Shrinking Milk Price Basis a Rising Concern in Midwest

December 3, 2015 03:42 PM
 
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With processing plants at capacity across much of the Midwest, a shrinking basis is causing milk checks to contract at a time when every penny counts.

In Minnesota, the milk price basis—the difference between the mailbox price and Class III—has shrunk to about 75¢/cwt. For the past few years, it was nearly $2. But early this year, as milk plants filled up, basis starting declining, says Marin Bozic, a dairy economist with the University of Minnesota.

“I do believe a portion of this basis will be recovered in 2016,” says Bozic. But before it does, a further decrease of 25 to 35¢/cwt could occur in the next few months.

Tim Swenson, a business consultant with AgStar Financial Services, agrees. “We will get a little back, but it will still be 50 to 75¢/cwt less than historical levels,” he predicts.

And Minnesota is not alone facing the phenomenon. Iowa dairy farmers, which had enjoyed a basis above $2/cwt in 2013 and 2014, were seeing basis levels of just 25 to 35¢/cwt. this past summer. And milk flowing from Michigan into Wisconsin manufacturing plants has also shrunk basis there, though many Badger State producers are still seeing $1.50 being added to Class III prices.

Bozic also gave his annual milk price prediction for 2016 at $17/cwt. There’s a 20% chance the price could fall below $16 and a 10% chance it could shoot above $18.50, he says. (For comparison, last year Bozic predicted a $17.50 mailbox price for the year. The actual average will be about $17.40.)

Swenson notes that the Class III futures market is offering stronger prices in the second half of 2016. “You need to work with your marketing experts to protect those better prices,” he says. “And they could move even above where they are now, so you need to protect these values and still leave some upside potential.”

Dropping cull cow prices are also a concern. Where cull cows were selling for more than $100/cwt for much of the year, those prices have now fallen to $80, $70 or even $65/cwt. “We will not be able to rely on beef prices next year or even the year after for cash flow,” says Bozic.

Both Bozic and Swenson spoke this week at the Minnesota Milk Producers Dairy Conference and Expo in St. Cloud, Minn.

 

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