At Progressive Dairy’s deadline, it’s a busy week ahead with the release of USDA reports monitoring and impacting milk prices. The January Milk Production report was scheduled to be released on Feb. 22. January cull cow slaughter estimates and Federal Milk Marketing Order (FMMO) advanced Class I base prices for March wil be announced on Feb. 23. The latest dairy product Cold Storage report will be released on Feb. 24. Check the Progressive Dairy website for updates as they become available.
Here’s an update on market conditions and tools available through the USDA and/or USDA’s Risk Management Agency (RMA).
Dairy Margin Coverage (DMC) program
The January 2023 DMC margin will be announced on Feb. 28, and it appears indemnity payments will be triggered. Based on DMC Decision Tool calculations as of Feb. 17, the forecast DMC margin for January is $8.29 per hundredweight (cwt), which would trigger payments at Tier I coverage levels of $8.50, $9 and $9.50 per cwt. Tier II coverage is not available above $8 per cwt.
Affecting January margins, administrators of the 11 FMMOs reported January 2023 prices and pooling data. Uniform or blend prices were lower, producer price differentials (PPDs) were mixed in a narrow range, the Class I mover formula has less impact on Class I prices, and more Class IV milk returned to the pool.
Read Progressive Dairy’s monthly review of the numbers to provide some additional transparency on your milk check: January FMMOs: A little lower prices, a little more Class IV.
The DMC margin outlook continues to deteriorate in 2023. As of Feb. 17, the DMC decision tool estimated margins at or below $6.50 per cwt for February-May, below $7.50 per cwt in June-July and below $9 per cwt in August-September. The average DMC margin for the year is $7.91 per cwt.
Affecting actual DMC indemnity payments, the 2023 sequestration reduction rate is 5.7%.
The USDA’s Farm Service Agency recently released enrollment figures for the 2023 DMC program. As of Feb. 6, 16,683 dairy operations had enrolled in the program, representing about 73% of operations with established production history. Milk volume covered under the program totaled 155.3 billion pounds, almost 79% of production history established in 2022.
The report does not include enrollment in the Supplemental DMC program.
Dairy Revenue Protection
Dairy producers managing risk through the Dairy Revenue Protection (Dairy-RP) program are currently eligible to cover revenue from second-quarter 2023 through second-quarter 2024. Coverage for the second quarter of 2023 closes on March 15.
Dairy-RP coverage cannot be purchased on days when major USDA dairy reports that could impact markets, including Milk Production, Cold Storage and Dairy Product reports (see Calendar). Dairy-RP is also not available on days when applicable futures contracts move limit-up or limit-down, or on days when Chicago Mercantile Exchange (CME) trading is closed due to holidays.
The market changes daily and Dairy-RP endorsements must be purchased between the CME market closing and the next CME opening.
Livestock Gross Margin for Dairy
Livestock Gross Margin (LGM-Dairy) is another subsidized margin insurance program administered by the USDA’s RMA.
LGM-Dairy provides protection when feed costs rise or milk prices drop and can be tailored to any size farm. LGM-Dairy uses futures prices for corn, soybean meal and milk to determine the expected gross margin and the actual gross margin. LGM-Dairy is similar to buying both a call option to limit higher feed costs and a put option to set a floor on milk prices.
Coverage can be purchased on expected milk marketings over a rolling 11-month insurance period. For example, the coverage period available during the final week of February contains the months of April 2023 through February 2024.
Sales periods for the LGM-Dairy program are open on a weekly basis. Unlike Dairy-RP, LGM-Dairy is available even if a sales period falls on the day of a USDA report. Premium payments are due at the end of the insurance period.
Protecting Your Profits update
Pennsylvania’s Center for Dairy Excellence (CDE) will post its monthly “Protecting Your Profits” update on Feb. 24. Led by Zach Myers, CDE risk education manager, the recording will be available in both webinar and podcast format. It will review current data and updates about the milk marketplace to guide decision-making and risk management strategies.
The next “live” Protecting Your Profits discussion will be held March 22. For more information, call (717) 346-0849 or email Myers.
Dairy margins ended January weaker, started February flat
Dairy margins continued to deteriorate through the second half of January and were relatively flat over the first half of February, according to Commodity & Ingredient Hedging LLC.
Second-half January milk prices declined further while projected feed costs held steady. First-half February milk price changes were limited, although there was some discrepancy between class prices: Class III moved lower while Class IV prices, supported by a rebound in spot butter prices, increased about $1 per cwt since the beginning of the month.
The recent weakness in milk prices combined with sky-high feed costs continue to crimp spot margins. This has led to increased dairy cow slaughter, although those numbers are skewed by the number of slaughter days recorded during the month.
The USDA’s monthly World Ag Supply and Demand Estimates (WASDE) report, released Feb. 8, reduced both 2022 and 2023 U.S. milk production estimates from the previous month but also cut 2023 price projections. At 228.3 billion pounds, the 2023 production estimate was lowered by 900 million pounds, with a smaller expected average cow inventory for the year and a subdued increase in milk production per cow. If realized, 2023 production would be up about 0.8% from 2022. Compared to earlier estimates, the projected 2023 Class III price was reduced to $17.90 per cwt, while the Class IV price forecast was cut to $18.25 per cwt. The projected 2023 all-milk price was reduced to $20.70 per cwt. (Read: USDA reduces 2023 milk production, price projections.)
The WASDE report made minor adjustments to the domestic corn and soybean balance sheets, but sizable production cuts in Argentina could significantly reduce global supplies of corn and soybean meal which has kept both markets elevated at historically high price levels.
The USDA announces 2023 survey-based planting intentions at the end of March.
