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Wildcards Are Driving the Milk-Price Outlook

Aug 30, 2013

With compressed dairy margins and continued price volatility, producers must take charge of their marketing decisions to secure profits.

Kristen SchulteBy Kristen Schulte, Iowa State University Extension and Outreach

Variability is a key word this year as dairy producers deal with a wide range of weather conditions. Some have gone from too wet to too dry in the space of six weeks. Several top dairy producing states are experiencing their second year of extreme weather conditions.

For dairymen, continued drought or prevented planting acres have affected the quantity and quality of feed available along with price. All three factors—quantity, quality and price—will continue to be issues for producers this year.

While there are several factors affecting milk prices, the relationship of corn and milk prices is one factor to watch. Since corn prices declined below the psychologically important $5.00 mark during the last part of July, the corn chart and the milk chart have moved in tandem.

Corn prices have come down from historical highs due to larger number of acres planted and expected yield potential. However, the growing season has resulted in variable yield expectations. The resulting price of new crop corn still has potential variability due to several late-season factors. One is timing of the first frost; in areas where crops were planted late, an early frost could impact the final stages of crop development and result in a yield hit. Potential first-frost dates and corn maturity are on a collision course in several parts of the country.

Feed demand is perhaps the biggest wild card in the corn demand situation. Lower prices have the potential to increase feed demand. In addition, feed demand from the poultry sector could especially increase due to higher numbers and improved profitability.

Many dairy producers across the Midwest have seen above-average milk production this summer due to the cooler weather. Milk production has seen increases in most regions except for the western states. With the overall increased milk production, dairy product inventories have also increased—demand has not absorbed the additional supply. Will the hot weather moving across much of the Midwest this week, school being back in session, and suppliers anticipating holiday product sales be enough to put bullish moves on milk prices?

Corn and milk prices have seen large movements in the past year. In 2012, the U.S. All-Milk price varied $5.90 (from a low of $16.20 in June and July to a high of $22.10 in November). On a percentage basis, this is 36.4% and is the second-highest price variance within a calendar year in the past 20 years. The All-Milk price has varied $0.80 so far in 2013.

The national corn price varied $1.56 (from $6.07 to $7.63) in 2012, which is a 25.7% move. Looking at the 2012 corn marketing year (September through August of 2013), the variation is only $0.36. New-crop corn is expected to be in the range of $4.50 to $5.30 per bushel range according to the latest USDA supply/demand report. Remember, expected prices received by producers (paid by dairymen) will vary.

With variability on both sides, where are milk margins or income over feed costs at currently? Prices continue to change; earlier this summer I anticipated the change in feed costs to be larger than the change in milk prices. While the reality in price volatility may vary for producers based on location and basis, margins have further compressed from the softening of milk prices over the past few months.

I challenge producers to ask themselves, "What has our operation done to secure profit margins?" With changing input prices, "Have I recalculated cost of production for my dairy operation?" How often should cost of production be recalculated depends on the variability of input prices the operation endures. The more volatile input prices mean recalculating costs should be done on a monthly to quarterly basis. Current costs of production will assist the producer in making the right marketing decisions.

Finally, with changing market influences and prices, I encourage producers to not let emotions ride with marketing decisions. Calculating one’s cost of production and having a marketing plan can help to make profitable business and marketing decisions. The softening of milk prices can trigger too many emotions and make decision making too difficult. Remember, margins create profits and opportunities.

Kristen Schulte is an Iowa State University Extension and Outreach Farm Business Management Field Specialist. Contact her at kschulte@iastate.edu.

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