July 15, 1998
Volume 1, Issue 8

Inside this Issue
What's Up With the Butter Market?
Feeding Citrus Pulp to Dairy Cows
15 Measures of Competitiveness
Milk Price Outlook
Hay Auction Prices
News Updates

What’s Up With the Butter Market?
Cameron Thraen
Agricultural, Environmental, and Developmental Economics

In mid to late 1996 the cheese market took milk prices for a ride.  In 1998 it is butter’s turn to mystify the experts and keep us guessing.  Some market analysts have stated “The (price) gyrations don’t have any rhyme or reason.”  Others believe that the market behavior is the product of a grand conspiracy.  Do not believe either of these explanations!  There is rhyme and reason to what has been going on and there is no grand conspiracy.  The main actors are low butter prices back in the early 90’s which stimulated the growth of demand for butter as an ingredient in confectionery and prepared foods, a current temporary shortage in cream, the exit of government owned butter stocks, and the absence of adequate commercial inventory.

Hopefully, in the short space of this article, I can help you understand why dairy product market prices, first cheese, and now butter, are behaving seemingly erratically when in fact they are not.  Dairy markets are complex and their interaction can seem baffling to the most ardent market watcher.  There are two fundamentals that are important in this discussion.  The first is to sort out why butter prices are increasing to begin with, and the second is to address the question of why have they increased so much.  To gain a perspective on these questions and the answers, consider the following situation that you, as a dairy producer, can relate to.

First, imagine yourself as the owner of a large dairy.  You have invested a substantial amount in site preparation, buildings and equipment, and cows.  You have signed long term contracts for veterinary services and hired labor. You have signed a contract with a local milk plant to provide their milk needs.  You are in the business of making milk.  You convert feedstuffs into milk.  You know exactly what your dairy is designed to produce and what your net margin per hundredweight will be at full capacity.  You are also aware that you compete with other agribusinesses that convert feedstuffs into other non-milk products such as meat and consumer products.

Now let’s address the first question.  What would cause the price of feedstuffs to increase?  You know the answer to this one.  Either a shortage of feedstuffs production or an increase in feedstuffs demand, or both.  It doesn’t matter because either one will start the feedstuff price rising.
Now let’s turn to the second question.  What determines how high feedstuffs price rises?  Imaging a situation whereby the demand for feedstuffs by your competitors begins to increase because of strong demand for their products.  What happens to the price of the feedstuffs that you need for your dairy?

It depends,  you will answer, and you are correct.  It depends on total available supply of feedstuffs and this includes current production and the amount on storage.  If the new added demand by your competitors can be absorbed by pulling supplies out of storage then feedstock prices will increase just enough to encourage those who own the stocks to let them out to the market.  However, if the amount in storage is too low to take care of this additional demand than consider what will happen in the market for feedstuffs.

There are a couple of choices.  You, and other dairymen, as major users of feedstuffs can cutback on the use of feedstuffs (and milk production) and let your competitors have it.  By doing so you will act as the storage source and the price of feedstuffs will rise by only a small amount.  Or will it?  How much would you charge your competitor to give them access to your feedstuff’s and limit your milk production?

Would you charge only the market price that you paid for the feedstuffs?  I doubt it and so do you.  Remember, even though you may be willing to give up the feedstuffs and produce less milk for the short term you will still have to pay interest on your debt, pay your laborers and veterinarian and all your other fixed expenses associated with your dairy.  Also remember that there will be a cost associated with not being able to supply the milk plant to which you have an obligation.  What will happen in this case?

You may be willing to forgo producing milk from your dairy but if you do so the price that your competitors will have to bid to make you give up your feedstuffs will be significantly higher than the current market price for feedstuffs.   As you are really a dairyman in the milk business and not in the business of feedstuffs storage, I think that you will continue to produce milk and will do so at the full capacity of your dairy. You will bid and pay right along with everyone else who needs feedstuffs to convert to a market product and feedstuffs prices will rise significantly.

This is exactly what is going on in the dairy markets including the butter market.  In the early 1990’s, the butter price was essentially removed from the price support program and allowed to decline to $0.65 per pound.  Butter is a wonderful ingredient in all sorts of foods and at this price the food industry found all sorts of uses for butter again.  This increased the demand for butter.

In the early part of this year, agribusiness that require butter as a primary input in their production processes are finding it in short supply.  There used to be “butter mountains”, that is butter in storage that was held by the Commodity Credit Corporation (CCC).  The CCC, in times of tight supply would let this butter out into the market as a matter of public policy, which would reduce CCC stocks and keep butter prices from rising too much.  Those “butter mountains” are gone and have not been replaced by a significant amount of private commercial storage.
Firms that need butter to convert into other products are no different than you. They have substantial investments in buildings and equipment.  They have long term contracts for hired labor and they have substantial commitments to supply their product to all sorts of folks.  They require butter and they must bid it away from all of their competitors.  To do so they must pay a price high enough to butter producers that allows them to bid milkfat away from their competitors and this includes the cheese producer.

