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The Spread Widens between Milk Prices and Feed Costs

Aug 30, 2012

Although projected price indexes are fairly stable over the next year, the spread between milk and feed prices may further tighten margins for producers.

Kristen SchulteBy Kristen Schulte, Iowa State University Extension Farm and Agribusiness Management Specialist

Margins continue to tighten as the 2012 year proceeds, but the milk price outlook provides some relief. Although milk prices have increased over the summer, they have not kept pace with feed commodity price increases. Dairy product exports and prices have remained strong so far in 2012, helping to support higher milk prices despite the continued increase in milk production.

Historically feed input costs have been 40% to 60% of total variable costs. Current outlook prices push the upper limit and in some cases may surpass 60%. Feed input costs have ratcheted up over the past few years with the per-bushel corn price increasing over 200% since 2005, while the per-ton alfalfa hay price has doubled in the same timeframe.

The first graph below shows prices for milk (announced Class III), corn and alfalfa hay as a price index from 1980 forward. When comparing corn and alfalfa hay prices, with the exception of the mid 1990s, prices were fairly stable until mid-2000s. Since the end of 2009, alfalfa hay has increased from a 1.71 to over 3.0 price index where it has remained since August 2011.

Schulte chart 1

Similarly, the corn price index increased from the end of 2005 to 2008, subsided until late summer 2010, then started to climb and has been between a 2.25 and 3.00 price index since February 2011. These feed price indexes are compared to the announced Class III milk price index, which has ranged from 0.75 to 1.91 since 2000. The spread of price indexes between feed inputs and milk continues to widen.

In the graph below, the dashed lines represent projected price indexes out to August 2013 based on futures or projected prices. Projected corn and alfalfa hay price indexes surpass current and historical record-high price indexes over the next year. However, Class III milk futures prices are at levels comparable to early 2008 and 2011 and below the record-high milk price index in August 2011.

Schulte chart 2

Although projected price indexes are fairly stable over the next year, the spread between milk and feed prices may further tighten margins for producers. These prices represent U.S. average prices. Price indexes and spreads will be different for regions across the U.S.
 

The USDA-NASS August crop report indicates U.S. corn yield is estimated to be reduced to 123.4 bushels per acre, down 23.8 bushels from last year. Soybean yield is also expected to be down, with the average bushels per acre at 36.1 bushels per acre, down 5.4 bushels from last year. Alfalfa hay production is down 16% across the U.S. compared to 2011. Tightened supplies of all feed input commodities will continue to push prices upward, further tightening margins for dairy producers.

Looking ahead, adequate feed inventory and financial planning may be crucial for producers to survive the coming year. Fields affected by drought may have less forage tonnage yield and, specifically, corn silage may have varying nutrient quality due to low grain yield compared to a typical growing year. Corn silage and forage inventories will need to be assessed to determine need to purchase additional forage or feedstuffs or to alter rations to have sufficient feed inventory for the year.

Increasing feed efficiency is one way to alleviate financial strain from increased feed prices. Purchase of additional feed at current projected market prices may affect cash flow and liquidity of the operation. Although milk price outlook is positive for coming months, feed commodity prices continue to increase at a greater rate. Re-evaluating cash flow and liquidity positions given the current commodity price levels and making needed adjustments will be key for producers to remain in a financially healthy position over the next year.

Kristen Schulte is an Iowa State University Extension farm and agribusiness management specialist. She can be reached at 563-547-3001or kschulte@iastate.edu.  

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