Dairy Market Watch, July 2012

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

Dairy Commodity and Milk Price Outlook for August  - October 2012.

            To start this edition of Market Watch 2012, I will review a couple of trends in U.S. milk production and milk price and provide an outlook for milk prices and dairy farm returns the next 6 to 12 months.

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 - June 2012.  I have selected the start month of December 2009, as this was the month that 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 this time period, 157,000 dairy cows have been added back to the US dairy herd.  The US herd expansion is at an estimated annual rate of +0.84%.  During this same period, milk production per cow has remained fairly flat (adjusted to a 30-day month), only showing an upswing beginning in December 2011.  For the first six months of 2012, average daily milk production per cow was 60.8 lb/cow as compared to 59.5 LB/cow for the same months in 2011.  For the January through June 2012 period, the average monthly US milk yield was 1,825 LB/cow.  In the last issue of Buckeye Dairy News, the story was very favorable weather and rapid growth in cow numbers and in milk per cow, now the story is just the opposite.  Heat, drought, and sky-high feed prices, along with falling milk cow numbers and output per cow is the current topic of discussion. With lower net returns, the expansion was stopped in its tracks as we moved into the summer months.  With an estimated 9.241 million dairy cows nationally, milk production growth slowed from a torrid 7.43% annualized rate delivered in February to a very modest 0.93% annualized rate in June 2012.  Should this continue, and I expect growth will slow even more in the coming two months, this will be put the wind in the milk price sail and we should see milk prices firm into the $18 to $20/cwt range by September.

Chart 1
Chart 1. US milk cows and milk yield, monthly 2010 through 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 this same time period. Milk production growth in the US was quite robust in early 2012, exceeding 3% annual rate for four of the six months to date.  During this same period, the Class 3 milk price lost ground and fell to under $16/cwt in the last four months.  With both cow numbers and productivity expanding in the last half of 2011 and into the first four months of 2012, the growth in US milk production grew considerably.  Milk prices responded, moving down from $19/cwt in November 2011, to bottom out at $15.23/cwt in May 2012.  Since then, with the annual rate of growth in milk production slowing to under 1%, the Class 3 milk price has strengthened considerably.  The current Chicago Mercantile Exchange (CME) futures market expectation for the July through December Class 3 price is $18.16/cwt.  The expectation for the next 12 months is $18.08/cwt.

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

What lies ahead in 2012?

            Taking a look at the 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 July 26, 2012 (the unconnected blue dots), the median Class 3 price over the period 2007 through 2012 (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 above the recent historical price range.  As we move into the last half of the 2012 summer months, the CME futures prices are at or above the 25% upper level at $18.60 to 18.70/cwt.  Overall, the CME market participants are pricing milk for a tighter supply demand balance over the coming 12 months.  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, adds about $2.50 to $3.00/cwt to the Class 3 milk price.  With the current CME market anticipating an $18/cwt Class 3 milk price, the mailbox price for planning purposes will be in the range of $20.50 to $21.00/cwt.  For a relative comparison for the July 2011 through June 2012 period, the Class 3 price averaged $17.78/cwt and the FMMO mailbox price $19.83/cwt.

Chart 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 Chart 4 are my estimates of the total dollars available to contribute to allocated costs on a per cow basis for Ohio.  Allocated costs include capital payments and returns to equity plus returns to management.  These are the dollars from the sale of milk which, after paying for feed and non-feed operating expenses, contribute equity to a dairy farming operation.

Chart 4
Chart 4.  Estimated allocated revenue available per cow 2003 through 2011 and 2012 (projected) for Ohio.

The financially difficult years of 2003, 2006, and 2009 are evident.  In these years, there was very little revenue remaining after paying operating costs to contribute to allocated costs.  This was especially true for 2003 and 2009.  Also evident are the years of 2007 and 2011.  Here, we see that in 2007 there remained $1200/cow available to pay down debt, build equity, and provide for a return to management of the dairy operation.  With milk prices recovering in the second half of 2012, I would project that the allocated cost per cow for 2012 will be closer to 2008 in magnitude when the Ohio mailbox price averaged $18.83/cwt against very high feed prices.  If you plan your business operation based on three year averages, the 2010 through 2012 average allocated revenue is estimated at $813/cow (red line, Chart 4).

Ohio Dairy Web has moved...

