Buckeye Dairy News: Volume 14 Issue 1

  1. Market View

    Dr. Cameron Thraen, State Extension Specialist, Dairy Market and Policy, The Ohio State University

    Dairy Commodity and Milk Price Outlook for February 2012 to July 2012.

    To start of this edition of Market Watch 2012, I will review a couple of trends in U.S. milk production and milk price now that the numbers for 2011 have been reported. I will then provide an early outlook for milk price going into 2012.

    US Milk Cows and Milk Yield

    Chart 1 shows the monthly history of i) milk production per cow (right scale, dashed line), and ii) total number of milk cows (left scale, solid line), for the United States, December 2009 to December 2011.  I have selected the start month of December 2009 as this was the month wherein the number of milk cows in the US bottomed out as a response to negative returns on most US dairy farms in 2009 (during 2009 an estimated 250,000 head were culled as a result of low milk price and high input cost).  The number of milk cows added to the US herd has been generally positive over the past two years, contributing to an upward rise in the total number. Over the 2010 to 2011 time period, 137,000 dairy cows have been added back. The US herd expansion is at an estimated annual rate of +0.8%. During this same period, milk production per cow has remained fairly flat (adjusted to a 30 day month). The average monthly US milk yield is 1,743 lb/cow over this period. Looking ahead, we see that milk yield is already on the seasonal upswing and cows are being added to the national herd, which would suggest that milk production is set to expand in the first half of 2012.

    Graph 1
    Chart 1. US milk cows and milk yield, monthly 2010 to 2011.

    Milk Production Growth and the Class 3 Milk Price

    Chart 2 depicts the recent relationship between i) the Class 3 milk price (line, left scale) and the annualized rate of change in US milk production (bars, right scale) over the period December 2009 to December 2011.

    Chart 2. Class 3 price and annual rate of growth in US milk production, 2010 - 2011.

    Milk production growth in the US was quite robust in 2010, hitting over 2% annual rate for the last two-thirds of the year.  During this same period, the Class 3 milk price showed some improvement, but fell to under $14/cwt in late 2010.  With both cow numbers and productivity declining in the last half of 2010, the growth in US milk production slowed considerably.  Milk prices responded, moving up from $13.48/cwt in January 2011, to top out at $21.67/cwt in August 2011.  Since then, with the annual rate of growth in milk production heading steadily upward and approaching 2.5%, the Class 3 milk price has declined.  The December 2011 Class 3 milk price was announced at $18.77/cwt.

    What lies ahead in 2012?

    Looking ahead, with dairy operations adding milk cows nationally, and the seasonal upswing in milk output per cow underway, it appears that there will be pressure on the milk price to retrench further.  Taking a look at the Chicago Mercantile Exchange (CME) Group Class 3 futures prices can provide an insight as to what the market participants are anticipating for the coming year.  Chart 3 shows the CME Class 3 futures price for 2012, as of settle on January 25, 2012 (the unconnected blue dots), the median Class 3 price over the period 2007 to 2011 (the solid line), the upper 25 percentile price line (upper dashed line), and the lower 25 percentile price line (lower dashed line).  Currently, the market is pricing Class 3 milk significantly above the recent historical price range.  As we move into 2012, the CME futures prices decline somewhat to the $16.50 to $16.85/cwt range.  Overall, the CME market participants are pricing milk for Class 3 use at an average of $16.89/cwt over the coming six months, $17.12/cwt for the last half of 2012, and $17.00/cwt for a 2012 average.  In Ohio and the Mideast Federal Milk Marketing Order (FMMO) 33, the average dairy operator's milk check, as measured by the announced FMMO Mailbox price, runs about $2.70 to $3.00/cwt to the Class 3 milk price.  With the current CME market anticipating a $17.00/cwt Class 3 milk price, the mailbox price for planning purposes will be in the range of $19.70 to $20.00/cwt. For a relative comparison, in 2010, the Class 3 price averaged $14.41/cwt and the FMMO Mailbox price was $16.88/cwt.

    Graph 3
    Chart 3. Chicago Mercantile Exchange (CME) Class 3 futures price, median Class 3 price, and 25% upper/lower percentiles.

    What does this mean for a typical dairy farm in Ohio?

