Global Dairy Prices Improve, but Variables Continue to Weigh on the Farm Sector

Lucy Craymer reported earlier this week at The Wall Street Journal Online that, “Global dairy prices have risen nearly 17% in four weeks, an encouraging sign for a sector beleaguered globally by low prices and growing stockpiles of cheese and milk powder.

“After hovering at historically low levels for much of 2016, prices have finally started to rally as farmers have culled herds to save money, reducing the available milk.

“The GlobalDairyTrade Price Index, which covers a variety of products and contract periods in the auction, rose 12.7% from the previous auction on Aug. 2. The index is now at its highest level since Oct. 20, 2015.”

Ms. Craymer pointed out that, “Production has fallen as farmers, many of whom have been operating below the cost of production, have been forced to send cows to the slaughterhouse to raise revenue and reduce spending rather than continuing to milk them. Furthermore, supplementary feeding, which increases milk yield but isn’t necessary, has been reduced to cut costs.”

More broadly with respect the agricultural economy, Steven Russolillo reported in today’s Wall Street Journal that, “Farm-equipment makers can’t catch a break.

Lower prices for corn, soybeans and other commodities have squeezed farmers’ incomes across the globe, prompting them to cut back significantly on equipment spending. That has upended companies such as Deere & Co., the world’s largest seller of tractors and harvesting combines. Its sales and profits have dropped for nine consecutive quarters.”

Today’s article added that, “Falling incomes have prompted many farmers to cut their investment spending. And now, many of Deere’s customers prefer to lease machinery rather than purchase it.”

And, a Reuters update from today contained the following projections from Deere & Co.:

” * 2016/17 projection for U.S. commodity prices for corn $3.15 per bushel.

” * Sees FY 2016 total U.S. farm cash receipts of $373.4 billion versus previous forecast of $375.1 billion.

” * 2016/17 projection for u.s. Commodity prices for soybeans $9.30 per bushel.”

Nonetheless, Bloomberg writer Mario Parker reported today that, “Deere & Co., the world’s largest agricultural equipment maker, raised its full-year profit forecast after cutting production and costs to adapt to weaker demand for tractors and combines.

“Full-year net income will be $1.35 billion in the year through October, Moline, Illinois-based Deere said Friday in a statement, compared with the $1.2 billion it projected in May. The company also reported better-than-expected fiscal third-quarter net income and a 16 percent reduction in its cost of sales. The shares jumped as much as 5.2 percent.”

The Bloomberg article noted that, “‘People ask that question, how much more can’ it cut? Stephen Volkmann, a New York-based analyst at Jefferies LLC, said by phone. ‘When you look at what’s happening in the agricultural community, it’s tough to argue that things are going to get better.’

“Deere has shed thousands of jobs and cut capacity since 2013, most recently last month at an Illinois operation. Tractor inventories in the U.S. are at a seasonal record high and credit availability is tight with farm incomes projected to fall for a third straight year amid bumper crops and lower commodity prices, signaling that Deere may have to make further cost cuts.”

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