Will California Join the Federal Milk Market Orders?

Published on: 11:36AM Aug 06, 2012

Red ink among Golden State dairies prompts calls for change, while the Midwest’s tightening milk supply boosts price premiums.

July certainly has been a tough month, not only in terms of heat and drought but also in terms of profitability.

Milk prices and feed prices did not keep pace with each other. The All-Milk Price for July increased 40 cents to $16.60, which was certainly good news but not in light of the substantial increase of grain prices. The average corn price jumped 99 cents per bu., increasing to $7.36, while the soybean price increased $1.70 per bu. to average $15.60.

The only bright spot of feed prices used to calculate the milk/feed ratio is the alfalfa hay price, which declined to $198.00 per ton, down $3.00. This resulted in a milk/feed ratio of 1.29 -– the lowest ever. However, it was not the lowest in terms of income-over-feed cost, which was $3.73, with the lowest occuring in June 2009 when it fell to $3.51. The income-over-feed cost is derived from subtracting the feed price consisting of the value of 51 lb. of corn, 41 lb. of alfalfa hay, and 8 lb. of soybeans from the All-Milk Price.

High feed prices and low milk prices reducing the income-over-feed costs have led to discussions about California joining the Federal Milk Marketing Orders (FMMO). The state’s 4b cheese milk price has been averaging $2.00 below the FMMO Class III cheese milk price since 2011. With margins tight or non-existent, the California Dairy Campaign (CDC) is calling for Congress to pass legislation to enable California to join the FMMO.

CDC is a grassroots organization of dairy farmers who are working to encourage lawmakers and the dairy industry to be more responsive to the needs of dairy farmers. Earlier, CDC submitted a petition to the California Department of Food and Agriculture to raise producer milk prices to be competitive with surrounding states, but the CDFA rejected the petition. The CDC is trying to build support for this change for the state. However, many dairy farmers are reluctant to back this kind of federal regulation at this point as it would mean discarding the state’s quota system.

Milk handlers indicate renewed competition for patrons in some areas. Some are offering premiums for milk, which is creating competition among milk plants. Farmers may look hard at these premiums in light of the milk price and high feed prices. This certainly is a sharp contrast to three to four months ago when premiums were eliminated, and in some cases penalties were imposed on overproduction due to the excessive milk supply.

Milk supply in the Midwest has declined to the point that spot loads of milk are commanding a premium upwards of $2.50 per cwt. This premium may increase as bottlers are already beginning to gear up for the upcoming school year.

Cheese prices have been trading in a range from $1.46-$1.72 for blocks and $1.46-$1.70 for barrels since the beginning of the year. It is interesting to note that current cash prices indicate a Class III price just above $17.00. Current futures prices for the last quarter of the year indicate cheese prices of around $1.91. If that would come to fruition, Class III futures really have no need of changing from where they already are. However, increasing cheese prices will push futures higher until each month converges to cash.

The market generally will keep a premium in contracts until such time a premium is no longer needed – unless, of course, the market is very bearish with declining prices, which will then generate an inverted market with later months lower than front months. For right now, the perception of traders is a tightening milk supply and higher prices as the year progresses.

Upcoming reports:

- World Agricultural Supply and Demand report on August 10
- Global Dairy Trade auction on August 15
- Livestock, Dairy, and Poultry report on August 16
- July milk production report on August 17

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.

The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. There is risk of loss in trading and my not be suitable for everyone. Those acting on this information are responsible for their own actions.