In a word, butter uses must pay the minimum to either pull butter out of storage or to entice milk into butter production and away from other uses.  Back on July 8th of 1994 this was $0.703 per pound.  As of July 10th, 1998 this was $1.985 per pound of 93 score Grade AA butter.

So what have we learned from this exercise?  First, we know that butter prices have been increasing relative to cheese prices since late 1995 which coincides with the virtual elimination of CCC butter stocks.  That means that users of butter could no longer manage shortfalls in supply and increases in demand out of these stocks and must now compete directly with other users of milk for their product.  Second we have learned that in competing for these supplies those who want milk converted into butter instead of cheese must be willing to pay a price that is sufficiently high enough to wrest the milk away from firms that would rather not give it up.

What does this mean for the dairyman?  In the short term, or until the dairy industry develops it’s own commercial sense of what an adequate level of storage should be, it means that dairymen can expect market prices to react quickly and move substantially up and down.  If you understand the fundamentals of these markets, there will be substantial opportunities for dairymen to take advantage of these price moves and to lock in substantial net margins and avoid majors losses in the future.  Stay tuned to the Buckeye Dairy News and we will address these topics in future issues.
 
Feeding Citrus Pulp to Dairy Cows

M.L. Eastridge
Department of Animal Sciences

Citrus pulp has been fed for many years to cattle, but the wet form has been primarily fed in the south near the citrus crops, and much of the pelleted citrus pulp has been exported. However, increased supply of citrus pulp, change in foreign markets, and ease of handling the pelleted form have resulted in its presence in northern feed ingredient markets.

Citrus pulp consists of peels, pulp, seeds, and cull fruits from primarily oranges, grapefruit, and lemons.  Calcium oxide or calcium hydroxide is added to the citrus residue to aid in the dehydration process. About 90% of the citrus pulp is dehydrated and pelleted. In the wet form, it can be fed fresh or ensiled, preferably ensiled with other feeds to provide optimum DM for fermentation and reduction of seepage.

Composition of dried citrus pulp:

     DM, %                   85.8
     CP, % of DM           6.9
     Fat, % of DM           2.6
     NEL, Mcal/lb           0.81
     NDF, % of DM       24.2
     ADF, % of DM       22.2
     Ash, % of DM           7.2
     Ca, % of DM         1.92
      P, % of DM            0.12
     Mg, % of DM         0.12
     K, % of DM           1.10
     Mn, ppm                9
     Fe, ppm              151
     Zn, ppm                11
     Cu, ppm                  8

Citrus pulp is lower in protein and energy than corn and is worth about 80 to 90% of the price of corn. The moderate level of fiber in citrus pulp facilitates it being used to replace a small amount of forage fiber or to displace some starch in the ration.

Citrus pulp is sometimes fed at 20% or more of the ration but 10 to 15% of the ration is more common. Some precautions include: 1) the palatability of citrus pulp necessitates gradual incorporation in the ration, 2) some animal performance and health problems with dark colored, wet citrus pulp have been observed in the field, 4) there have been some anecdotal reports of health problems in herds with feeding pelleted citrus pulp and a toxicity has been suggested but not substantiated by research, 4) do not feed citrus pulp extremely high in Ca, and 5) feeding citrus pulp has lead to false positives for penicillin in milk when using the Spot Test.

The nutritive composition, and sometimes price, of citrus pulp lends to it being a favorable ingredient in dairy rations. If problems in the herd are observed when feeding is begun, remove the citrus pulp from the ration.

15- Measures of Competitiveness
Ernest Oelker, Agriculture Agent

This month: Total feed costs per hundredweight (cwt.) of milk sold

Competitive Level: Less than $6.00 per cwt. of milk sold
(May range from below $5.00 to around $8.00, depending on feed prices)

Calculation:  Total cost of all feeds fed to all dairy cows and replacement heifers
? total cwt. of milk sold for the same period

Example:   $300,000 purchased feed
              +  270,000 homegrown feed
              = $570,000 total feed cost?
                     90,000 cwt. (lb. ? 100) of milk sold
              = $6.33 feed cost per cwt. milk sold

Total feed cost per cwt. of milk sold measures the effectiveness of management in controlling the largest cost items in producing milk. You should carefully calculate the total cost of producing home grown feeds, including interest and taxes on real estate and depreciation on machinery and storage facilities. Compare this figure to market values to see if your crop production costs are reasonable. Many dairy farmers can purchase feed more cheaply than they can grow it.

