The USDA released its latest Ag Prices report on Sept, 30, including factors used to calculate DMC margins and payments. Based on Progressive Dairy preliminary analysis of USDA numbers, the August DMC margin is estimated at $10.83 per hundredweight (cwt), down $1.58 per cwt from July. Despite the decline, there will not be any indemnity payments for any insured level (Table 1) for August.
Milk price lower
The August 2020 announced U.S. average milk price decreased to $18.80 per cwt, down $1.70 from July’s average of $20.50 per cwt (Table 2). Year to date, the U.S. average milk price is $17.74 per cwt, about even with average prices in 2019 and 2017 over the same eight-month period.
Compared to a month earlier, changes in milk prices varied widely across major dairy states. Largest month-to-month increases were in Florida, Georgia and Virginia, where higher Class I prices contributed to price gains. In contrast, August prices declined $3.90 per cwt or more from July in Idaho, Iowa, Minnesota, Oregon and South Dakota.
August prices were $20 per cwt or higher in six states but under $18 per cwt in eight others. The lowest announced prices were in Michigan ($16.90 per cwt) and New Mexico ($17.10 per cwt); the high was $23.30 per cwt in Florida.
Feed prices slightly lower
Compared with July, August U.S. average feed costs were lower. The average price for a blend of premium and all alfalfa hay used in DMC calculations was $182 per ton, down $1 per ton from July. The August 2020 U.S. average corn price was $3.12 per bushel, down 9 cents; soybean meal averaged $290.18 per ton, down $1.07 per ton from July. That yielded an average DMC total feed cost of $7.97 per cwt of milk sold, down 12 cents from July (Table 3).
September margin headed lower
The projected DMC margin is headed lower next month. Based on milk and feed futures prices at the close of trading on Sept. 28, the DMC Decision Tool estimates margins are likely to slip to about $8.26 per cwt in September, triggering indemnity payments at the highest insurable margins of $9.50, $9 and $8.50 per cwt levels. Thereafter, monthly margins are projected to be above $9.50 per cwt until February 2021.
A reminder: The sign-up period for the 2021 DMC program will be held Oct. 12-Dec. 11, 2020, through Farm Service Agency (FSA) offices.
September Class III milk price dips further
The Federal Milk Marketing Order (FMMO) Class III milk price fell to a four-month low in September at $16.43 per cwt. It’s $3.34 less than August and $1.88 less than September 2019.
The September 2020 Class IV milk price improved slightly, up 22 cents from August to $12.75 per cwt. It’s still $3.60 less than September 2019.
Through the first nine months of 2020, the Class III price averaged $17.48 per cwt, the highest for that period since 2014. The January-September 2020 Class IV price averaged $13.53 per cwt, down $2.68 from the same period a year ago and the lowest since 2016.
PPD implications
The September Class I base price was previously announced at $18.44 per cwt, putting the Class I base-Class price back in a more normal relationship. The gap between the September Class III and Class IV prices also closed somewhat, to $3.68 per cwt. That’s down from $7.24 per cwt in August and $10.78 per cwt in July.
Final September uniform prices and producer price differentials (PPDs) will be calculated for most FMMOs in the middle of October. With the falling Class III price, the incentive for depooling is diminished. That should reduce the depth of negative PPDs, at least for the time being.
October a different story
That’s going to change in October. The USDA has announced the October 2020 FMMO Class I base price at $15.20 per cwt, down $3.24 from September. Meanwhile, the approval of up to $1 billion for a third round of the USDA’s Farmers to Families Food Box Program boosted cheddar block prices and pushed Class III milk futures higher.
October’s FMMO Class III and IV prices won’t be announced until Nov. 4. However, as of Sept. 30, October Chicago Mercantile Exchange (CME) Class III milk futures closed at $19.53 per cwt, about $4.33 per cwt higher than the announced Class I base price. And the expected gap between Class III and Class IV futures prices will widen in October: As of Sept. 30, the CME October Class IV futures price closed at $13.86 per cwt, $5.67 per cwt under the Class III price.
After an extreme inversion in Class I base and Class III prices in June and July, leading to widespread depooling and extremely negative PPDs, FMMO milk class pricing returned to a somewhat normal position in August and September.
After sitting below $2 per pound for much of August, cheddar block prices moved back above $2 on Sept. 3, posting small increases through the first half of the month. On Sept. 17, the USDA announced the third round of the Farmers to Families Food Box Program contracts sending cheddar block prices up more than 22 cents per pound the following day. CME cheddar block prices peaked at $2.6475 per pound on Sept. 21, averaging about $2.58 per pound for the week.
With the Class I base-Class III price inversion in October and the widening Class III-Class IV price gap, the incentive for depooling and resulting negative PPDs returns. 
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Dave Natzke
- Editor
- Progressive Dairy
- Email Dave Natzke