            My website have been moved to a new server.  For more information on the market outlook, as well as my insights on US dairy policy, please visit my Ohio Dairy 2012 website.  You can visit: (http://aede.osu.edu/programs-and-research/ohio-dairy-web/ for the latest market and policy information of importance to the Ohio dairy industry.


Dairy Policy Watch 2012 (top of page) pdf file
John Newton, Ph.D. Graduate Student and Cam Thraen, Dairy Markets Extension Specialist, Department of Agricultural, Environmental and Development Economics, The Ohio State University

On the surface, the dairy title of the House (H.R. 6083) and Senate (S. 3240) Farm Bill appear identical.  They both offer participating dairy farmers with a comprehensive income over feed cost margin protection program and a fast acting, and short-lived, milk supply stabilization program.  However, when you compare and contrast each piece of legislation, it becomes increasing apparent that these two bills have some noteworthy differences as they pertain to the margin protection and supply stabilization programs. 
In this article, we look at the House and Senate legislation and highlight the key differences among the programs (page numbers are given in parenthesis for reference purposes).  The differences are categorized into three sections: (i) margin protection program, (ii) milk supply stabilization program, and (iii) miscellaneous provisions. 

Margin Protection Program

  1. The administrative and premium fee structures for the margin insurance program are considerably different. 

    a. The administrative fee is based on the pounds (LB) of milk marketed by the farm in the previous calendar year.  The administrative fees in the House proposal are capped at $1,000 (p. 90), while the Senate bill caps the administrative fee at $2,500 (p. 83) per farm per year. 

    b. The premium schedule for supplemental insurance coverage depends on farm size.  Farms are grouped into one of two size categories (tiers) based on annual milk marketings.  Tier one farms deliver less than 4 million LB and tier two farms deliver more than 4 million lbs per calendar year.  The premium schedule in both bills for supplemental margin coverage is nearly identical for tier one farms.  However, for tier two farms, the premiums in the Senate bill range from $0.005 to $0.24/cwt higher (S. p. 91, H.R. p. 99) than the House premiums.  Figure 1 details the premium rates contained in the House and Senate bills for tier two farms.

    c. Combined, these two differences make the Senate proposal more expensive for participating farms delivering more than 4 million LB/year.

  2. The House bill offers retroactive margin insurance coverage for up to $6.00 for farms who file a notice of intent to participate in the program no later than 30 days after the effective date of the subtitle (p. 86).  The Senate bill allows farms to transition using either the milk income loss contract or the margin program as long as both programs are in existence (p. 81).

Milk Supply Stabilization Program

  1. Both bills contain language to suspend the stabilization program, depending on the relationship between US and world prices for cheddar and 1.25% skim milk powder (enhanced suspension thresholds).  The enhanced suspension thresholds used to suspend the stabilization program are different among the two pieces of legislation.  The price triggers in the House bill (p. 112) are set lower than the Senate bill (p. 104), making it easier for the stabilization program to be suspended.
  2. Both bills require an annual report on the impact of the stabilization program on dairy markets, including accounting for funds collected and used by the stabilization program (S. p. 102, H.R. p. 109) but the Senate bill also requires the annual report to address the impact of the stabilization program on markets.
  3. The Senate bill directs the Office of the Chief Economist to conduct a study of the impacts of the stabilization program (p. 108), while the House bill does not include such language.
  4. Neither bill currently specifies a process to remunerate milk processors for the costs of managing the stabilization program.  Management of the program includes: (i) maintaining farm production records to calculate payment reductions, and (ii) remitting monies to the USDA in the event of payment reduction.

Miscellaneous Provisions

  1. The Senate bill does not allow farms to participate in both the Livestock Gross Margin Insurance Program for Dairy (LGM-D) and the margin protection program (p. 84), while the House bill allows LGM-D participation only after operations that are not enrolled in margin protection program had the opportunity to purchase LGM-D (p. 91).
  2. The Senate bill begins no later than 120 days after the effective date of the subtitle (p. 77), and the House bill provides 150 days (p. 87) for establishment.
  3. The House bill provides a sign-up period of 12 months (p. 85), while the Senate bill allows up to 15 months for farm registration (p. 80).


House Bill:

Senate Bill:

Newton Figure 1

Figure 1. Tier 2 premium schedule for margin insurance.