Key Takeaways:
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Margins are looking better all the time. Class III prices have risen drastically from the $15.50/cwt observed in April, and lower feed costs are contributing to the optimistic outlook, as well. Though replacements are expensive, some producers may be willing to pay the price to benefit from higher milk prices while maintaining income from beef-on-dairy calves. The futures market is currently presenting favorable margins, providing an excellent opportunity for producers to secure coverage.
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For the tenth month in a row, U.S. milk production dropped below prior-year levels, as the national herd is considerably smaller than a year ago. Despite a significant positive swing in the margin outlook, dairy producers are faced with a lot of challenges when it comes to expanding production, including highly pathogenic avian influenza (HPAI) and heat stress. Further, replacement heifers continue to be in short supply, and those that are available are quite expensive. Elevated cattle prices are making a strong case for producers without succession plans to exit the business.
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Cheap cheese spurred on a large amount of buying activity helping to clean up the overall balance sheet, but with the big jump in prices, buyers are likely to become wary and remain hand-to-mouth moving forward. With all of the investments in dairy processing, particularly in Class III categories, the production pipeline remains robust. If buyers remain price-sensitive, we are sure to see some market volatility in the not-so-distant future.
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