Projected milk prices aren’t good, and insurable margins using various safety nets and marketing tools aren’t much better, according to Alan Zepp, risk management program manager at Pennsylvania's Center for Dairy Excellence (CDE).
Zepp reviewed the federal Livestock Gross Margin-Dairy (LGM-Dairy) and Margin Protection Program for Dairy (MPP-Dairy), and puts and options on the Chicago Mercantile Exchange (CME) futures market during his monthly “Protecting Your Profits” conference call, Jan. 24.
Market fundamentals haven’t changed much in the past three to four months, with U.S. cow numbers holding steady and milk production per cow inching upward, he said. U.S. dairy product inventories, while historically high, are not especially burdensome by themselves, but European Union (EU) intervention stocks of milk powder are still overhanging the market. Despite modest gains in U.S. milk production, total world milk production continues to grow and will add downward pressure on global milk prices.
Looking at demand, U.S. consumer confidence is high, supporting domestic consumption, and the relative weakness of U.S. dollar should be supportive for exports, Zepp said.
U.S. benchmark dairy product prices remain competitive with global prices. As of Jan. 23, the CME block cheese price stood at $1.46 per pound, compared to $1.58 per pound on the Global Dairy Trade (GDT) and $1.72 per pound in the EU. CME butter was $2.16 per pound, compared to $2.22 per pound on the GDT and $2.29 per pound in Germany. CME nonfat dry milk was trading at 67 cents per pound, compared to 82 cents per pound on the GDT and 76 cents per pound in Germany.
Margins
The next LGM-Dairy policy sales period is Jan. 26-27, offered through certified crop insurance agents. Dairy income margins insurable under LGM-Dairy for the 10-month period (March-December 2018) average $6.53 per hundredweight (cwt), as of Jan. 23, using minimum feed ration costs.
The cost of a zero-deductible LGM-Dairy policy for the 10-month period (using a ration similar to the MPP-Dairy program) was 52 cents per cwt, with a $1 deductible policy costing about 13 cents per cwt.
Looking at selected months further out, the insurable LGM-Dairy margin for September-December 2018 would cost 71 cents per cwt; a $1 deductible would cost 61 cents per cwt.
Although neither would be considered “cheap,” LGM-Dairy coverage would be slightly less expensive than using futures contracts and put options.
Although they’ve improved slightly, 2018 CME Class III futures contracts averaged just $14.73 per cwt as of Jan. 23; Class IV futures contracts averaged $14.25 per cwt.
Zepp said September CME Class III futures contract settled at $15.71 per cwt as of Jan. 23. An at-the-money put option ($15.75 per cwt) cost 86 cents; a $14.75 put option (similar to a $1 per cwt deductible LGM-Dairy policy) cost 43 cents per cwt.
Current futures markets project MPP-Dairy margins at about $8 per cwt.
Zepp said the unattractive insurable margins mean LGM-Dairy sales have not been as brisk as earlier in the fiscal year and fears of the program running out of money have dissipated. A proposal in a federal disaster bill, designed primarily to cover hurricane costs, removed the cap on federal funds available for LGM-Dairy. That provision has been approved in the House, but has yet to be considered by the Senate.
Find Zepp’s archived Protecting Your Profits podcast on the Center for Dairy Excellence website. Next month’s call is scheduled for Feb. 21, with the next LGM-Dairy policy sales period set for Feb. 23-24. 
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Dave Natzke
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