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DEMAND FOR DAIRY: A robust economy is helping keep consumer purchases of manufactured dairy products, especially cheese, quite strong. This has led to higher product prices and milk class prices.

Prices looking up as milk production remains anemic

Dairy Notes: The signup deadline for the Dairy Margin Coverage program is Sept. 20.

By Gary Latta

In its latest report, USDA announced July milk production was up only 0.1% over last year in the top 24 dairy states.

Results in the Northeast were mixed. Total milk production was up 0.3% in New York and up 1.3% in Vermont, but down 7.6% in Pennsylvania.

Total number of cows in New York was up 0.8% to 627,000 head, while production per cow is down 0.48% to 2,055 pounds. Total number of cows in Pennsylvania is down 6.73% to 485,000 head, while production per cow is down 0.86% to 1,715 pounds. Total number of cows in Vermont are down 0.78%, while production per cow is up 2.2% to 1,810 pounds.

Nationally, there are 82,000 fewer milk cows, but production per cow is up 17 pounds. This has been the consistent trend in 2019, and we see similar patterns in other major milk-producing countries where a combination of herd contraction, bad weather, high feed costs and other factors have led to lower milk production. 

Domestic dairy product demand in the U.S. remains quite brisk. A robust economy is helping keep consumer purchases of manufactured dairy products, especially cheese, quite strong. This has led to higher product prices and milk class prices.

Class I prices in the Northeast Federal Order have been steadily rising from the $17-to-$18 range in January to the $20-to-$21 range in August, depending on zone location. USDA is expecting domestic use to remain strong for the remainder of this year and into 2020. 

Block cheese at the Chicago Mercantile Exchange has risen from $1.38 a pound in January to over $1.91 in August. Barrels of cheese at the CME have risen from $1.16 in January to $1.76 in August. Butter has been less dramatic, but slowly inching upward from $2.20 in January to $2.34 in August. Nonfat dry milk has been even less dramatic, but still inching upward from $0.97 per pound in January to $1.03 in August. Whey prices have fallen slowly throughout the year due to lost Chinese exports as a result of decreased demand from a swine flu epidemic there.   

Slower growth, higher prices

The latest USDA and World Agriculture and Supply Demand Estimates show slower growth in U.S. milk production for the rest of 2019 and into 2020. Much of USDA’s reasoning is based on fewer cows, higher feed costs and less growth in output per cow over this period. 

As a result of recent CME prices and production growth estimates, the 2019 Class III price estimate is raised $0.25 to $16.30 per cwt. The combined effect of higher butter price and lower nonfat dry milk adjustments reduced the 2019 Class IV forecast by $0.15 to $16.30 per cwt. The 2019 all-milk price is now forecast at $18.30 per cwt, up $0.10 from the previous month forecast. The 2020 all-milk price is now expected to be near $18.80 per cwt, down $0.05 from last month’s forecast.  Overall, though, dairy prices are steadily moving upward. 

Deadline for DMC coming

The last day for dairy producers to sign up for the new Dairy Margin Coverage program is Sept. 20. Enrollment began June 17, and to date over 16,985 eligible dairy operations have signed up. This represents just over 63% of eligible operations in the U.S.

The new DMC is a considerable improvement over the previous Margin Protection Program for Dairy Producers. Participation in the new DMC is voluntary and administered through USDA’s Farm Service Agency. 

The program provides protection when the difference between the U.S. all-milk price and the national average feed cost (computed by formula) drop below a dollar amount selected by the producer. 

The intricacies of the program can be complex, but fortunately there are several websites, online tools and offices where you can get help. A good place to start is at USDA’s Economic Research Service website.

Also, check out the USDA’s Farm Service Agency website at fsa.usda.gov. On this website you can find the link to the new Dairy Margin Coverage Decision Tool. This is a fantastic tool developed by university economists and USDA. It is administered through the University of Wisconsin.

Mark Stephenson of the University of Wisconsin and Andrew Novakovic of Cornell have written “Dairy Margin Coverage - The New Margin Protection Plan for Dairy Producers,” available online.

At USDA Service Centers you can visit with Farm Service Agency and Natural Resources Conservation Service employees for your specific questions and needs. Find your local FSA office online.

The National Milk Producers Federation has been instrumental in helping design the new DMC. Find more resources covering DMC on NMPF's website, or read through their archived posts on DMC.

Other programs available

Another USDA program dairy farmers might want to look at is the Livestock Gross Margin for Dairy Cattle program, administered through the USDA’s Risk Management Agency.

With LGM-Dairy, producers purchase a premium-subsidized margin insurance that is based on Class III futures prices, soybean meal and corn. Flexibility exists to tailor the quantity of milk covered and quantities of soybean meal and corn. Under the provisions of the new farm bill, producers can enroll in both the DMC and LGM-Dairy programs. USDA RMA has a fact sheet available on LGM-Dairy, as well as a searchable document database that feature LGM-Dairy FAQs and policy information.

The Dairy Revenue Protection program is designed to insure against unforeseen downturns in quarterly milk sales compared to a preselected, guaranteed level. Expected revenue is based on futures prices and the amount of milk selected for coverage by the producer. Coverage is indexed to individual states where the farm is located.

Two revenue pricing options can be selected: the Class price option or the component price option. Again, USDA’s websites provide a good deal of educational material, cost estimators, decision tools and agent locators.

The American Farm Bureau Federation also has an excellent website on Dairy Revenue Protection.

Futures and options

You might want to look at dairy hedging strategies using futures and options. Hedgers take a position in the futures market, which is equal and opposite of their current position or what they expect to take in the cash market. Many producers utilize dairy futures to minimize risk through either brokers or through their cooperatives. Many cooperatives have a staff dedicated to just this purpose.                

Penn State’s also has good resources to learn more about dairy risk management.

The Chicago Mercantile Exchange also has some great tutorials material on hedging.

Latta is a political and economic consultant for Northeast Dairy Foods Association Inc.
TAGS: USDA
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