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January 2009 Archive for Dairy Talk

RSS By: Jim Dickrell, Dairy Today

Jim Dickrell is the editor of Dairy Today and is based in Monticello, Minn.

February milk price won’t cover feed costs

Jan 27, 2009

By Jim Dickrell


For perhaps the first time since the Great Depression, February milk prices might not even cover the cost of feed to produce that milk.

Mike McCloskey, owner of Fair Oaks Farms at Fair Oaks, Indiana, laid out the numbers at Dairy Forum 2009 in Orlando last week. McCloskey milks about 15,000 cows and also serves as CEO of Select Milk Producers in the Southwest U.S. and Continental Milk Producers in the Midwest.
 
With feed costs at 10¢/lb of dry matter, McCloskey says it costs about $9.50/cwt of milk produced to feed the cow, her replacement and her share of the dry cows. “Our milk check in the West will be $9/cwt in February,” he says. 

“How we used to cull cows was based on fixed cost, and the theory was to always run the dairy full. Now we can’t cover our variable costs,” he says.
A cow milking 50 or 60 lb./ day was still milked because she was still contributing to cover fixed costs. “In February, a cow milking 50 or 60 lb/day will actually be losing us money,” he says. “And I think we will see a tremendous amount of culling.”

That prospect, where the milk price will not even cover the variable cost of feed let alone labor, electricity and semen, is one that very few dairy producers alive today have ever faced. 
 
The milk-to-feed price ratio is the worst since, well, just about ever. In 2008, M-F ratio dipped below 2.07 in March and has never recovered. In fact, since 1985, the M-F ratio dipped to 2.07 or less just twice, in May 1996 and May 1997.
 
The difference, even in those years, was that feed costs were still relatively low with milk prices dragging the ratio down. In 2008 and now in 2009, it’s the combination of both high feed prices and low milk prices that are creating a double whammy of red ink.

Albert DeVries, with the University of Florida, has developed some sophisticated culling decision tools. They  account for a whole host of factors, from current production level, days in milk, open status and feed costs. For more information on the program, click here.

“There are still going to be some cows that are going to pay for themselves, especially those early in lactation with feed efficiencies at 1.8 or 1.9,” he says. “But there will be more open, late lactation cows which will be candidates to cull faster now.” 
 
These cows, with feed efficiencies of 1.1 or 1.2, will be barely covering feed costs. The dilemma is whether you cull these cows even if you don’t have a fresh heifer to replace her, he says.
 
Even though Milk Income Loss Contract (MILC) payments will resume in February, they’ll only offer a partial recovery of costs. For the University of Wisconsin’s estimate of MILC payments, go to: http://future.aae.wisc.edu/collection/software/current_MILC_est.xls
 
The coming rough ride will be a tremendous wake-up call on the importance of risk management. Either producers maintain huge piles of cash and liquidity to weather these kinds of negative cash flow, or they participate in forward pricing to protect their margins. (Follow this link for information on Livestock Gross Margin-Dairy insurance. Each has its costs, but this coming storm has the potential to put highly leveraged producers or those unable to tap equity out of business.

“This is a least-cost business,” says McCloskey. So producers have to maximize efficiency, understand their costs, and use risk management tools when the market presents opportunities. 
 
His advice: Don’t panic. Keep your long-term strategic goals for your business front of mind when making any kind of short-term, tactical adjustments. And if you haven’t already done so, vow to manage future volatility when the market presents opportunities. 
 
Good advice. Good luck.
 

--Jim Dickrell is editor of Dairy Today. You can reach him via e-mail at jdickrell@farmjournal.com.

This column is part of the Dairy Today eUpdate newsletter, which is delivered to subscribers biweekly and includes dairy industry analysis, dairy nutrition information as well as the latest dairy headline news. Click here to subscribe.

 

Milk the MILC program

Jan 07, 2009

It’s been so long since USDA sent out Milk Income Loss Contract (MILC) payments (February 2007), you might have forgotten about the program. 
 
Sign-up for the new and improved program actually began December 22.  There are a few new twists to the program.
 
The new annual production limit is 2.985 million lb. of milk, at least through August 31, 2012. The MILC payment will be paid on 45% of the difference between the Class I price in Boston and $16.94. (That is a reversion to the payment rate of the original program, compliments of the 2008 Farm Bill. It had been scaled back to 34% in 2006, 2007 and 2008 as a cost-saving measure.)

Also new is a National Average Dairy Feed Ration Adjustment (NADFR), which will be calculated using corn, soybean and alfalfa to make up a 16% protein dairy feed. The prices used in the calculation will be posted each month by USDA’s National Agricultural Statistics Service.

If feed prices exceed $7.35/cwt, the $16.94 trigger price will be adjusted upward by the percentage that the feed price exceeds $7.35. In USDA’s hypothetical example, the feed price was assumed to be $10.05/cwt. This exceeds the $7.35 trigger feed price by 36.73%. That percentage is then multiplied by 45% which is then multiplied by $16.94. The result, $2.80, is then added to the $16.94 Boston Class I trigger to come up with a new trigger price of $19.74/cwt.

If the actual Boston price is $18, the MILC payment is calculated by subtracting $18 from $19.74 times 45% to come up with a payment of 78.3¢/cwt. I know it’s confusing. But without the feed adjustor, there would have been no payment since $18 is higher than $16.94. 
 
(I also plugged in actual feed prices for October and preliminary feed prices for November. Even though the feed prices in those months were higher than $7.35--$8.80 in October and $8.10 in November, neither would have been high enough to trigger an MILC payment. The reason: The Class I price in Boston was still higher than the adjusted price.)

The new MILC program also has a new Adjusted Gross Income limitation of $500,000. If your non-farm income exceeds $500,000, you are not eligible for the MILC payment. While few dairy producers I know hit that trigger, it’s one more form you’ll be required to fill out.

Based on the futures market (and not factoring in the feed adjustment trigger), the biggest MILC payments could come in the first quarter this year. You have until January 21 to sign up for payments starting this January, or for later months, until the 14th of the month before the selected MILC production start month.
 
So if you’re a large producer, with multiples of 150 cows, you might want to apply soon to get the highest payments possible. 
 
For more information on the MILC program, go to: www.fsa.usda.gov, and click on Price Support. Or, visit your friendly, local FSA office. Good luck milking the program. This year, you’re gonna need it.

--Jim Dickrell is editor of Dairy Today. You can reach him via e-mail at jdickrell@farmjournal.com.

This column is part of the Dairy Today eUpdate newsletter, which is delivered to subscribers biweekly and includes dairy industry analysis, dairy nutrition information as well as the latest dairy headline news. Click here to subscribe.

 

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