Center Focus Column

Reasons for Optimism

Milk futures prices on the Chicago Mercantile Exchange (CME) are showing more movement recently, with the average Class III milk price for the next 12 months averaging $16.53 per hundredweight as of May 8th. That’s up about $1.70 per cwt. from where Class III milk prices averaged the past 12 months. Class IV milk futures prices for the next 12 months average $17.14 per cwt., up $2.06 per cwt. from the average of the announced Class IV prices for the past 12 months.

Analysts are starting to cite the positive momentum in most dairy commodity markets as a reason for optimism, with domestic prices for butter and cheese both ticking upwards in recent weeks. Global prices are also rebounding, with the dairy price index on the Global Dairy Trade being an indicator of the world market. The average dairy price index on the latest GDT session was up 0.4 percent, marking 11 sessions of increased prices.

Recent USDA reports have also provided some momentum. The latest USDA Milk Production report, released in late April, reported a 0.4 percent decrease in the nation’s total milk supply, with 86,000 fewer head of dairy cows in the U.S. than were here a year ago. This month was the first time in six years that the USDA reported a decrease in the milk supply, with several dairy states, including Pennsylvania, reporting steep losses in milk production.

Production of both cheese and butter is also falling, with the USDA’s latest Dairy Products report showing butter production down 3.9 percent from a year ago while total cheese production was down 0.7 percent. Stocks are coming back in balance, with the latest Cold Storage report showing butter stocks down 1 percent from a year ago. However, natural cheese stocks were still up 4 percent.

Focus on the Controllables

While there is positive momentum in the marketplace right now, uncertainty still exists on how long it will last and how dramatic the rebound will be. A recent analysis from Penn State shows the average cost of production in Pennsylvania was around $18.66 per hundredweight in 2018. Even with a $17 Class III milk price, that would still leave mailbox prices for most farms at or below breakeven levels.

Stress levels are high on all Pennsylvania dairy farms right now. The evidence of that is in the latest USDA Milk Production report. Cow numbers are down 30,000 head over the past year in the Commonwealth, with milk production per cow down 25 pounds year over year in March. USDA numbers also show farm numbers in Pennsylvania declining by nearly 6 percent in the past year.

The Penn State analysis broke farms into groups based on their cost of production and show comparisons between the highest COP group and the lowest. The average herd size and the average herd production numbers were not dramatically different between the groups. The difference came down to feed costs, labor costs and overhead costs, which included debt and interest payments.

Understanding your own cost of production and the factors that influence it is critical to navigating your way through an uncertain and volatile market, even as milk prices start to rebound. Penn State estimates it will take two years of prices near 2014 levels for dairy farms to recover from the past four years of low milk prices. No analysts are predicting prices to get that high anytime soon.

Penn State has some great tools to help you quickly calculate your cost of production. All you need is your Schedule F from your taxes and a few other basic numbers, and you can get a good estimate of where you stand on an annual basis. However, it is a number that can change based on feed costs, weather and other input needs. Calculating it on a quarterly or even monthly basis could give you a better handle on how your dairy is tracking with market expectations.

Risk Management a Necessity

The USDA is offering new risk management programs to help you protect yourself against falling milk prices. The new Dairy Margin Coverage (DMC) program replaces the Dairy MPP program and offers much better coverage than was available in the past. Enrollment in DMC will begin on June 17, 2019, with coverage levels for Tier 1 and for Tier 2 production levels of less than 5 million pounds available up to $9.50 per cwt.

Milk production will retroactively be covered starting January 1, 2019. The actual margins for January, February and March are $7.99, $8.22 and $8.85 per hundredweight, respectively. This means farmers will know before you sign up that the program will have a guaranteed payment in 2019. For farms with the full 5 million pounds, just the first quarter of the year will net a payment of nearly $6,500. All farms should consider signing up once the enrollment period opens. Enrollment for DMC will close after September 20, 2019.

The USDA also began working with crop insurance providers in October 2018 to offer the Dairy Revenue Protection program. This is more complicated to understand than DMC and is based off CME milk futures prices. But if you understand your cost of production and are willing to follow the markets, the program could allow you to put a floor under your milk price higher than what you will have just by using DMC.

It is good to see optimism in the marketplace, but farms can no longer afford to just hope the roller coaster will continue going up. Controlling what you can control, knowing your cost of production and having a risk management strategy in place has become a necessity to move forward in an uncertain marketplace. Resources are available to help you do that. To learn more about Penn State’s cost of production resources, contact your local extension agent or call the Center at 717-346-0849.

More information about the new DMC Program will become available as the rules are updated. Contact your local FSA Office to learn more. Sign-ups must be done in person, so you’ll have to visit your local office after June 17 to enroll. Participation in the Dairy RP program must be done through an authorized crop insurance provider. The USDA has a list of crop insurance agents that offer Dairy RP online at www.rma.usda.gov/tools/agent.html.

The Center’s Risk Education Manager Zach Myers is available to help farms understand their risk management options and develop a plan. He can also help you better understand the Dairy RP program. If you would like to meet with him, please contact the Center at 717-346-0849 or email him directly at zmyers@centerfordairyexcellence.org.

Editor’s Note: This column is written by Jayne Sebright, executive director for the Center for Dairy Excellence, and published monthly in the Lancaster Farming Dairy Reporter.