What’s behind dairy producers’ struggle with the extended period of low milk-to-feed ratios?

Dairy farmers have been struggling with low milk/feed ratios for a long time. In fact, the last time the ratio was above 2.0 was in March 2011. The ratio has been above 2.0 just 18 months out of the past 63 months. A level of 3.0 has historically been used as a profitability level wherein expansions will take place.

Interestingly, during this extended period of low milk/feed ratios, we have experienced record high milk prices. There have been periods of low milk prices in the past that have actually yielded the best milk/feed ratios due to correspondingly low feed prices. The idea of high milk prices does not necessarily mean more profitability. So then the question arises as to why higher prices push greater milk production and increasing cow numbers. According to the numbers, it does not seem to make sense. However, part of it has to do with psychology and some of it has to do with each individual operation.

Farmers always desire to produce more when prices are higher. It does not matter if it is corn, soybeans, wheat, cattle, hogs, etc. Those bigger paychecks always make one feel good. I realize that can only go on for so long, until income does not cover input for a period of time.

Those who raise quite a bit or all of their feed have been in a better position during this extended period of low ratios. Margins improve when a person is not at the mercy of the market. Quality feed can be harvested and stored for feed rather than having to pay for that quality. I do want to add that it is not always the case that those who purchase their feed are at the mercy of the market. Those who utilize the futures and options market to hedge feed purchases can achieve the same or similar results of those who raise their own feed.

Many farmers have had a real taste of this over the past year as drought conditions forced those who generally have their own feed into purchasing it. This really put a crimp on the income of many dairy producers. There were high hopes this year would be better and in some areas it is. Other areas have really been struggling with significant winterkill in alfalfa and the delayed planting of corn. In some areas, it looks like corn may not even be able to be planted. The impact of this is yet to be seen, but dairy farmers are resourceful and have always been able to find a way to squeeze the milk out of the cows efficiently.

This efficiency keeps cheese production strong. The latest USDA "Dairy Products" report showed total cheese production for the month of April at 3.2% above a year ago, with 928.2 million pounds produced. Of that total, American types increased 2.4% and Italian types rose 2.9%. Current strong production as well as strong production in previous months continues to push inventory levels higher. Seasonally, inventory will increase until June, and then it begins to decline as milk production and cheese yields decline. This continues through the end of the year. The current level of milk production and cheese production may extend this growth a bit longer unless demand increases greater than it has been or production declines in the next month or so.

Cheese and curd exports during the month of April increased 6% over the previous year, totaling 25,551 metric tons (mt). Whey exports were up 2.2%t to a total of 43,058mt. Strong exports are expected to continue the rest of this year but maybe not as strong as earlier anticipated when drought gripped New Zealand and Australia. Butter exports during the month of April fell 28.8% from a year ago, totaling 4,267mt. This is the same decline experienced in 2012 compared to 2011. Cooperatives Working Together has not assisted in the export of butter since April 29. It is not surprising butter stocks are growing at a rapid pace. The bright spot was that exports of nonfat dry milk for the month jumped 40.5% to 55,187mt.

Upcoming reports:

- World Agricultural Supply and Demand report on June 12
- Global Dairy Trade auction on June 18
- May Milk Production report on June 19
- May Cold Storage report on June 21

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.

The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. There is risk of loss in trading and my not be suitable for everyone. Those acting on this information are responsible for their own actions. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. This material has been prepared by an employee or agent of AgDairy LLC and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions.  

The corn crop is not yet in the bin. Dairy farmers and livestock producers need to be concerned about the growing season ahead.

Concern began to develop weeks ago as corn planting progress was drastically behind the five-year average and the slowest on record. This raised concerns over crop production and the potential for higher corn prices. Current corn prices are already high with cash prices generally above futures prices in most areas.

After a week showing record corn planting progress, most of those concerns have been put on the back burner. There are areas in which planting will remain behind, with some acres possibly switched to another crop or not planted at all. However, this does not seem to concern the market at this time as those areas are not the main focus of traders.

