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Slow Milk Price Growth Meets Rapid Feed Cost Expansion

Summer prices have been challenging for Class III prices, but very tumultuous when it comes to feed.Despite the short lived spike in Class III in May, Class III and IV have been normalizing and slowly growing for all of 2021 (Figure 1). Current futures suggest that Class III will potentially grow to $18/cwt by the end of the year, while Class IV looks stable around $16/cwt.  Based on a regression of Class III and Class IV, the predicted Pennsylvania all milk price will grow from around $18.75/cwt to potentially $20/cwt for the second half of 2021. 

Figure 1: Twenty-four month Actual and Predicted* Class III, Class IV, and Pennsylvania All Milk Price ($/cwt)

fig1
*Predicted values based on Class III and Class IV futures regression (Goodling, 2021).

Feed prices have taken a more dramatic position in the past few months.  Led by highs in corn and soybeans, 12 month average feed costs for the U.S. are 9.4% higher and Pennsylvania 15.6% higher than the previous 12 month average (Table 1).  In the last three months, feed costs have come down slightly, but still remain at highs reached over a decade ago.  Farms with adequate home raised feed inventories are better positioned to address the resulting tight margins than those reliant on a larger quantity of purchased feed.

A Tale of 3 Risk Management Levels

Low milk price and/or high feed commodity prices leads to increased discussion around risk management strategies. There have been various risk management strategies available to producers over the years, and a popular current option is Dairy Margin Coverage (DMC) established in the 2018 Farm Bill. The DMC is two and a half years into its program, and its utilization by producers has varied greatly by premium level chosen, percent production enrolled, etc. Given the current margin environment, a comparison of three premium levels offered illustrates an interesting picture. Let's take an example dairy interested in covering 90% of its 5,000,0000 lbs. milk eligible for DMC. How would this dairy's net indemnities compare for 2019-2021 at three coverage levels: $4.00, $6.50, and $9.50? Net indemnity means the total payouts less any fees and premiums. Figure 2 shows what the annual net indemnities per cwt were at each level as well as the monthly Milk and Feed Cost Margin USDA calculates for payment determination.

Figure 2: USDA Dairy Margin Coverage Net Indemnities for 2019-2021 at $4, $6.50, and $9.50 premium levels

fig2

 USDA Farm Service Agency, 2021.  "Dairy Margin Coverage Program".

It should be noted 2021 only contains the first six months and the amount of milk covered and the amount of premium are adjusted to reflect such. The minimum level of $4.00 has yet to result in an indemnity payment since 2019, and with a minimum $100 fee, there is hardly any impact on an annual basis for the level of production. At $6.50 coverage, it has been a mixed performance. In 2019, it did not trigger any payments, but did have a $0.07/cwt cost. Two months triggered payments in 2020, resulting in a net indemnity of $0.06/cwt, and currently 2021 is tracking to be somewhere in between. The top level coverage, $9.50, definitely has been a positive since DMC was offered. It has resulted in a net indemnity around $0.50/cwt in 2019 and 2020, and currently is poised to return nearly $2.80/cwt if margins remain in their sub $7.00 range for the remainder of 2021. Although this may not offset all the rising costs producers are facing, having these additional funds for those that elected higher levels of coverage will help to lessen the impact on this year's financial position. As with any risk management strategy, every operation is unique, and so decisions should be based on that operation's financial position, estimated production, and long term objectives.  Enrollment for DMC occurs in the fall prior to the coverage year, so producers elected coverage for 2021 back in October thru December 2020. No official data has been announced for the 2022 enrollment period, but most likely will occur in the October to December 2021 time frame.

Income Over Feed Cost, Margin, and All Milk Price

Table 1: 12 month Pennsylvania and U.S. All Milk Income, Feed Cost, Income over Feed Cost ($/milk cow/day)

fig2

¹Based on corn, alfalfa hay, and soybean meal equivalents to produce 75 lbs. of milk (Bailey & Ishler, 2007)
²The 3 year average actual IOFC breakeven in Pennsylvania from 2015-2017 was $9.00 ± $1.67 ($/milk cow/day) (Beck, Ishler, Goodling, 2018).

Table 2: 12 month Pennsylvania and U.S. All Milk Price, Feed Cost, Milk Margin ($/cwt for lactating cows)

fig4

¹Based on corn, alfalfa hay, and soybean meal equivalents to produce 75 lbs. of milk (Bailey & Ishler, 2007)
²The 3 year average actual Milk Margin breakeven in Pennsylvania from 2015-2017 was $12.33 ± $2.29 ($/cwt) (Beck, Ishler, Goodling, 2018).

Figure 3: Twelve month Pennsylvania Milk Income and Income Over Feed Cost ($/milk cow/day)

fig5

²The 3 year average actual IOFC breakeven in Pennsylvania from 2015-2017 was $9.00 ± $1.67 ($/milk cow/day) (Beck, Ishler, Goodling, 2018).

Table 3: Twenty-four month Actual and Predicted* Class III, Class IV, and Pennsylvania All Milk Price ($/cwt)

Aug-20$19.77$12.53$18.10
Sep-20$16.43$12.75$18.00
Oct-20$21.61$13.47$18.80
Nov-20$23.34$13.30$20.20
Dec-20$15.72$13.36$18.80
Jan-21$16.04$13.75$17.30
Feb-21$15.75$13.19$17.40
Mar-21$16.15$14.18$17.90
Apr-21$17.67$15.42$18.40
May-21$18.96$16.16$19.30
Jun-21$17.21$16.35$19.10
Jul-21$16.49$16.00$19.01
Aug-21$16.15$15.75$18.73
Sep-21$17.35$15.93$19.33
Oct-21$17.34$16.04$20.20
Nov-21$17.66$16.12$20.37
Dec-21$17.63$16.22$20.42
Jan-22$17.40$16.34$20.18
Feb-22$17.40$16.53$20.28
Mar-22$17.42$16.67$20.37
Apr-22$17.48$16.85$19.78
May-22$17.48$16.89$19.80
Jun-22$17.48$16.93$19.83
Jul-22$17.52$17.04$20.02

*Italicized predicted values based on Class III and Class IV futures regression (Beck, Ishler, and Goodling 2018; Gould, 2019).

To look at feed costs and estimated income over feed costs at varying production levels by zip code, check out the Penn State Extension Dairy Team's DairyCents   or DairyCents Pro  apps today.

Data sources for price data

  • All Milk Price: Pennsylvania and U.S. All Milk Price (USDA National Ag Statistics Service, 2021)
  • Current Class III and Class IV Price 8/13/2021 and 8/16-8/19/2021 (USDA Ag Marketing Services, 2021)
  • Predicted Class III, Class IV Price (CME Group, 2021)
  • Alfalfa Hay: Pennsylvania and U.S. monthly Alfalfa Hay Price (USDA National Ag Statistics Service, 2021)
  • Corn Grain: Pennsylvania and U.S. monthly Corn Grain Price (USDA National Ag Statistics Service, 2021)
  • Soybean Meal: Feed Price List (Ishler, 2021) and average of Decatur, Illinois Rail and Truck Soybean Meal, High Protein prices, National Feedstuffs (USDA Ag Marketing Services, 2021)
Source : psu.edu

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