    Milk prices are obviously very important to the financial health of a given dairy.  However, as we witnessed in 2008, milk prices at the $20/cwt level mean little if expenses for feed and other inputs are soaring.  The data in Table 1 report the relationship between milk price, as measured by the FMMO Ohio Mailbox price, the cost of feed and non-feed inputs, and the net margin measured as milk income over cost.  The data in the table show this income versus cost structure for the years 2003 through 2011 (the last reported month for 2011 is November).   The last column in the table shows the current income to cost situation and can be compared to estimates for prior years.  The first thing to note is a significant increase in the mailbox price in FMMO 33 for 2011 compared to prior years.  My estimate for all of 2011 is $21.7/cwt.  Next, note that while feed and non-feed input costs are high, they have softened from the peak in 2008.  This has produced a milk income over feed and non-feed cost margin higher than any prior year during this period, including the years 2007 and 2008.  The last three rows of the column on the right show these margins on a hundredweight basis. Milk income over feed is above $11/cwt; income over non-feed is over $18/cwt; income over total operating cost (feed and non-feed) is over $7/cwt. Each measure is well above the recent past.  

    Table 1. USDA Cost and Returns for a typical Ohio dairy, 2003 to 2011.

     What to watch for in the coming weeks?

    At this time, the item I am watching is the current Class 3 milk price on the CME and the cash cheese price.  With cash butter at $1.56/LB, the current CME Class 3 price is consistent with a spot cheese price of $1.72/lb.  The current cash price for cheese is about $1.50/lb.  So, either the CME Class 3 is pricing cheese correctly and the spot will have to increase, or what I suspect to be more likely, the CME Class 3 price is too high and will have to adjust down to get back into a normal relationship with the cash cheese price.  Be prepared for a downward adjustment in the CME Class 3 price in the first half of 2012.

    My six month forecast for dairy commodity prices and milk prices is available on my Ohio Dairy 2012 website.  You can visit: (http://aede.ag.ohio-state.edu/programs/OhioDairy/ for the latest market and policy information of importance to the Ohio dairy industry.

    The Ohio Dairy Web 2012

    If you have been looking for the Ohio Dairy 2012 website and unable to connect, this is because it was moved.  Recent changes to the College of Food, Agriculture and Environmental Sciences and Agricultural, Environmental, and Development Economics (AEDE) website addresses have necessitated a new address for my Ohio dairy website.  The most reliable link to reach the dairy website is to bookmark the AEDE department's new web address and then link to the dairy website by selecting 'Programs and Research / Ohio Dairy Web'.  The new AEDE website address is:  http://aede.osu.edu.   The direct link to Ohio Dairy Web 2011 is currently http://aede.ag.ohio-state.edu/programs/OhioDairy/ .

  2. Costs of Nutrients, Comparison of Feedstuffs Prices, and the Current Dairy Situation

    Dr. Normand St-Pierre, Extension Dairy Management Specialist, Department of Animal Sciences, The Ohio State University

    Very few people anticipated the bearish report issued January 12th by the US Department of Agriculture. In this report, the USDA increased the 2011-2012 production estimates for both corn and soybean. On report day, March corn futures reached the 40-cent down limit; the drop extended to 60 cents the following day. Where will prices be in a few weeks from now is anyone's guess. Regardless of where corn and soybean prices end up, volatile markets always lead to buying opportunities, especially for some byproducts.

    Nutrient Prices

    As usual in this column, I used the software that we developed at Ohio State to price the important nutrients in dairy rations, to estimate break-even prices of all major commodities traded in Ohio, and to identify feedstuffs that currently are significantly underpriced. Price estimates of net energy lactation (NEL, $/Mcal), metabolizable protein (MP, $/LB - MP is the sum of the digestible microbial protein and digestible rumen-undegradable protein of a feed), non-effective NDF (ne-NDF, $/LB), and effective NDF (e-NDF, $/LB) are reported in Table 1. Compared to its historical average of about 10¢/Mcal, NEL is still severely overpriced at 15.1¢/Mcal, although this figure is slightly down from 16.2¢/Mcal that occurred last November. For MP, its current price (17.6¢/LB) is considerably less than its 6-year average (28¢/LB). Thus, we are currently in a period of very high dietary energy prices, but low protein prices. The cost of ne-NDF is currently discounted by the markets (i.e., feeds with a significant content of non- effective NDF are price discounted), but the discount of 5.0 ¢/LB is below its 6-year average (-9¢/LB). Meanwhile, unit costs of e-NDF are historically high, being priced at about 4¢/LB compared to the 6-year average (3.3¢/LB).

    Table 1. Prices of dairy nutrients for Ohio dairy farms, mid-January 2012.

    Economic Value of Feeds

    Results of the Sesame analysis for central Ohio as of January 16 are presented in Table 2. Detailed results for all 27 feed commodities are reported. The lower and upper limits mark the 75% confidence range for the predicted (break-even) prices. Feeds in the "Appraisal Set" were either deemed outliers (completely out of price), or we simply don't have good market prices information (i.e., different quality of alfalfa hay - for these, the 'corrected' values should be used). One must remember that Sesame compares all commodities at one point in time, mid January in our case. Thus, the results do not imply that the bargain feeds are cheap on a historical basis.

