'You will have as much success as hitting the casino,' Kappelman quipped.

Instead, look for value and margins and target the upper one-third (or bottom one-third) of the historical market.

'If you consistently do that, you will be a winner and have a wonderful relationship with your banker,' he predicted.