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Dairy’s Income-over-Feed Cost Is the Best Ever

Published on: 12:15PM Mar 03, 2014

Milk prices are breaking records and history is being made.

Dairy farm profitability is the best it has ever been, according USDA numbers released on Feb. 28. A milk/feed ratio of 2.55 is certainly not the highest it has ever been, but it the best since January 2008. However, an income-over-feed cost (IOFC) is the best in history at $15.01 per cwt.

One would have anticipated the years of the late 1990s and early 2000s, when the ratio was higher, would have produced the best IOFC, but such was not the case. The previous best IOFC was in September 2007 when the IOFC was $14.94 with a milk/feed ratio of 3.17.

We must remember that these numbers do not necessarily mean dairy producers are in the best financial position in history. These numbers are strictly a calculation of the All-Milk price divided by the milk/feed ratio to derive the IOFC. Costs of goods and services, land costs, etc., have certainly changed over the years, making this quite different for each individual farm. Each farming operation will have its own milk/feed ratio and IOFC, based on whether feed is grown on the farm, whether it is purchased, or whether it is a combination of the two. However, this does put the industry in perspective as we enjoy record milk prices.

There are numerous reasons supporting milk prices - one of them certainly being the weather. The Midwest has struggled with severe cold weather for over two months, hindering milk output. Eastern regions of the country have suffered through times of heavy snows as well as ice storms. Despite these hardships, milk production in January was 0.9% higher than last year in the country. It does look like weather will begin changing in the near future, which could allow for greater milk production growth. Other than the drought in California, good weather has prevailed in the West, with a definite division noted on the milk production report. Most Western states showed production increases while states in the East showed production declines from a year earlier.

Cheese manufacturers are also providing a reason for milk prices at lofty levels. Manufacturers are keeping production close to demand. No one wants to produce more than they need, with the desire to keep inventory from building at the plant level. If prices fall, plants do not want to be left with high-priced inventory. Cheese orders have slowed in some areas and in some varieties due to high prices, which results in plants slowing production to match this demand.

Buyers have been holding back in hopes lower prices will materialize before they need to purchase supply to build their own inventory. Any weakness in prices brings buyers in to pick up what supply they can. It appears the industry is caught in a cycle with no real answer as to what will break it out of that cycle. Despite this scenario, cheese inventory did increase in January out of necessity and not out of the desire to build inventory for later demand.

Milk continues to be diverted from cheese production to butter/powder production. This has provided ample supply for the domestic and international markets. Orders are being filled easily with inventories growing. Greater volumes of butter and Grade A nonfat dry milk are showing up at the spot market.

One thing we know for sure is that records have been are being broken and history is being made. Make sure you are taking advantage of these prices by hedging prices and paying down debt. Chances are prices will not remain like this forever.

Upcoming reports:

- Global Dairy Trade action on March 4
- World Agricultural Supply and Demand report on March 10

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.

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