    Table 2. Actual, breakeven (predicted) and 75% confidence limits of 27 feed commodities used on Ohio dairy farms, mid-January 2012.


    For convenience, Table 3 summarizes the economic classification of feeds according to their outcome in the Sesame analysis.

    Table 3. Partitioning of feedstuffs, Ohio, mid-January 2012.

    As usual, I must remind the readers that these results do not mean that you can formulate a balanced diet using only feeds in the "bargains" column. Feeds in the "bargains" column offer savings opportunity and their usage should be maximized within the limits of a properly balanced diet. In addition, prices within a commodity type can vary considerably because of quality differences as well as non-nutritional value added by some suppliers in the form of nutritional services, blending, terms of credit, etc. In addition, there are reasons that a feed might be a very good fit in your feeding program while not appearing in the "bargains" column.

    Current Dairy Situation

    We used the estimates of the nutrient costs to calculate the Cow-Jones Index (CJI), an index constructed here at Ohio State to measure the difference between milk revenues and the costs of providing the required nutrients at a production level of 65 LB/cow/day. The Cow-Jones is conceptually very similar to income-over-feed costs, but it is calculated without making reference to any specific diet. The reference cow used to calculate the CJI weighs 1500 LB and produces 65 LB of milk at 3.6% fat and 3.0% protein - which is about the average cow productivity in Ohio. This cow has daily requirements of 31.3 Mcal of NEL, 4.64 LB of MP, 10.15 LB of e-NDF, and 3.38 LB of ne-NDF. The cost of supplying these nutritional requirements has fluctuated in the last 6 years. Dietary energy is currently quite expensive and it currently costs over $5.00/day to provide the NEL required for the production of 65 LB/day. This means that on an average, one has to pay $7.82 just to supply the NEL required to produce a hundredweight of milk.
    The change in the CJI over time is shown in Figure 1. We cannot calculate the CJI for January 2012 yet because milk component prices will not be announced until early February by the Federal Order administrator. As of December 2011, the cost of supplying all the nutrients amounted to $9.09/cwt, down from a recent peak of $10.84/cwt in September, and down from $9.70/cwt in November. The milk income was $18.96/cwt. The difference is the CJI and was equal to $9.88/cwt. The break-even level for the CJI is approximately $8.00/cwt. A Cow-Jones in excess of $9.00/cwt is indicative of good profitability in the dairy industry. Thus in the month of December, Ohio dairy producers were operating comfortably above break-even levels on an average. Of course, some people are more efficient in feeding their cows; others achieve greater production levels than the state average of 65 lb/day. For these producers, their income over feed costs would be better than the CJI. The index, however, is a very good barometer for the average producer. The fact that the nutrient costs in December amounted to 48% of the milk revenues, down from over 60% in January 2011, explains this relative (and very welcomed) profitability.

    Figure 1. Cow-Jones Index from January 2005 through December 2011. Although milk prices have been substantially above their 6-year average so far in 2011, the large increases in feed prices have resulted in good but modest profit margins for the whole year.

  3. Collegiate Dairy Judging and 4-H Dairy Program Updates

    Bonnie Ayars, Dairy Judging Teams Coach and Extension Youth Specialist, The Ohio State University

    Dairy Judging. 2012 was barely started till the first dairy judging contest of the season was taking place in Ft. Worth, Texas at the stock show. This was our second appearance at the contest. The results were outstanding. Our accomplishments included High Team and Individual in the Holstein breed, three members in the top 10, and a third place for the team overall. Attached is a news release of our trip and the contest:

    Pictured: Coach Ayars, Rachel Foureman, Derik Baumer, Dan Nicol, and Matthew Borchers.

    Showmanship. Back in October at the World Dairy Expo, the national organization of Purebred Dairy Cattle Association (PDCA) approved a new set of showmanship guidelines for dairy youth.  Previously, they had been referred to as a scorecard! I was pleased to serve on the committee to develop the new guidelines along with Dr. Halbach of Wisconsin, Dr. Knowlton of Virginia Tech, and Dr. Henderson of Cal Poly.  We also worked with Canadian youth representatives, incorporating many of their excellent ideas into our revisions. These guidelines are  published in a new Holstein Foundation workbook just released. The title is "Showring Ready" and can be accessed at http://www.holsteinfoundation.org/education/hfworkbooksRequst1682557156541ldskf.html. You can also easily locate the workbook on the Holstein Foundation website.

    Facebook. Ohio 4-H Dairy Program does have a Facebook page which I would like to encourage everyone to review and "friend" us.  Let me emphasize that it is being used as a tool and not a toy.  See for yourself and let me know what you think!

