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, co-owner of Fair Oaks Farms in Fair Oaks, Ind., laid out the numbers at Dairy Forum 2009 in Orlando last month. McCloskey milks 15,000 cows and also serves as CEO of Select Milk Producers in the Southwest and Continental Milk Producers in the Midwest.
With feed costs at 10¢/lb. of dry matter, he 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. "A cow milking 50 or 60 lb./day will actually be losing us money.”
The prospect of the milk price not even covering the variable cost of feed, let alone labor, electricity and semen, is one that few producers alive today have ever faced.
Even though Milk Income Loss Contract payments will resume this month, they'll only offer a partial recovery of costs. There have already been calls for the Obama administration and Congress to bolster those payments as part of the national economic stimulus package. Whether those calls are heard remains to be seen.
Hindsight is always 20/20,
but dairy advisors point to last summer, when $19 milk was there for the hedging. A few producers have protected their margins for 2009: 4% to 5% of Dairy Farmers of America members and 3% of Dairylea members, says Katherine Rossini, director of risk management and analysis for Dairylea in Syracuse, N.Y.
The number was higher in 2008. But because of the run-up in feed, fuel and fertilizer last year, fewer producers were willing to lock in milk prices, Rossini says.
If nothing else, this year will be a learning opportunity for risk management. Most dairy co-ops offer a variety of hedging tools. And there's also livestock gross margin for dairy insurance (see Bonus Content).
For some highly leveraged producers, none of this will matter. For everyone else, taking risk management seriously and locking in margins when opportunities present themselves only makes business sense. If 2009 doesn't convince you of that, nothing will.
to see estimates of MILC payments.
to read about LGM Dairy from the January issue of Dairy Today.