Will the Farm Bill Cure What Ails Us?

Published on: 11:51AM Apr 30, 2012

Low milk prices and tight margins have generated quite a bit more interest in the farm bill, especially in the potential for a supply management program and the production margin protection program.

Overall, the market has not been supportive to milk prices. Both stability and weakness have been seen in all sectors and have turned traders more bearish on the price outlook. Somewhat stable cheese prices have not been enough to support Class III futures.
Current calculations of underlying cash prices, relative to futures, show May through July contracts at a discount to the Federal Order current price calculation as of the week ending April 27. However, weakness in dry whey is having a definite impact on price outlook. Heavy cheese production is keeping dry whey supply plentiful and readily available for demand.
Manufacturers are reducing prices to encourage sales. The current market setup is reminiscent of 2007 when prices reached nearly 80 cents and then fell over the next two years, dropping below 16 cents. The difference is that, in 2007, high prices impacted demand when they caused end users to find alternatives. This took some time to overcome because, once demand is affected, it takes time to bring back that demand. Now prices are declining due to heavy production and increasing supply.
Nonfat dry milk is facing the same issue as whey, with supplies continuing to increase. Powder production has been heavy as dryers have been absorbing some of the plentiful milk supply and running at capacity for quite some time. Regional prices continue to weaken as manufacturers cut prices and end users are purchasing on an as-needed basis. This is not just a domestic issue, Nonfat dry milk/skim milk powder prices are declining world wide. The latest Global Dairy Trade auction showed skim milk powder price down 7.6 %. All other products traded on that auction were also lower with the overall trade weighted average declining 9.9%.
Current price projections are for milk prices to remain depressed for the foreseeable future. Milk production remains strong. First-quarter milk production this year was up 5.2% and the strongest first-quarter growth since 2000. Cow numbers continued to increase in March, with the nation’s dairy herd up 86,000 head from a year ago. Per-cow production was up 59 lb. Even though cull cow prices are good and feed prices are high, tightening the milk/feed ratio significantly, producers are improving milk production in order to generate cash flow.
Low milk prices and tight margins have generated quite a bit more interest in the farm bill, especially the potential for a supply management program and the production margin protection program. A lot of debate will take place before the farm bill is finalized and adopted. Some indicate the supply management program aspect of the bill will come under extreme fire. Both the industry and dairy producers are on both sides.
It is interesting to note that when milk prices are high and income exceeds cost of production virtually no one wants a supply management program. When price is low and margins non-existent, many are clamoring for a supply management program. This debate has raged for quite some time but now seems to becoming closer to some form of adoption. Interestingly enough, Europe has been looking at eliminating its quota system in the next few years.
A concern of the current farm bill mark-up from the agricultural committee is the inclusion of this section: “Limitation. -- A dairy operation may only participate in the production margin protection program or the livestock gross margin for dairy program under the Federal Crop Insurance Act 25 (7 U.S.C. 1501 et seq.), but not both."
This section does not appear in the House version at the present time.
There will be much debate before this is all said and done. We certainly do not want an elephant that will be carried around for the duration of the next farm bill.
Upcoming reports:
- Agricultural Prices report on April 30
- Fonterra auction on May 1
- California Class 4a/4b prices on May 1
- Dairy Products report on May 2
- April Federal Order class prices on May 4
- World Agricultural Supply and Demand report on May 10
- California Class I on May 10
- Fluid milk sales on May 11
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.