June Dairy Month activities are well underway, but dairy producers will have to wait a little longer to celebrate a milk price improvement. Students are headed for summer vacation, so demand for fluid milk will be tested. With heat stress imminent, milk production will trend downward.
April milk prices lower
April 2017’s U.S. average milk price of $16.50 per hundredweight (cwt) was down 80 cents from March and the lowest since last October, according to the USDA’s monthly Ag Prices report. Despite the decline, the April 2017 U.S. average price is still $1.40 cwt more than April 2016, and the January-April 2017 average of $17.80 cwt is $2.27 per cwt more than the same period a year earlier.
All major states saw milk price declines in April (Table 1) compared to a month earlier, with prices down at least $1 per cwt in 12 states. Compared to a year earlier, April milk prices were up $2 per cwt in Florida and Washington.
MPP-Dairy margin shrinks
While overall feed costs remained steady, the lower average milk price cut into April dairy farmer income margins calculated under the Margin Protection Program for Dairy (MPP-Dairy).
April national average prices were lower for corn ($3.43 per bushel, down 6 cents from March) and soybean meal ($305.67 per ton, down $14.67). However, the average price for alfalfa hay jumped to $148 per ton, up $13 from March and the highest average since April 2016.
The overall feed cost was $7.95 per cwt of milk sold, up just 0.5 cent from March and the highest since July 2016 (Table 2). Subtracted from the average milk price, the April MPP-Dairy income margin was $8.55 per cwt, down 80 cents from March and the smallest margin since July 2016.
The April MPP-Dairy calculations are the second half of two-month factors used to determine potential payments for the March-April pay period. The two-month margin average was $8.95 per cwt, meaning no MPP-Dairy indemnity payment will be made.
Other risk management tools
Alan Zepp, risk management program manager at Pennsylvania's Center for Dairy Excellence (CDE), reviewed MPP-Dairy, the Livestock Gross Margin-Dairy (LGM-Dairy) program and puts and options on the Chicago Mercantile Exchange (CME) futures market during his monthly “Protecting Your Profits” conference call in late May.
While end-of-May Class III milk futures prices were about $1 per cwt below the five-year average, the milk income over feed cost margin (using MPP-Dairy feed price factors) was about $1.40 per cwt higher than the five-year average, Zepp said.
Using milk and feed futures prices, the MPP-Dairy margin for the remainder of 2017 was projected at just over $10 per cwt. Although conditions can change, it appears unlikely there will be MPP-Dairy indemnity payments through the end of the year.
Producers buying Livestock Gross Margin for Dairy (LGM-Dairy) at the end of May could have protected margins averaging $8.54 per cwt for the 10-month period (July 2017-April 2018) at a cost of 60 cents per cwt. Cost for a $1 deductible policy was 17 cents.
Comparatively, a put option on a July Class III milk futures contract of $16.75 per cwt would have cost 47 cents, with a $15.75 put (equal to a $1 deductible LGM-Dairy policy) costing 11 cents per cwt. A put option on a September Class III milk contract of $17.25 per cwt cost 69 cents, with a $16.25 put (equal to a $1 deductible LGM-Dairy policy) costing 28 cents per cwt.
Other major dairy exporting countries are starting to ramp up production, but U.S. dairy product prices are mostly in alignment with world prices and remain competitive in export markets, Zepp said. U.S. cheese and butter inventories remain large, but domestic demand is strong.
May margins stronger
Dairy farmer margins strengthened over the first half of May and then held steady over the second half of the month, according to Commodity & Ingredient Hedging LLC. Rising milk prices provided most of the improvement, with feed costs holding mostly steady.
Margins remain at historically strong levels, near or above the 80th percentile of the previous 10 years through the first quarter of 2018.
Milk prices continue drawing support from strength in dairy product values, particularly cheese and butter. Chicago Mercantile Exchange (CME) butter prices, currently around $2.40 per pound, have not been this high since September of 2014. Global butter prices are also at lofty levels.
