Milk futures remain high as feed costs drop to levels last seen in 2020, yet other market pressures such as lower butter and cheese prices and waning holiday demand, as well as recent milk production reports revealing gains for the first time in more than a year, complicate the matter.
“As prices climb to elevated levels, increased volatility often follows, and we’ve certainly been witnessing this recently,” says Alex Gambonini of HighGround Dairy. “All of these factors are contributing to downward pressure on nearby futures prices.”
Markets shift quickly and securing margins when favorable is vital for dairy businesses.
“The past month has been a strong reminder of how quickly markets can shift, highlighting the importance of securing margins when opportunities arise,” Gambonini says.
Here’s Progressive Dairy’s look at important dates, reports and advice affecting risk management decisions, as well as other information impacting the milk check in November.
Dairy Margin Coverage (DMC) program
The September 2024 DMC margin and indemnity payment will be announced Thursday, Oct. 31, with October’s margin calculated Friday, Nov. 29.
At $13.72 per hundredweight (cwt), the realized DMC margin for August was the highest margin recorded since the program’s inception in the 2018 Farm Bill. At this margin, the month’s DMC margin was more than $4 above the $9.50 per cwt top coverage level in Tier I, resulting in yet another month of no indemnity payments. (Read: August delivers with $13.72 DMC margin)
As of Oct. 22, the September 2024 margin forecasts are estimating a nearly $2 increase in milk price plus another 33-cent hike in feed costs for a DMC margin forecast at $15.25 per cwt. The yearly average is at an estimated $11.93 per cwt as margins are anticipated to dip in the final months of 2024.
Dairy Revenue Protection (Dairy-RP)
Dairy producers managing risk through Dairy-RP are eligible to cover revenue quarterly, up to five nearby quarters. In November, Dairy-RP coverage is available for the first quarter of 2025 (January through March) through the first quarter of 2026.
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.
At the time of this writing, the USDA had not yet finalized indemnities for the third quarter of 2024. However, HighGround Dairy evaluated the indemnities and enrollment based on other issued reports and determined there were no indemnities issued for the quarter as prices for Class III and Class IV averaged $21.26 and $21.73 per cwt, respectively. Nearly 18.3 billion pounds of milk (33% of U.S. milk supply) was covered under the insurance program for the third quarter with enrolled producers paying, on average, 34 cents per cwt for coverage.
Livestock Gross Margin for Dairy (LGM-Dairy)
LGM-Dairy is another subsidized margin insurance program administered by the USDA’s Risk Management Agency (RMA).
The 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 November includes the months of December 2024 through October 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
- U.S. milk production was down 3.9% in September compared to August but up 0.1% from a year prior. Third-quarter estimates were also up marginally from the same period in 2023. (Read: Milk production up slightly in September)
- Federal Milk Marketing Order (FMMO) uniform milk prices increased last month as most areas hit the highest average since 2022. October to December futures prices suggest September uniform prices could be the peak for the year. (Read: Market forces elevate September FMMO uniform prices near two-year peaks)
- Large crops and lower feed costs could help partially offset a dip in milk prices as dairy producers look to close out the year and plan for 2025. (Read: USDA projections provide mixed news for dairy’s bottom line)
Check the Progressive Dairy website for updates affecting milk prices as they become available.
