Despite high feed prices, producers’ desire to push milk production remains alive and well. That could quash the effectiveness of the Dairy Security Act's supply management provision.
Now that the holidays are behind us, the market seems to have settled down to usual, for the time being. Cash business is being done without much fanfare, giving the impression buyers and sellers may be comfortable at present price levels.
The much anticipated tightness in the market that was predicted during the summer did not materialize. There were numerous farms that went out of business, sending high numbers of cattle to slaughter. However, younger animals took their place, and balanced rations kept milk production strong. Farmers found ways to reduce feed costs and increase production during a difficult year.
One thing I had anticipated this year was that dairy producers were going to utilize more and different feeds in balancing rations, and that is exactly what many have done. Producers have discovered feed stuffs that actually have lowered costs and improved milk production. The prolonged period of the low milk/feed ratio, which has been unprecedented, forced dairy producers to look for changes. The December ratio was 1.65, the lowest it has been since September, ending the year with an average milk/feed ratio for 2012 of 1.52 -- the lowest in history. This has stimulated greater culling. But the fact that milk production has been growing and feed prices have been slowly declining could keep the desire to push milk production alive and well.
Congress extended the 2008 farm bill, leaving business as usual. A new farm bill, once adopted, may contain the Dairy Security Act. However, the desire of dairy producers to increase milk production when milk price is higher could render the Dairy Security Act (the proposal for managing milk production to keep milk prices supported along with a margin insurance) somewhat useless.
Those who want to have the ability to improve milk production as they see fit are unlikely to utilize this voluntary program. I have yet to talk to a dairy farmer who is interested in taking part in this program if it is included in the farm bill. Rough surveys have been taken which indicate about 40% of the nation’s dairy farmers are interested in taking part of this voluntary program if it is included in the farm bill.
I think this percentage may be a bit high. After all, if only a minor percentage of farms take part in this, it may end up like the voluntary CWT Herd Retirement Program, which had little, if any, impact on overall milk prices during the time it was active. In fact, the first five years of the program resulted in U.S. cow numbers increasing despite the Herd Retirement Program. And we all know what happened in 2009 when milk prices fell to 21-year lows. That triggered cow numbers to decline as culling picked up aggressively.
A vicious cycle could result if those who signed up for margin insurance and milk supply management would be required to reduce milk output, because producers who did not sign up for the voluntary program would push milk production to take advantage of the resulting higher milk prices. This could create greater supply and, once again, lower prices, resulting in the repeat of those taking part in the supply management provision to be required to reduce production again, and on and on.
One thing that has not been lacking the past two years is periods of high milk prices. Record high All-Milk prices were established in both 2011 and 2012. The problem is that high feed prices were also taking place, leaving us essentially trading dollars for dollars. Margin insurance could reduce some of this risk, as well as other tools such as futures and option strategies.
One can only hope that world demand for dairy products continues to grow. This growth will be essential for better milk prices. Our purpose is to continue to produce high quality dairy products that domestic consumers and the world will want. If the U.S. cannot compete internationally, then whatever domestic programs are implemented will have limitations as well as only short-term effect on milk prices.
I recommend stepping up and protecting feed prices for the year. The decline of grain prices seen over the past month is the gift we have been waiting for. If you have already purchased call options or call option spreads, roll those options down to a lower strike price. There is significant upside price risk if the weather pattern does not change by this spring.
- World Agricultural Supply and Demand report on Jan. 11
- Annual Crop Production report on Jan. 11
- Quarterly grain stocks report on Jan. 11
- Dairy Export report on Jan. 11
- Global Dairy Trade auction Jan. 16
- Advanced Class I price for February on Jan. 16
- December Cold Storage report on Jan. 22
- December Milk Production report on Jan. 23
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.