Update highlights

Natzke dave
Dave Natzke
Editor / Progressive Dairy

Margin weaker but no DMC payment for December

The USDA released its latest Ag Prices report on Jan. 31, including factors used to calculate December 2022 DMC margins and potential indemnity payments. Combining higher feed costs and a lower average all-milk price, the December DMC margin was $9.76 per hundredweight (cwt), down $1.13 cents from November but still above the top Tier I coverage level of $9.50 per cwt. There will be no indemnity payments at any coverage level.

December 2022 DMC at a glance

DMC program margin factors compared to previous month:

  • Alfalfa hay: $327 per ton, down $4 from November 2022
  • Corn: $6.58 per bushel, up 9 cents
  • Soybean meal: $462.85 per ton, up $26.10
  • Total feed costs: $14.94 per cwt, up 23 cents
  • Milk price: $24.70 per cwt, down 90 cents
  • Margin above feed cost: $9.76 per cwt, down $1.13
  • DMC indemnity payments: None

Source: USDA Farm Service Agency, National Ag Statistics Service and Ag Marketing Service, Jan. 31, 2023

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Milk prices lower

The December 2022 announced U.S. average milk price fell 90 cents from November to $24.70 per cwt, a three-month low. The milk price average was still $3 higher than December 2021, and the annual average was $25.56 per cwt, the highest on record.

December milk prices were lower than the month before in 23 of 24 major dairy states, with Michigan unchanged. Among individual states, average prices were down $1.30-$1.50 in Arizona, Florida, Georgia, Kansas, New Mexico, Texas, Utah and Virginia. The high price for the month was in Florida at $28.10 per cwt; the low was in New Mexico at $22.20 per cwt.

Compared to a year earlier, December 2022’s U.S. average milk price was up $3.50 per cwt or more in California, Florida, Georgia, Indiana, Oregon, Virginia and Washington.

Feed costs higher

In addition to the lower average milk price, the DMC margin tightened due to higher overall average feed costs. The feed cost for each month is calculated by summing three numbers: (1) the corn price per bushel times 1.0728, plus (2) the soybean meal price per ton times 0.00735, plus (3) the alfalfa hay price per ton times 0.0137.     

December feedstuff prices yielded an average DMC total feed cost of $14.94 per cwt of milk sold, up 23 cents from November but the lowest since May.

Looking ahead

The deadline to enroll in the 2023 DMC and Supplemental DMC program was Jan. 31. The January DMC margin will be announced on Feb. 28, 2023.

Last updated on Jan. 31, the DMC decision tool projected the January 2023 margin at $8.18 per cwt, which would trigger DMC indemnity payments at $9.50, $9 and $8.50 coverage levels. Thereafter, projected margins weaken substantially, falling below $7 per cwt February through June and remaining below $9.50 through October.

Looking back

With no payment in December, DMC indemnity payments were issued in only two months in 2022, August and September. Total payments were estimated at about $84.3 million. 

Other operating costs mostly lower

Outside of feed – and not factored into DMC margins – other costs were mixed but mostly lower. The December index of prices paid for commodities and services, interest, taxes and farm wages was unchanged from November 2022 but nearly 10% more than December 2021. Machinery costs dipped 0.3% from November but were up 11% from December 2021. The December fuel cost index was down 17% from November but 14% more than December 2021. Fertilizer prices dipped 0.3% from November but remained 11% higher than December 2021.

All-milk, mailbox price spread widened slightly in October

The gap between October 2022 average “mailbox” prices and comparable “all-milk” prices grew to about $1.04 per cwt, the widest in 12 months (Table 1). However, the monthly spread remained smaller than that seen frequently in the first half of 2021.

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Based on a preliminary look at two USDA milk price announcements:

  • During October, U.S. all-milk prices averaged $25.90 per cwt, up $1.50 from September 2022.
  • The October 2022 mailbox prices for selected Federal Milk Marketing Orders (FMMOs) averaged $24.86 per cwt, up $1.46 per cwt from September 2022.

The October spread was the widest since October 2021. While several cooperatives announced “market adjustment” deductions to cover rising transportation and labor costs at the end of September 2022, the October 2022 increase in the spread between all-milk and mailbox prices was substantially lower than a year earlier.

The October spread between individual states or regions again varied widely, with a difference of about -$2.65 per cwt in Florida and Georgia to -27 cents per cwt in Wisconsin.

All-milk prices are reported monthly by the USDA National Ag Statistics Service (NASS). The all-milk price is the estimated gross milk price received by dairy producers for all grades and qualities of milk sold to first buyers, before marketing costs and other deductions. The price includes quality, quantity and other premiums, but hauling subsidies are excluded.

The mailbox price is the estimated net price received by producers for milk, including all payments received for milk sold and deducting costs associated with marketing. Mailbox prices are reported monthly by the USDA’s Agricultural Marketing Service (AMS) and generally lag all-milk price announcements by a month or more. The price announcements reflect similar – but not exactly the same – geographic areas.

The difference in the two announced prices can affect dairy risk management, since indemnity payments under the Dairy Margin Coverage (DMC) are based on the all-milk price, while Dairy Revenue Protection (Dairy-RP) and Livestock Gross Margin for Dairy (LGM-Dairy) programs are based on FMMO class and component prices.

Vitaliano: Strong exports offset domestic weakness

Retail dairy product price inflation affected domestic commercial use of milk during the September-November period, even as inflation itself rose more slowly than in previous months, according to National Milk Producers Federation’s Peter Vitaliano. Summarizing dairy markets in the January 2023 Dairy Management Inc./National Milk Producers Federation Dairy Market Report, he said U.S. dairy exports were on track to set a new calendar-year record as a percent of U.S. milk solids production, at about 18%, helping buttress prices against the domestic-use decline. 

Price-feed cost margin forecasts under the DMC program will soon drop below the $9.50 per cwt maximum coverage level, extending well into the summer.

For more information on commercial use, dairy trade, milk production, product inventories, prices and margins, click here.

Product inventories inch higher

Cheese and butter inventories in cold storage were up slightly to end December. According to the USDA’s monthly Cold Storage report, released Jan. 25:

  • Total natural cheese stocks were estimated at about 1.45 billion pounds, up about 1% from November 2022 and up slightly from December 2021. Stocks of American cheese were estimated at about 825.2 million pounds, up 1% from both the previous month but down 2% from the previous year.
  • Butter stocks were estimated at 216.2 million pounds, up 9% from December 2021 and up 8% from November 2022.

Coming up

  • The Federal Reserve’s Federal Open Market Committee (FOMC) meets Jan. 31-Feb. 1, to review economic conditions and consider interest rate adjustments.
  • FMMO January 2023 Class II-III-IV milk prices are announced on Feb. 2. That will be followed by release of individual FMMO uniform price, producer price differential and pooling-depooling data, Feb. 11-14.
  • The USDA releases the December 2022 Dairy Products report on Feb. 2. Preliminary December 2022 U.S. milk production was up 0.8% from a year earlier.
  • The USDA’s World Ad Supply and Demand Estimates report is released Feb. 8, updating 2023 milk production and price projections.
  • The USDA’s Foreign Agricultural Service reports December 2022 dairy and agricultural export totals on Feb. 8-9, proving monthly and year-end estimates.

Check the Progressive Dairy website for updates as they become available.