We may have been able to plant a lot in a week’s time, but there is concern over the progression of the crop, with emergence now significantly behind. It will take exceptional weather for the crop to catch up to the historical average. The current focus is on planting, with little thought given to the rest of the summer at this point. That is understandable as rain coverage over the past few weeks has improved soil conditions in many areas, also eliminating much of the concern carried over from last year.

Dairy farmers and livestock producers still need to be concerned as there is a lot of growing season to move through. The crop is not yet in the bin. The corn price a year ago was virtually at the same level it currently is for the new-crop December contract. One only hopes we do not see a repeat of last year and that good crops are produced with ample carryover keeping feed and food prices manageable.

What happens to grain production will have a large impact on milk production. Milk prices will generally follow corn prices. A lower corn price will spur greater feed demand, thereby improving milk production. The opposite is also true. However, this may not be as closely correlated as it has been. This past year taught farmers new things when it came to maintaining milk production during a higher feed price year. Many alternative feed sources and products were tried in the effort to reduce cost while yet maintaining milk production. Rather than abandoning these alternative feeds and ration mixes, what was learned needs to become a part of the business plan of the operation. Even in a plentiful year of grain, the milk/feed ratio for any operation may be improved with the use of some alternative feeds.

Even in adversity, farmers can get the milk from the cows. Milk production in April moved higher than last year by 0.2%. There were just two months showing lower production than a year earlier. This is incredible, given the tight margins experienced in the past year.

One has to wonder what this year will bring. USDA already anticipates record milk production. If estimated production is reached, it would be the fourth consecutive year of record milk production. Production has exceeded the previous year 14 of the past 16 years. Over the past five years, milk production has increased 14.7 billion pounds, or 7.9%.

My recommendation is to purchase call options or call option spreads to protect expected feed needs for the coming year. If grain prices increase from weather problems such as they did last year, this will certainly improve profitability. Purchase at-the-money calls and sell calls 70 cents higher for a net cost of 22 cents. Purchase $5.50 calls for 30 cents by themselves to provide unlimited price protection.

Upcoming reports:

- May Agricultural Prices report on May 31
- California 4a/b prices on May 31
- Dairy Products report on June 4
- Global Dairy Trade auction June 4
- World Agricultural Supply and Demand report on June 10

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.

The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. Those acting on this information are responsible for their own actions. This material has been prepared by an employee or agent of AgDairy LLC and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There is risk of loss in commodity trading that may not be suitable for recipients of this publication.

As hay stocks decline, some Central region dairy farmers are sacrificing milk production in lieu of stretching their feed supply.

It certainly has been a difficult year. Farm profitability in most cases has been very slim, with the national average milk-to-feed ratio ranging from a low of 1.29 in July to high of 1.73 in both October and November. Despite this range, profitability did not improve very much.

On top of this, many farms were short on feed due to the drought requiring further cash outlay over and above what they would normally have had to pay for feed. The cold, wet spring this year will delay harvest of winter forage and first cutting hay in the Midwest and Northeast, further taxing feed supply.

One result of this delay has been the reformulating of rations to find substitutes for feed supply in order to stretch inventory. Reports from milk handlers in the Central region are that milk receipts are not steadily increasing as expected. Farmers are sacrificing milk production in lieu of stretching feed supply. Another difficulty many Upper Midwest farmers are dealing with is severe winter kill of the hay crop. Many farms in Wisconsin have 50% or more loss of alfalfa fields, requiring alternative planting decisions to be made. This certainly is not welcomed and adding insult to injury.

Hay supplies have been dwindling as more hay land is being sacrificed to row crops. Drought conditions have reduced production, leaving hay supply significantly reduced.

USDA reported U.S. hay stocks as of May 1 at 14.156 million tons, down 34% from a year ago. By comparison, hay stocks on May 1, 1989, after the severe drought the previous summer, were 17.507 million tons. In fact, hay stocks as of May 1 are the lowest since 1950 when USDA began recording them.

When looking at the state breakdown of hay stocks, there are some interesting changes over the past year. Eight states bolstered their hay stocks from last year. These states were California, Colorado, Georgia, Kentucky, New Jersey, Oklahoma, South Carolina and Texas. The state of Texas showed the largest increase, with hay stocks growing 700,000 tons to a total of 1.650 million tons, which are the largest hay stocks of any state. However, supply declines were severe in many states, with some falling as much as 50% or more. South Dakota showed the largest decline, with stocks falling from 2.4 million tons on May 1, 2012, to current stocks of 850,000 tons.