    Congratulations are extended to one Ohio's 4-H dairy advisers, Lisa Gress, as she has been selected to receive the 4-H Meritorious Service Award at the Volunteer Conference in March. Last year, we were also fortunate to have Bernie Heisner selected for a leadership award and COBA designated for the "Friend of 4-H" recognition.

    At www.4hansci.osu.edu/dairy, you can also read about any of our current programs and events. There is also a file available for you to view our new stand-up poster display that has been making its way around to many dairy events.  We are the first livestock 4-H youth program to use such a promotional tool!

  4. 2011 Dairy Farm Business Analysis - The time is now!

    Dianne Shoemaker, Field Specialist, Dairy Production Economics, Ohio State University Extension

    Grain prices rocked in 2011 if you were selling, but hurt like the devil if you were buying.  Milk prices were pretty nice, but net farm income on each farm will vary from outstanding to poor depending on a number of factors. Whether you were selling grain or buying feed will be one of the major factors. How did your farm do? You surely have a general sense ... you were either pre-paying to manage income tax liabilities or that wasn't an issue ... but how did you do by the numbers?

    Direct costs, total costs, and net returns per cow, per cwt, per acre, per bushel, per ton of crops grown. Total cost of production per cwt, feed cost per cwt, net farm income per cow.  These are important numbers for every farm as they monitor individual enterprise profitability, develop and monitor risk management plans, and look for opportunities. 

    What was the return on assets? Return on equity? What were the Farm Financial Standards Council "Legal 21" financial measures? How did your farm do this year compared to last year? How does your farm stack up against all of your competition? Against all farms your size? Against the top 20% of both groups? 

    Need help answering all of these questions? Completing your farm's financial analysis for 2011 using the FINAN with enterprise analysis program is an organized and effective way of getting those answers done each year ... with the added benefit of a growing state, regional, and national database for benchmarking.

    Through grant funding from the National Farm Benchmarking project, we are able to offer a full 2011 FINAN financial analysis, including enterprise analysis to 100+ farms. Field crop, dairy, livestock, poultry and horticultural crop farms are welcome to participate. Analyses will be completed by either Extension or Farm Business Consultants who previously worked with the Farm Business Planning and Analysis program. 

    Participants in the project will work with their Extension Educator or Farm Business Consultant to complete their farm's analysis by May 2012. Maintaining each farm's confidentiality is critical and farm analyses are coded before submission to the database where data are only shared as group data, so individual farms are never identifiable.

    In July, Ohio's farms are invited to participate in a meeting to review Ohio's farm business summary and learn how to use their individual farm's analysis, Ohio's data, and the national database to enhance their farm’s financial and risk management.

    We invite and encourage you to participate in Ohio's 2011 Farm Business Summary. This is a prime opportunity with the benchmarking grant covering the $600 per farm cost of analysis. Questions? Contact Dianne Shoemaker or Eric Barrett at (330) 533-5538 to discuss this opportunity. 

    Extension and Financial Analysis Consultants who can help you with this project include:

    Dianne Shoemaker

    Mahoning County Extension



    Ann Gano McCleary

    Keeping Tabs, Inc



    Thomas Weygandt

    Farm Consulting



    Don Garrett

    Ag Data Solutions



    Tom Ackerman

    Farm & Sm Bus Consulting, LLC



    Eric Barrett

    Mahoning County Extension



    Chris Bruynis

    Ross County Extension



    Bruce Clevenger

    Defiance County Extension



    Jeff McCutcheon

    Morrow County Extension



    Heather Neikirk

    Portage County Extension



    Jon Rausch

    Union County Extension




  5. Livestock Mortality Composting Certification Program Scheduled

    Glen Arnold, Field Specialist, Manure Nutrient Management Systems, Ohio State University Extension

    A livestock mortality composting certification program has been scheduled for Tuesday, January 31st at the Putnam County Extension office at 124 Putnam Parkway in Ottawa, Ohio at 7:00 PM. Contact Glen Arnold  at 419-422-3851 (Arnold.2@osu.edu) for more information or contact Ann Meyer at the Putnam County Extension office at 419-523-6294. Registration is $15 and requested by January 27th.

    This training session will certify an operator to compost all approved livestock species and is available to all Ohio livestock producers. Composting is a natural process where bacteria and fungi decompose organic material in a predominantly aerobic environment. During the composting process, microorganisms break down organic materials into a stable mixture called compost. The compost resembles humus and is spread on farming fields.

    Composting, rendering, incineration, and burial are the four most common ways to dispose of livestock mortality. To legally compost dead livestock in Ohio, producers must attend a certification program.

    For producers who utilize composting, sawdust is the most commonly used carbon source for composting livestock mortality in Ohio. Surveys indicate farmers utilizing composting find it a cost effective and convenient method to dispose of livestock mortality.