Friday, July 29, 2022
CapitalPress.com 7
Dairy economist considers the
impacts of infl ation, interest rates
By CAROL RYAN DUMAS
Capital Press
Capital Press File
High feed prices continue to restrict milk production.
Feed costs limit U.S.,
global milk production
By CAROL RYAN DUMAS
Capital Press
Record-high milk prices
prompted only a minimal
expansion in the U.S. dairy
herd, as high feed prices con-
tinued to limit milk production
in the second quarter.
Nonetheless, U.S. cheese
stocks continued rising to
record highs.
U.S. milk production in
May was 0.7% lower year
over year despite the cow
herd increasing by 2,000 head
from April. Totaling 9.4 mil-
lion head, the U.S. milk cow
herd is still short 102,000 head
versus a year ago, CoBank
reports.
“Record-high feed costs,
extremely tight heifer inven-
tories and high construc-
tion costs continue to limit
expansion potential,” Tanner
Ehmke, CoBank’s lead econ-
omist for dairy and specialty
crops, said in the report.
Although feed costs eased
at the end of the quarter, only
incremental increases in cow
numbers and milk production
are expected for the remainder
of 2022, he said.
Expansions have thus far
been limited to states like
Texas and South Dakota in the
central U.S. where dairies typ-
ically grow their own crops
and have more control over
feed costs. New dairy barn
construction is underway in
some regions, notably in areas
where plant expansions have
been announced, he said.
“Globally, milk sup-
plies remain constrained with
Europe and Oceania strug-
gling with inclement weather,
high feed prices and regula-
tory pressures to reduce green-
house gas emissions,” he said.
Combined milk production
in the EU and UK in April was
down 0.9% year over year,
while New Zealand produc-
tion was down 5.6%, he said.
“Ongoing cost and regula-
tory pressures are expected to
limit milk production growth
for the remainder of 2022,
tightening the world dairy
product balance sheet and
sending more export business
to the U.S.,” he said.
On the processing side,
milk in the U.S. continued to
fl ow to cheese vats in the sec-
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ond quarter with cheese man-
ufacturers building inventories
to record levels. Cheese pro-
duction at the start of the sec-
ond quarter also continued its
push to record highs, he said.
But in a concerning sign of
consumers responding to high
food prices, American-style
cheese disappearance fell
10% year over year in April.
Demand for other cheeses
inched up only 0.6%. Retail-
ers note consumers are also
switching to lower-priced and
private label cheeses to save
on cost, he said.
“The sharp slowdown in
domestic cheese demand cou-
pled with rising production
pushed U.S. cheese invento-
ries to new record highs, espe-
cially with American-style
cheeses,” he said.
Total cheese stocks were
1.5 billion pounds in May,
surging 31 million pounds
from the previous month.
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With June’s infl ation rate at 9.1% —
the highest in 41 years — and the Federal
Reserve raising interest rates to tame it,
many in the dairy industry are concerned
about how the upheaval will impact them.
“Obviously, a concern here with infl ation
and interest rates rising so quickly is that the
Fed may make a misstep and tip U.S. econ-
omy into recession, and that may impact
consumption habits,” said Tanner Ehmke,
CoBank’s lead economist for dairy.
“That may impact the consumer’s abil-
ity or willingness to buy dairy products,” he
said during the latest “Dairy LiveStream”
webinar.
Consumers are already trading down
from branded products to private labels or
shrinking the size of packages they’re pur-
chasing, such as buying a half gallon of
milk instead of a full gallon, he said.
“We’re already seeing these infl ationary
pressures now,” he said.
So the question is, What’s going to hap-
pen in the dairy industry if the Fed contin-
ues raising interest rates aggressively? he
said.
“The obvious initial impact would be
on borrowing costs for dairy farmers and
dairy processors. It’s going to become more
costly to borrow,” he said.
But he stressed the need to do the math
on the nominal interest rate versus the real
interest rate.
“The real interest rate is the nominal
interest rate, which is what you are paying
your bank, minus infl ation,” he said.
For instance, if a farmer is paying 6% on
an operating loan and infl ation is 9%, the
market is paying the farmer 3% to borrow
money. So there’s still an incentive to bor-
row, he said.
CoBank’s been watching USDA’s
monthly milk reports, and the size of the U.S.
dairy herd is only increasing incrementally.
So there are a lot of things going on to curb
expansion, including high feed, labor and
material costs, he said.
“If we start to see the infl ation numbers
tick down and the interest rate numbers come
up, then we’re going to see a penalty there for
borrowing. So perhaps what we’ll see then is
another disincentive to expand,” he said.
For processors, another major cost is their
cost to carry inventory, and that’s going to
increase as borrowing costs go up, he said.
“So what they may do there is reduce
inventory, and that may show up in tighter
stocks for dairy products in the U.S.,” he said.
Another part of that equation is consumer
behavior, he said.
“If the consumer’s going to be slowing
down in their purchases, that would have the
opposite eff ect perhaps on what is stored in
inventory,” he said.
There are a lot of things that are pushing
and pulling against each other, and there’s
no clear answer for what rising interest rates
could do on inventories and incentives to
borrow money.
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