The 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

As of mid-May 2012, milk is flooding most regions of the country.  As of the end of April, it was estimated that the cumulative national milk production was running over 4% above last year (this is after accounting for the extra day in February).  The number of cows (9.270 million) is up slightly from last year (about 1%), which indicates that the extra production is primarily due to additional productivity per animal (62.8 lb/day compared to 60.5 lb/day at this time last year).  Exports have so far been maintained.  Exports are in essence supporting U.S. domestic prices, but there is a real danger that our domestic prices might collapse later this year.  As I write these lines (May 24, 2012), the Class III futures for the next 10 months are trading between $15.21 and $16.20/cwt.  These prices would equate to a blend price in Ohio between $16.01 and $17.00/cwt.  At best these are at break-even prices when one considers current cash feed prices.  I see little chance for a significant downturn in feed prices.  The rest of the year should hopefully not be as bad as 2009, but dairy producers will have to be very vigilant.  This includes the proper selection of feed ingredients to make up the dairy rations.

Nutrient Prices

As usual in this column, I used the software SESAME™ 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 now severely overpriced at 17.9¢/Mcal, but it is down 1.5¢/Mcal from March.  For MP, its current price (29.9¢/lb) is at about its 6-year average (28¢/lb).  Thus, we are currently in a period of very high dietary energy prices but average protein prices, although it may not feel like it.  This is even more evident when one is reminded that less than 10 years ago, dietary energy (NEL) was priced at about 5¢/Mcal.  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), and the discount of 13¢/lb is above its 6-year average (-9¢/lb).  Meanwhile, unit costs of e-NDF are historically a bit low, being priced at about 1.0¢/lb compared to the 6-year average (3.3¢/lb).  Homegrown forages are generally the best sources of this important nutrient.

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

Economic Value of Feeds

Results of the Sesame analysis for central Ohio in mid May 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 deemed outliers (completely out of price).  One must remember that Sesame compares all commodities at one point in time, mid-May in this case.  Thus, the results do not imply that the bargain feeds are cheap on a historical basis.

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

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

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-May 2012.


At Breakeven


Bakery byproducts
Corn, ground, shelled
Corn silage
41% Cottonseed meal
Distillers dried grains
Feather meal
Gluten feed
Soybean meal - expeller
Wheat middlings

Alfalfa hay - 40% NDF
Brewers grains, wet
Citrus pulp
Whole cottonseed
Gluten meal
48% soybean meal
Wheat bran

Blood meal
Beet pulp
Canola meal
Fish meal
Meat meal
Soybean hulls
44% soybean meal
Roasted soybeans

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

As I write this column on May 24, the cash markets for dairy products do not bode well.  Chicago blocks and barrels of cheddar cheese are selling for about $1.50 and $1.46/lb, respectively.  Chicago AA butter price stands at ~$1.36/lb; non-fat dry milk is trading around $1.15/lb.  Unless commodity prices recover from these levels, May and June class prices for cheese, butter, and powder could be around $5/cwt less than last year's class prices.  Combined with near record prices for feed, we may be facing painful times in months ahead of us.

Too much milk.  The downward pressure on dairy commodity prices is not just a domestic phenomenon; the amount of milk being produced is on the rise in all major dairy producing regions of the world.  It has rained in Oceania - lots of rain.  New Zealanders and Australians are doing what they normally do when there are tons of grass around: add cows and make more milk.  Ultimately, Oceania is a world price taker.  The domestic market in both Australia (22 million people) and New Zealand (4 million people) is so small that milk produced in these two countries must find a place on the world's markets.  New Zealanders in particular, clearly understand this reality and are actively marketing dairy products in all areas of the world, but particularly Asia.

European Union quota to end.  European producers are increasing milk production in spite of the quota system still in place.  The quotas are scheduled to disappear in 2015.  Thus, their value is dropping and some producers are rapidly expanding their herds to become more competitive on a world basis.  Consequently, according to Dairy Market News, the milk supply in Oceania and Europe is much like it is in America: "Current output is far exceeding demand".

Powder puff.  Milk powder markets are no different.  The market for nonfat dry milk is weak at best.  Interest from export markets is weakening.  Unfortunately, the U.S. now exports a substantial proportion of its nonfat dry milk production, close to 15% of its milk solids production.  In a way, this is good because our domestic markets would literally crash if these solids were trying to find a home in an American stomach.  But, exporting brings new factors into the pricing of dairy products, and these new factors can only add to price volatility.  This includes the currency exchange rate.  The U.S. dollar has strengthened quite a bit because of the financial situation in Europe.  Strengthening of our dollar is unfavorable to exports.

Class I utilization dropping.  Meanwhile, the proportion of milk being used for Class I keeps dropping.  In Federal order areas, it was reported to be 3.4% lower this April than last year at the same time.  In California, the Class I pool usage dropped by a staggering 6.7%.

I wish that I could see a ray of sunshine somewhere in these figures, but I don't.  Let's hope that my dairy barometer is completely off, but don't count on it.  It is time to go back to your cash-flow budgets and set plans for 6 months of negative profitability and tight cash flows.