While dealing with a significant reduction in hay inventory and increasing prices this past year, hay exports continue to grow. Current hay exports account for 4% of the nation’s annual production. Japan, Taiwan, and South Korea have been our traditional buyers, with China, Vietnam, United Arab Emirates and Saudi Arabia recently importing more U.S. supply.

Hay prices have risen significantly in recent years, with alfalfa price reaching $200 per ton for the first time in October 2011. Since then, price has been at or above that level 13 times with the past nine consecutive months above $200. A record high price was set in March at $219 per ton.

Hay acreage and production has suffered due to strong grain prices and drought, and this likely will not change anytime soon. The bright spot could be that in time production of hay could increase the interest of farmers to again plant more acres for income, erosion control and demand.

Upcoming reports:

- Global Dairy Trade auction on May 15
- April Milk Production report on May 20
- April Cold Storage report on May 22
- Advanced Federal Order Class I price on May 22

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.

The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. There is risk of loss in trading and my not be suitable for everyone. Those acting on this information are responsible for their own actions. This material has been prepared by an employee or agent of AgDairy LLC and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There is risk of loss in commodity trading may not be suitable for recipients of this publication.

Instant information and world influences often drive dairy markets, but wise traders also follow proven pricing patterns.

It is interesting to note how all of us generally personify the market. We give it a mind and a life. One of the reasons we tend to do this is because it can many times act like an uncontrolled being that moves as it wills. So we have coined the terms, "The market knows where it wants to go" or "Oats knows where corn will go" and a few others.

These phrases are coined because of patterns that have been established over years of trading. This is much like the "Farmers Almanac" or a book I once read entitled, "Weather Wisdom," which recorded the atmospheric events old-timers observed for years and the resulting weather patterns experienced. I would have to say that many of these observations seem to be more accurate than the current weather technology available to us today.

When it comes to marketing, much of the same can be said. Certain market patterns can still be followed and, in the end result, be more accurate than the day-to-day volatility. However, technology and the instant access to information around the world as well as twitter opinions can have a significant affect on day-to-day and well as minute-to-minute trading activity.

This was seen when an Associated Press Twitter account was hacked last week, and false information was transmitted resulting in the stock market "flash crash," only to regain value is short order after the tweet was discovered to be bogus. This is a fearful situation and one that can have significant impact on the markets. Panic produces volatility, but panic is short-lived and should not be a consideration when using the markets for price protection.

Dairy markets have been moving through a situation similar to this over the past few months. Weather in New Zealand and Australia has been the catalyst for Global Dairy Trade auction prices showing dramatic increases over the fear of world supplies tightening as the year progressed.

Figures released by Statistics New Zealand indicated China as the largest importer of dairy products from the country for the first quarter of this year. Exports to China increased 32% from a year earlier. Since 2008, China’s imports from New Zealand have more than tripled. This is getting quite a bit of attention from the industry, especially due to the weather situation New Zealand has been experiencing. If supply from the country is reduced substantially, China will likely be looking for supply from anywhere else it can find it. Interestingly enough, the U.S. was and is the third largest importer from New Zealand, according to the report.

Not only has the market changed as far as instant information and world market influence, but it has also changed from the standpoint of comfortability. Grain markets seem to have become more comfortable with tighter inventory and lower stocks-to-use ratios while, on the other hand, dairy markets seem to be more comfortable with larger inventory.

On the latest "Cold Storage" report released last week by the USDA, American cheese stocks increased 19.2 million pounds from February to 680.2 million pounds, up 4% from last year and the highest stocks since 1986. Swiss cheese stocks increased 4.0 million pounds to 30.5 million pounds, up 6%. Other cheese stocks increased 13.8 million pounds from the previous month to 391.4 million pounds, up 7% over last year. This put total cheese inventory at 1.1 million pounds, 5% from a year ago and the highest since 1986. Butter stocks increased 19.5 million pounds for the month to 254.8 million pounds, 22% higher than last year and the highest stocks for the month of March since 1993. Even with these high inventory levels, the industry feels the market is comfortable and not burdensome.