On the feed side of the ledger, neither corn nor soybean meal registered much movement in early May, although feed costs were up slightly in the second half of the month, as early-season corn crop conditions were down from last year due to excessively wet weather in the eastern Corn Belt.
Mark Linzmeier, CEO of MarginSmart, said early-June milk and feedstuff futures prices reduced profitability over the next 12 months compared to a week earlier. Nearly all feedstuff prices have continued to slide lower.
Price outlook
On the strength of higher dairy product prices, federal milk marketing order (FMMO) Class III and IV and California Class 4a and 4b prices are all higher for May compared to April, offsetting April-to-May declines in both FMMO Class I and California Class 1 prices.
Compared to the end of April, Chicago Mercantile Exchange (CME) barrel and block cheddar cheese prices ended May up 12.75 cents and 26.5 cents per pound, respectively. The CME butter price jumped 30.5 cents per pound, and the nonfat dry milk price was up 8.75 cents per pound.
As of June 1, June 2017 CME Class III and Class IV futures prices were up about $1 and $1.50 per cwt from May’s settlement, respectively, and both move above $17 per cwt for August.
At the end of May, Class III milk futures prices were about $1 per cwt below the five-year average, according to Alan Zepp, risk management program manager at Pennsylvania's Center for Dairy Excellence. However, thanks to lower feed costs, the income margin (using MPP-Dairy feed price factors) was about $1.40 per cwt higher than the five-year average.
Global Dairy Trade index rises again
The Global Dairy Trade (GDT) price index rose 0.6 percent during the latest auction, held June 6. Nearly all products offered – with the exception of anhydrous milk fat and whole milk powder – posted price gains, led by cheddar cheese (up 14.5 percent) and skim milk powder (up 7.9 percent). It marked the sixth consecutive increase in average auction prices. The next GDT auction is June 20.
April cull cow prices higher
Monthly U.S. cull cow prices continue to rise since bottoming out in December 2016. April 2017 cull cow prices (beef and dairy combined) averaged $72.20 per cwt, up 70 cents from March 2017, but $9.30 per cwt less than April 2016. Year-to-date, the cull cow price average is $67.65 per cwt, down $10.65 per cwt from January-April 2016.
The pace of dairy cow culling remained slightly behind last year. For April 2017, federally inspected milk cow slaughter was estimated at 228,100 head, 43,000 less than March but 1,100 more than April a year ago. Through the first four months of 2017, dairy cows slaughtered under federal inspection were estimated at 1.011 million head, about 10,000 less than January-April 2016.
Northeast milk dumping provision extended
Northeast Federal Milk Marketing Order (FMMO) market administrator Erik Rasmussen has approved a second temporary period for pooling of milk disposed or “dumped” at the farm or other non-plant locations until Aug. 31. The original period was March 1–May 31, 2017.
In May, Dairy Farmers of America, Inc. (DFA) requested pool handlers be allowed to again temporarily dispose of surplus milk at a farm or non-plant location, while retaining the status of pooled producer milk. Cooperative milk handlers Agri-Mark, Inc., Upstate Niagara Cooperative, Inc. and Cayuga Marketing LLC submitted statements supporting DFA’s request.
Nine pool handlers reported dumping surplus skim milk in April, but no raw farm milk was requested to be dumped at a farm or non-plant location, according to a letter posted on the Northeast FMMO website.
A similar provision is in effect in the Mideast FMMO through July 31.
Dairy products: Butter production lower
USDA’s Dairy Products report indicated April 2017 total cheese output (excluding cottage cheese) was 1.04 billion pounds, 3.7 percent more than April 2016, but 2.1 percent less than March 2017. Italian-type cheese production totaled 448 million pounds, 2.2 percent above April 2016, but 4.4 percent below March 2017. American-type cheese production totaled 419 million pounds, 5.3 percent above April 2016 and 0.8 percent above March 2017. Butter production was 164 million pounds, 4.1 percent below April 2016 and 6.8 percent below March 2017. 
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Dave Natzke
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- Progressive Dairyman
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