Margin outlook has significantly improved from a few months ago as sustained high cheese and butter prices drive milk prices higher and lower feed costs all contribute to the positive outlook.
“The current margin outlook is certainly better than it was just a few months ago, thanks to significantly lower feed costs, improved cheese prices and historically high butter prices,” says Alex Gambonini of HighGround Dairy.
While the futures market indicates favorable margins for the remainder of 2024, markets do change and strategizing risk mitigation is vital.
“There is no guarantee that the current situation will persist, especially with additional cheese processing capacity coming online and concerns about flooded acres potentially impacting corn and soybean production,” Gambonini says. “As the futures market presents favorable margins, we encourage producers to secure coverage when opportunities arise.”
Here’s Progressive Dairy’s look ahead at important dates, reports and advice affecting risk management decisions, as well as other information impacting your milk check in August.
Dairy Margin Coverage (DMC) program
The June 2024 DMC margin and indemnity payments will be announced July 31, with the July 2024 DMC margin calculated Aug. 30.
Despite elevated feed prices, a bullish milk market in May carried producers through the month with no indemnity payment triggered through the DMC program. May’s income over feed cost was $10.52 per hundredweight (cwt), the largest since November 2022. (Read: May DMC margin is $10.52 per cwt)
As of July 24, the June 2024 margin forecast was at $12.27 per cwt. Margins to this degree haven’t been seen since April 2022 when the DMC margin was reported at $12.29 per cwt. If realized, June 2024’s margin would be the start of a very favorable second half of the year with margins only rising as milk prices stay elevated and feed costs fall; in particular, October’s margin forecast is predicting an impressive $14.18 per cwt. While excitement looms, caution is encouraged as markets do change.
Dairy Revenue Protection (Dairy-RP)
Dairy producers managing risk through Dairy-RP are eligible to cover revenue quarterly, up to five nearby quarters. In August, Dairy-RP coverage is available for the fourth quarter of 2024 (October through December) through the fourth quarter of 2025.
The estimated second quarter of 2024 indemnity payments have been calculated using the announced class and component prices and milk yields. HighGround Dairy reported that indemnity payments averaged just over 1 cent per cwt, down 98 cents from the first quarter due to the much-improved milk prices. Of the roughly 13 billion pounds of milk covered under Dairy-RP in the second quarter, 5.9% was indemnified with 99.8% of that coming from Class III options. The average price for Class III milk was $17.97 per cwt, weighed down by April’s price of $15.50 per cwt.
The market changes daily and Dairy-RP endorsements must be purchased between the Chicago Mercantile Exchange (CME) market closing and the next CME opening. Dairy-RP is not available on days when applicable futures contracts move limit-up or limit-down, or on days when CME trading is closed due to holidays (see Calendar).
Also, Dairy-RP coverage cannot be purchased on days when major USDA dairy reports that could impact markets are released. This includes Milk Production, Cold Storage and Dairy Production reports.
Livestock Gross Margin for Dairy (LGM-Dairy)
LGM-Dairy is another subsidized margin insurance program administered by the USDA Risk Management Agency.
This insurance program provides a protection when feed costs rise or milk prices drop, and can be tailored to any size farm. The program 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 marketing over a rolling 11-month insurance period. So the coverage period during August includes the months of September 2024 through July 2025.
The sales period for the LGM-Dairy program is 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.
Production and price outlooks
- Individual Federal Milk Marketing Order (FMMO) uniform milk prices rose in June, in some cases reaching the highest average in nearly two years. The highest uniform milk price was recorded in Florida at $24.72 per cwt. (Read: June 2024 FMMO uniform prices improve)
- July’s World Ag Supply and Demand Estimates (WASDE) report forecasts higher prices for cheese, butter, whey and nonfat dry milk from the previous month due to recent price strength and tighter milk supply predictions. (Read: Lower milk output per cow offsets higher cow inventories)
- U.S. milk production fell about 1% to 18.767 billion pounds in June compared to the same month last year, according to the USDA’s Milk Production report. (Read: Milk production continues to decline in USDA June estimates)
Check the Progressive Dairy website for updates affecting milk prices as they become available.