Upcoming reports:

- April Agricultural Prices report on April 30
- Global Dairy Trade auction on May 1
- April Federal Order class price on May 1
- California Class 4a/4b prices on May 1
- Dairy products report on May 2
- World Agricultural Supply and Demand report on May 10

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through his website.

The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. Those acting on this information are responsible for their own actions. This material has been prepared by an employee or agent of AgDairy LLC and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There is risk of loss in commodity trading that may not be suitable for recipients of this publication.

Buyers have been stepping up aggressively to get their hands on cheese, butter and nonfat dry milk.

Market-moving information has been in abundance recently. Both domestic and international news has been plentiful as far as dairy is concerned. This information has turned market participants more bullish. Cash prices have been moving somewhat contra-seasonal and have increased more than had been anticipated early in the year.

The potential impact on dairy product supply stemming from the drought in New Zealand has had the greatest underlying support. A significant decline of milk production from dried up pastures prompted many to dry off cows early. Others are using supplemental feed, which is increasing costs. March production is estimated to be nearly 30% below last year. There is time before the majority of the cows will freshen, and for rain to replenish soil moisture and promote pasture growth. However, it does not look to promising at present. There are some forecast models showing rain events in the next few weeks, but it is still too early to tell.

Cheese and butter buyers have been stepping up aggressively to get their hands on available supply. Prices have been increasing as sellers have been reluctant to offer product. Inventory is being held with confidence, waiting for higher prices as well as retaining supply for later in the year.

Nonfat dry milk (NDM) has been the leader of the cash complex. Buyers have been falling over themselves attempting to obtain product despite current fundamentals. Prices were anticipated to increase, but many are surprised at the speed in which it has happened. Grade A nonfat dry milk price jumped over 28 cents in the past month. This volatility is not unusual in this market, with early 2011 recording a very similar rise in price over a three-week period.

Production schedules are increasing now that spring flush is underway. Supply seems sufficient with resellers offering loads but at the high end of the price range. NDM production in February totaled 62,369 metric tons, down 20% from last year. Cumulative production is down 14.0% for the first two months of the year versus last year. Lower production in the face of supply concern from Oceania has lit a fire under the market.

USDA did not make a large change in milk production or dairy prices on the latest World Agricultural Supply and Demand Estimates report. Projected milk production was reduced 100 million pounds from March, totaling 201.8 billion lbs. If realized, milk production would be 1.5 billion pounds more than 2012.

Milk and product prices were increased with the current estimate for the All-Milk price projected to average $19.70, up $1.19 from 2012. This certainly is good news. However, the concern over higher feed prices is alive and well. USDA did not increase grain ending stocks as much as most had anticipated. This puts us in a serious situation if weather is not ideal this growing season. The nation is already experiencing less than ideal weather. Soil is too cold and too dry in some areas. Other areas of the country continue to experience snow and rain with below normal temperatures keeping farmer out of the fields

USDA will reinstate the monthly milk production reports after there was significant outcry from industry personnel. The report will be a bit different as the surveys of production will be using government agencies, cooperatives and other organizations rather than the surveys it had done. This may not be as accurate but certainly will be welcomed by the industry.

My hedging recommendations are similar to my last article. Hedge feed prices now before prices regain what was lost since the Quarterly Stocks report. Corn has already regained 20 cents with soybeans up 30 cents from the lows. Use call options and call option spreads that will protect against higher prices while at the same time allow for lower prices if ideal weather is experienced and lower prices unfold.

Upcoming reports:

- Global Dairy Trade auction on April 16
- March Milk Production report on April 19
- March Cold Storage report on April 22
- Livestock Slaughter report on April 25

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.

This material has been prepared by an employee or agent of AgDairy LLC and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions.

The thoughts expressed and the basic data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed herein are subject to change without notice. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There is risk of loss in commodity trading may not be suitable for recipients of this publication. Those acting on this information are responsible for their own actions.