Dairy Outlook: June 2019

Milk Price Gains with Feed Uncertain

Pennsylvania All Milk Price and the US All Milk Price for March and April were at the highest levels since November and December of 2017. Class III and Class IV futures suggest a gradual increase over the next several months. However, that good price news is tempered by the futures price of corn, driven by weather and delayed planting concerns, as well as continuing difficulties in world trade. Tight feed inventories and sub-par qualities could impair the progress dairy enterprises were hoping to see in 2019 and could impact profitability into 2020. May will be the first time the state average IOFC will be above the $9.00/milk cow/day breakeven since December 2017.

Dairy Margin Coverage Sign-ups Begin Soon

Dairy Margin Coverage (DMC) sign-ups will begin on June 17 and continue into September. Similar to sign-ups for the 2018 version of the Margin Protection Program, a lot of information is available prior to making a commitment. Many herd owners are able to sign up for maximum coverage knowing the expected return for the first four months of 2019 will exceed the annual fee and premiums owed.

One of the challenging decisions for those planning to sign up for DMC is whether to go year by year or sign up for a full five years of coverage and receive a 25% discount. A five-year commitment means that margin coverage cannot be altered for later years, which adds to the risk because of uncertainty in where prices will be in the coming years. There may not be a “right” or “wrong” answer on this.

For an example, we can look at a scenario for 2019 with coverage for five million pounds of Tier 1 milk at the maximum $9.50 margin coverage level. As shown in Figure 1, if six million pounds is the established annual production, the additional Tier 2 pounds can be covered at the $4.00 margin level for no additional cost. Without the 25% discount, the total cost for this 2019 coverage will be $7,600. The expected return for January through April, based on futures from 6/11/19, will be $15,555. Based on current projections, the total expected net benefit for 2019, after deducting the $100 program fee, $7,500 premium cost, and 6.2% government sequestration, will be $13,505.

With the 25% discount, full coverage for 2019 will cost $5725, and the same for each of the four following years. This would be a 5-year commitment of $28,625, but the knowledge that payments through April of this year will already cover more than half of that amount may be enough incentive to go for the discount.