If feed cost is above $6.00 per cwt. of milk sold:

Evaluate feed quality, feed production costs, and purchased feed costs. Frequently balance rations for all groups based on current feed analyses. Feed for high production if cows have the genetic potential. If cows do not reach their potential, evaluate facilities.

Keep dry periods below 60 days. Keep culling rates below 25 percent. Keep age at first calving below 24 months. Consider using BST.

Milk Price Outlook
Cam Thraen, Agricultural Economist
The announced Basic Formula Price (BFP) for June is  $ 13.10 per cwt. for milk testing 3.5 percent butterfat.  This price is up $2.22 over the May price and $2.36 higher than June 1997.  The adjustment to the M/W base month price of $11.05 is a plus $2.05.  The current butterfat differential for June is 21.7 cents.  A year earlier the butterfat differential was 11.4 cents.

The strength of the $2.22 increase in the BFP was fueled primarily by the strong cheese and butter market prices in June compared to May.  Remember the change in the BFP reflects the change in the MW base month price and the current month adjustment in the product prices.  While the base month price declined from April's $11.82 to May's $11.05, cheese and butter prices showed strong increases.

What is ahead for July?  In trading on July 9th both barrels and blocks remained unchanged from the previous week at $1.545 and $1.6075 respectively.   The butter market remained unchanged in trading on July 10 with Grade AA prices at $1.985.  At prices this high buyers are doing what they can to adjust their demand and it is likely that we will see more sideways trading and therefore the upward adjustment to the June MW base month price will not be as large as the previous month.

The current CME BFP futures prices for July and August are $14.50 and $14.08 respectively.  The market is saying that, barring an unlikely strong reversal in the butter and cheese markets over the next three weeks, the July BFP should move up again into the $14.00 - $14.50 range.

Hay Auction Prices (July 2, 1998)

Location                         First                    Second                Third                  Large Round/bale
Damascus (/bale)           $.15 – 3.75          $3.00 - 5.75
Ashland County (/ton)    $52.50 -82.50     $105.00-180.00                               $22.50 - 24.00
Farmerstown (/ton)        $50.00 – 75.00    $16.00                 $16.00
West Salem (alfalfa/ton) $75.00 - 125.00  $137.50                                            $10.00 - 25.00
Kidron (/ton)                 $40.00 - 112.50   $70.00 - 150.00  $75.00 - 105.00   $11.00 - 15.00

News Updates

1998 State 4-H Dairy Cattle Quiz Bowl Contest

Columbus, Ohio - Fourteen county 4-H teams competed for top prizes in the 1998 Dairy Quiz Bowl Contest at The Ohio State University on June 13.  Champaign County 4-H?ers won the senior division title and Mahoning County 4-H?ers won the junior division title.

The Dairy Bowl  has four-member teams that answer a moderator?s questions.  Questions test the knowledge 4-H?ers gained from their dairy projects.  Six teams competed in the senior division while eight vied for the junior crown.

Senior winners from Champaign County are Jennifer Nelson of Urbana; Nathan Thomas of North Lewisburg; Jason Hoffman of Mingo; Todd Deam of Cable and Cam Winters of Cable.  Their coaches are Mark and Lorraine Townsley of Urbana.

Junior winners from Mahoning County are Katey Lora of Salem; Neil Moff and Brian Moff of Columbiana; Mark Miller of Salem; and Eric Miller of Beloit.  Their coach is Julie Martig of Salem.

The senior runner-ups from Licking and Wayne Counties are Abby Menzie of Johnstown; Mike Shipley of Newark and Erin Gill of Wooster.  Their coaches are Tim Wolf of Shreve and Laurie Menzie of Johnstown.

The junior runner-ups from Champaign County are Elaine Bodey of Urbana; Tim Lamb of Cable; Shannon Deam of Cable and Jenna Hoffman of Mingo.  Their coaches are Mark and Lorraine Townsley of Urbana.

The 1998 Ohio 4-H  Dairy Quiz Bowl Contest was sponsored by the Ohio PDCA, Farm Credit Services, and The OSU Animal Sciences Department.  The same sponsors will pay expenses for the team members to compete in the national competition at Louisville, Kentucky during the North American International Livestock Exposition in November.
 

All educational programs conducted by The Ohio State University Extension are available to clientele on a nondiscriminatory basis without regard to race, color, creed, religion, sexual orientation, national origin, gender, age, disability or Vietnam-era veteran status.

Issued in furtherance of Cooperative Extension work, Acts of May 8 and June 30, 1914, in cooperation with the U.S. Department of Agriculture, Keith L. Smith, Director, The Ohio State University Extension.