Dr. Normand St-Pierre, Extension Dairy Management Specialist, Department of Animal Sciences, The Ohio State University
I'll be breaking a few hearts here... Do you remember the report issued by the US Department of Agriculture on January 12th of this year? 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. Some were betting on how low corn prices would get this fall once the projected large US corn crop would start hitting storage bins and grain elevators.
Here we are, just a little over 7 months later, in the middle of one of the worse droughts in US history, facing low corn yields not seen for decades - and that's for those who have any crop to harvest. How quickly things change in agriculture. Which is why we basically cannot predict with any reasonable degree of accuracy either commodity feed prices or milk prices. Once in a while, you will catch me making a forecast, but with the clear disclaimer that I really don't know more than the average Joe. I do it for entertainment; I am right about half the time and wrong the other half, which is about what you get when you flip a coin... But I am honest, whereas all pseudo-experts keep missing the mark and by a considerable margin. What the futures markets are reflecting is what other clueless people think prices will be in the future. Unfortunately, the current situation provides an example as to why production and price risk management are increasingly important.
All is not a disaster. One benefit of a surge in feed markets is that it takes time for all feed to reach their new price equilibrium; some prices go up too quickly, while some others lag. This means that in this insane feed market that we are currently facing, there are some feeds that are relative bargains. This column should assist you in identifying some of them.
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 severely overpriced at 22.2¢/Mcal. For MP, its current price (30.3¢/LB) is amazingly 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. That's quite amazing when one looks at the late surge in commodity prices, including the soybean complex. This is not intuitive at first. Here is a simple example to help in understanding this. Suppose that we are just valuing NEL and crude protein in feeds. If we go from a situation where corn is at $100/ton and soybean meal is at $200/ton to one where corn is at $400/ton and soybean meal is at $500/ton, then we would be in a situation of increased dietary energy costs and decreased protein costs, although both commodities have gone up each by $300/ton. This is about what has happened in feed markets as of late.
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 12.3 ¢/LB is about at its 6-year average (-9¢/LB). Meanwhile, the unit cost of e-NDF is amazingly favorable, being priced at about -6¢/LB compared to the 6-year average (3.3¢/LB). Of course, this is primarily driven by the current price of corn silage, which is based on the December corn futures last September (at the time of harvest), and alfalfa hay, which at least based on the USDA survey is still quite reasonably priced in Ohio ("reasonably" here meaning compared to the insane prices for other feeds).
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 July 23 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, late July in our 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, late-July2012.
Table 3. Partitioning of feedstuffs, Ohio, late-July 2012.
Brewers grains, wet
Alfalfa hay (40% NDF)
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.
As of July 30, The USDA estimates that 48% of the US corn crop is in poor or very poor condition. The grain markets eased up a bit last week, albeit at very high prices. Where feed prices will land come fall is anyone's guess, but the odds of a significant decrease are in my estimate low. This last statement is a disguised forecast; coming from me you may as well flip a coin...