Dr. Normand St-Pierre, Extension Dairy Management Specialist, Department of Animal Sciences, The Ohio State University
This is a time of the year when we should be joyful. Thanksgiving provided us with an opportunity to feed ourselves beyond reason, followed by majestic couch collapses to enjoy good company and American football. Christmas is just around the corner, with young ones fearing lumps of coal in their stockings and big ones just fearing another pair of socks… But as I travel throughout the State, I sense a universal anxiety filling up the days and nights of our dairy farmers. There is much uncertainty regarding milk prices and too much certainty regarding (high) feed costs. We have a proposed farm bill that contains a margin insurance program where feed costs are not regionalized and are solely based on the prices of two open market commodities (corn and soybean meal) and one very poorly traded feed (hay; can anyone tell me what kind of hay this is?). Too many people seem to ignore that the long-term average net farm income is about $1.50/cwt of milk. An “error” of $1.00/cwt on the insured margin represents about 66% of the average net farm income. If this is a safety net, the holes in the net seem awfully large to me! Meanwhile, we still should be attentive to what we can manage. Feed purchasing decisions still matter.
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 as of November 19, 2012. 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 6-year average of about 10¢/Mcal, NEL is now much more reasonably priced than it was just a month or two ago. For MP, its current price (63.6¢/lb) is considerably greater than its 6-year average (28¢/lb). Thus, we are currently in a period of very high dietary protein prices combined with average dietary energy prices. This is not due to a significant fall in the corn market but to an increase in the markets of feed supplying high quality rumen undegradable protein combined with a significant reduction in the price of fats. 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 4¢/lb is below its 6-year average (-9¢/lb). Meanwhile, unit costs of e-NDF are historically high, being priced at about 5.9¢/lb compared to the 6-year average (3.3¢/lb). So, dietary fiber, whether effective or not is currently highly priced from a historical standpoint. Homegrown forages are generally the best sources of effective NDF. For some mysterious reasons, the USDA in its Agricultural Price Report for October reported that Ohio alfalfa hay prices were the highest in the nation – more than in Texas and New Mexico… In fact, according to USDA, Ohio hay prices would be $76/ton higher than in Pennsylvania and $64/ton higher than in New York. Somebody is asleep on his desk in Washington. That same “somebody” will be determining hay prices used in the margin insurance calculations in the proposed Farm Bill.
Table 1. Prices of dairy nutrients for Ohio dairy farms, mid-November 2012.
Economic Value of Feeds
Results of the Sesame analysis for central Ohio in mid November 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 November in this 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-November 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-November 2012.
|
Bargains |
At Breakeven |
Overpriced |
|
Bakery byproducts |
Alfalfa hay – 40% NDF |
Blood meal |
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 a 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. Also, 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 use the estimates of the nutrient costs to calculate the Cow-Jones Index (CJI) for November. This index was 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 (ration). The reference cow used to calculate the Cow-Jones 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 nutrients has fluctuated over the years. Dietary energy is currently priced at its 5-year average, as it costs $3.59/day to provide the NEL required for the production of 65 lb/day (Table 4). This means that, on an average, one has to pay $5.52 to supply the NEL required to produce a hundredweight of milk. On the protein side, it currently costs $2.95/cow/day to supply the required MP, which equates to $4.54/cwt. The total feed costs for our standard cow is now $7.00/day, or $10.76/cwt (or about 14.5¢/lb of TMR dry matter). These figures result in a Cow-Jones of $10.50/cwt, which is over $2.75/cwt more than the break-even of $8.00/cwt. Dairy producers who are paying cash prices for their feeds (and have something to feed…) are currently making some money; nothing too exciting, but much better than just 2 months ago. The problem is that because of the drought, many will have to be purchasing forages in the spring at a time when the forage supply will be very tight.
Table 4. Calculations of the Cow-Jones Index for Ohio, November 2012.
The fact that the nutrient costs in November amounted to over 50% of the milk revenues should be of concern and foreshadows a difficult financial environment if either current feed prices are maintained throughout the year or if milk prices were to fall. Unfortunately, wholesale prices for cheese and butter have dropped considerably in November, whereas prices of whey and non-fat dried milk have held their own. Milk price forecasts (either using the futures markets or more conventional economics analyses) have been dropping over the last 3 to 4 weeks. It seems very safe to assume that the $21.02/cwt Class III price of October will not be sustained. As of the end of November, the Class III futures closed at $18.88/cwt, a drop of $2.14/cwt from the October price. The Class III futures for the whole of 2013 are averaging $18.41/cwt. So if feed prices are just maintained at current levels and if futures prices are accurate predictors, then we are looking at negative margins with $18/cwt Class III milk next year.