Update Highlights

What if? Milk production growth management plans evaluated

With industry concerns over an imbalance in milk supply and demand, two dairy economists have compiled results of a study evaluating alternative milk production growth programs.

Natzke dave
Dave Natzke
Editor / Progressive Dairy

“Analyses of Proposed Alternative Growth Management Programs for the U.S. Dairy Industry” was published in August 2021 by Charles Nicholson, Cornell University, and Mark Stephenson, University of Wisconsin – Madison. The analysis and a video discussion featuring Nicholson and Stephenson is available on the Dairy Markets and Policy website. They are also in the process of creating an online tool designed to help individual producers consider what such a program might mean for their business.

The analytical models are applied to actual milk production between January 2014 through 2021. The study looked at five primary areas of interest, on and beyond the farm: Milk prices, variation in milk prices, net farm operating income, impacts on domestic and export sales, and government expenditures. Additionally, the study analyzed the potential impact on new farms entering dairying.

Five different growth management plan (GMP) designs were compared with a baseline (no growth management program). Major components of each program compared variable rates of adjustable market access fees (MAF) and percentages of allowable milk production increases (API).

Farm sizes were based on five different annual production averages, with one also incorporating a managed grazing system. Those sizes included: less than 1 million pounds of milk per year, a Wisconsin grazing farm starting at 1.2 million pounds of milk per year, 1-5 million pounds per year, 5-20 million pounds per year and greater than 20 million pounds per year.

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Overall, all five GMP designs enhanced farm milk prices and income margins over feed costs and increased average net farm income, while reducing average price variation. The magnitude of these effects was associated with the size or nature of the MAF and API structures. Here’s a summary:

  • Milk prices and variation: Average annual milk prices were increased between 73 cents and $1.41 per hundredweight (cwt) depending on the design of the GMP. Including refund payments for farms staying within API limits, average milk revenue would be higher by $1.15-$2.13 per cwt. Federal Milk Marketing Order (FMMO) Class II and Class IV milk prices would see the biggest impact. The reduction in the average variation in milk prices was moderate, ranging from 16 to 21 cents per cwt. Nicholson notes one caveat related to overall milk prices: Implementation of growth management plans would not necessarily result in higher prices all the time. Higher average prices were generated by lifting the low sides of cyclical price changes but leaving seasonal price variation.

  • Farm profitability: Farms that stayed within the allowable growth tended to see a larger average net farm operating income, in part because of higher milk prices from the market, but also because they would receive payments from the pool of MAF dollars.

  • Milk production: Compared to the baseline scenario with no growth management plan in place, the most restrictive GMPs would slow the average annual U.S. milk production from 2.5% to 2.1% per year.

  • Retail prices: U.S. retail fluid milk prices would increase by as much as 15 cents per gallon, with retail prices for other dairy products rising by 3% to 11%.

  • Domestic sales: Average annual growth of U.S. dairy product dairy product sales was reduced by 1%-3%.

  • Trade: Average annual growth of U.S. dairy product exports slowed by 2% on a volume basis and 1.5%-2% on a value basis. The value of U.S. dairy product imports would increase due to price enhancements.

  • U.S. government expenditures: Government spending on programs to provide dairy support would be cut by as much as $2.5 billion. The decline includes lower Dairy Margin Coverage (DMC) and Margin Protection Program for Dairy (MPP-Dairy) indemnity payments.

Among other findings, the study showed the establishment of GMPs would accommodate the entry of 60 new farms annually, with milk production up to 5 million pounds per year and a three-year grace period without payment of MAFs.

An initial assessment suggests that a GMP would not have mitigated the price shocks experienced in the first months of the COVID-19 pandemic but would have reduced the number of farms experiencing negative net farm operating income (NFOI).

DMC: A tale of three risk management levels

Penn State Extension specialists Robert Goodling Jr. and David Swartz provide some financial analysis of the DMC program in their latest Dairy Outlook report, released in late August.

The analysis, covering the first 30 months of the DMC program that was implemented in 2019 under the 2018 Farm Bill, compares premium costs and indemnity payments at three levels of protection: $4, $6.50 and $9.50 per cwt. The example dairy covered 90% of its 5 million pounds of annual milk production history. Net indemnity means the total payouts less any fees and premiums.

The minimum level of $4 per cwt margin coverage has yet to result in an indemnity payment since 2019, and with a minimum $100 fee, there is hardly any impact on an annual basis for the level of production.

At $6.50 per cwt coverage, performance has been mixed. In 2019, it did not trigger any indemnity payments, but did have a 7-cent-per-cwt cost. Two months triggered payments in 2020, resulting in a net indemnity of 6 cents per cwt, and currently 2021 is tracking to be somewhere in between.

The top level of coverage, $9.50 per cwt, resulted in a net indemnity of about 50 cents per cwt in 2019 and 2020, and currently is poised to return nearly $2.80 per cwt if margins remain in their sub-$7-per-cwt range for the remainder of 2021.

It should be noted 2021 only contains the first six months (milk production and premium cost). The July DMC milk income over feed cost margin was $5.68 per cwt, triggering indemnity payments at the $6 level and above.

No official date has been announced for the 2022 DMC enrollment period, but most likely will occur in the October to December 2021 time frame.

Global Dairy Trade index shows strength

Global Dairy Trade (GDT) dairy product prices posted their strongest gains since early March, boosting the overall index by 4% in the latest auction, held Sept. 7. Prices for all major product categories were higher:

  • Skim milk powder was up 7.3% to $3,274 per metric ton (MT, or about 2,205 pounds).
  • Butter was up 3.7% to $4,948 per MT.
  • Whole milk powder was 3.3% to $3,691 per MT.
  • Cheddar cheese was up 3.6% to $4,328 per MT.
  • Anhydrous milkfat was up 3.1% to $5,970 per MT.

The next GDT auction is Sept. 21.

Ag Economy Barometer: Outlook better but clouded by inflation

Results from the monthly Purdue University/CME Group Ag Economy Barometer survey indicate producer attitudes concerning short- and long-term financial conditions improved slightly amid mounting concerns about inflation.

The Ag Economy Barometer provides a monthly snapshot of farmer sentiment regarding the state of the agricultural economy. The survey collects responses from 400 producers whose annual market value of production is equal to or exceeds $500,000. Minimum targets by enterprise are as follows: 53% corn/soybeans, 14% wheat, 3% cotton, 19% beef cattle, 5% dairy and 6% hogs. Latest survey results, released Aug. 3, reflect ag producer outlooks as of Aug. 23-27.

Among highlights in the most recent survey:

  • The outlook for farm financial performance and revenue expectations improved to its highest level since May.

  • Producers are becoming increasingly concerned about farm input price inflation. On the August survey, 39% of respondents said they expect input prices to rise by 8% or more in the next 12 months; 21% expect farm input price inflation to exceed 12% over the same period.

  • Compared to recent months, fewer producers said they planned to reduce farm construction activity. Farmers’ machinery purchase plans reported on the August survey were unchanged from those reported in July.

“Industry reports continue to suggest that supply chain challenges are hampering farmers’ machinery purchase plans and could also be playing a role in reduced construction activity,” said James Minert, director of Purdue University’s Center for Commercial Agriculture and principal investigator for the survey.

In a series of questions on cover crops, about two-thirds of respondents said they use or have used cover crops in the past. Of those, 59% said they plant cover crops on 25% or less of their total acreage, while 10% of cover crop users reported planting cover crops on 75% or more of their acreage.  end mark