CHICAGO: There’s so much milk flowing out of US cows these days that some is ending up in dirt pits because dairies can’t find buyers.

Domestic output is set to be the highest ever for a fifth straight year. Farmers are still making money as prices tumble because of cheaper and more abundant feed for their herds. Supplies of raw milk are topping capacity at processing plants in parts of the US and compounding a global surplus even with demand improving.

Agri-Mark, a 1,200-dairy cooperative in New England that had $1.1 billion of sales last year, started pouring skim milk last month into holes used for livestock manure. It was the first time in five decades, and farmers so far have unloaded 12 truckloads, or 600,000 pounds (272 metric tonnes).

While having small amounts of milk spoil or go unsold isn’t unusual, Northeast dairies dumped 31 per cent more this year through May than the same period of 2014, government data show. “Usually we’d find someone to buy it at a reduced price, or ship it to the Midwest,” said Bob Wellington, a senior vice president at Andover, Massachusetts-based Agri-Mark, which was founded in 1913.

“But those plants are full. There’s no way to process it in the time needed for a perishable product.”

Domestic output in May reached 18.4bn pounds, the most in any month, and is on pace to reach a record 208.7bn pounds this year, the US Department of Agriculture said June 18.

Globally, production will rise 2.1pc to a record 582.52 million tonnes as top exporter New Zealand sells the most ever and the European Union ends limits on dairies that had been in place since 1984, the USDA said.

US farmers expanded after futures on the Chicago Mercantile Exchange surged to a record in September, fuelled partly by rising cheese demand and a jump in purchases by China. Since then, warmer weather has brought a seasonal increase in supply, demand slowed from importers, and a stronger dollar eroded exports.

“The world needs less milk,” said Eric Meyer, president of HighGround Dairy, a Chicago-based broker.

Global dairy prices have dropped 39pc from an all-time high in February 2014 and are the lowest in five years, United Nations data show. In Chicago, benchmark Class III milk futures, used in cheese making, are down 36pc to $16.23 per 100 pounds from a record $25.30 in September.

Prices may fall to $14.41 by the end of the year before recovering in 2016, said Tom Bailey, a New York-based analyst at Rabobank International.

New Zealand’s dollar has tumbled to a five-year low as falling milk prices amplified speculation the nation’s central bank will cut interest rates this month. The kiwi slid against almost all of its 16 major peers this year.

The milk slump has been a boon to buyers including processor Dean Foods Co and retailer Supervalu Inc, contributing to a slowdown in the pace of food inflation. At the same time, the dollar’s rally against most of the world’s currencies helped to spur a 10pc drop in US milk exports in the first four months of 2015, while imports rose 12pc, compounding the domestic surplus, government data show.

The bear market has been no barrier to more supply. At Mitch Breunig’s farm in Sauk City, Wisconsin, he’s still profitable even as the value of his milk fell 26pc. Costs have dropped for things like fuel, and wet spring weather left an abundant alfalfa harvest, providing higher-quality hay for his 420 cows to eat. The animals are producing 3pc more milk than last year.

“I just have way more feed than a year ago,” Breunig said, adding that his eight grain silos are full. “In terms of profitability, boy, that has a huge effect.”

Demand remains strong, with Americans eating more dairy products than ever, especially cheese and butter, said Bill Brooks, a Dearborn, Missouri-based dairy economist at INTL FCStone. Futures may reach $17.57 in the fourth quarter, he said June 18. The USDA estimates global milk demand will rise for a sixth straight year to a record 582.7m tonnes.

There’s also concern output is dropping in California, the largest US producer. A four-year drought may be eroding feed quality and cutting into profit, said Bill Schiek, an economist at the Dairy Institute of California in Sacramento.

Dairy profits may not last much longer. Income over feed costs will fall 38pc to average $8.90 per 100 pounds of milk in 2015, from a record last year, FCStone’s Brooks said.

By arrangement with Washington Post-Bloomberg News Service

Published in Dawn, July 5th, 2015

On a mobile phone? Get the Dawn Mobile App: Apple Store | Google Play