Heat causes lower milk production -Rich Posson
The August monthly milk production report, due for release Thursday, should offer a reduction of milk production. Following several years of a relentless trend toward higher production, we may finally see a decadal cycle toward lower milk production that can last into 2012.
A reduction of production should come from extreme US heat, high humidity for the northern states, and crop destruction from drought for the southern states. Over the next 10 months, some southern states dairymen will have to import forage and grain from the northern states, as well as deal with cattle loss due to extreme heat. Such a heat wave has lasted long enough to consider long term damage to milk cow productivity.
If, by chance, the upcoming report does not show much of a decline or no decline of production, be patient, future reports will. And, keep in mind that since the 1960s if price was lower due to higher production is was more from an excuse or economy problems, that in general monthly production and monthly price were of a positive correlation suggesting in general we pay more for higher production. Whereas a sizable cut in production can cause a ballistic higher price characteristic.
The model correctly called for a climate problem this year and this without the use of La Nina characteristics, which were also present. The model correctly anticipated the long term bull market trend from July of last year, and currently assumes the current decline in price is only a minor intermediate intra year trend known as the L2. With the recent peak of the L2 trend as higher than a previous and more important L1 trend top, and the L1 as the most important intra year trend followed by the model, the model correctly offers the opinion that the recent high of 2011 is unfinished business, and so once the L2 has bottomed, milk should rally into, if not through September and to a new high price for 2011, and for the next L1 top.
The model assumes milk is under valued relative the intermediate trends, while being fair valued with good demand relative a long term trend, but with the coming supply crunch, current fair value price level will become a under valued price level. Long term studies suggest milk is worth a record $27 C3 per cwt for 2012.