Market and Policy Watch 2013

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

By now, it is well known that a new farm bill was not signed into law, and many of the dairy provisions of the 2008 farm bill where extended through September 2013.  The Milk Income Loss Contract (MILC) payment program was extended using the more generous payment parameters.  While most Washington watchers give the passage of a new farm bill in the coming months less than a 25% chance, the provisions of that bill, when signed into law, will very likely be based on the margin insurance and market stabilization programs as put forth in the Dairy Security Act.  This puts the focus of coming dairy policy on income over feed cost (IOFC) margins.  A colleague of mine has made the point in past issues of Buckeye Dairy News that an IOFC margin calculation based on U.S. average milk and feed values is pointless, as such a calculation may bear little connection to an individual dairy operator’s actual milk price or feed cost.  While it cannot be argued that calculating IOFC with using the USDA reported All Milk price, corn price, soybean meal price, and alfalfa hay price is representative of specific IOFC on any given dairy farm, this observation misses the point. 

As a dairy farmer, you will be provided the opportunity to participate in an insurance program with costs based on your dairy production size and premiums paid based on IOFC coverage levels selected.  In return, you will be participating in potential financial payouts triggered by an macro measure of the IOFC for the entire United States dairy industry.  This is purely a financial consideration.  As a dairy farmer, do you wish to participate in this program, incurring cost and potential financial payouts, or do you wish to go another direction, relying on the private market instruements, such as futures market hedging, futures puts or Calls, or possibly purchasing Livestock Gross Margin Insurance.

Regardless, the focus of income support for agriculture, including dairy, will be on providing the opportunity for farmers to particiapte in an insurance program, whether that be crop insurance or IOFC insurance.  Therefore for dairy, it is important to be able to forecast this national IOFC margin for the coming production year.  Working with John Newton, Ph.D. graduate student in the Department of Agricultural, Environmental and Development Economics, we have developed just such a forecast model for this IOFC.

The IOFC is a forecast based on a complex model which uses the Chicago Mercantile Exchange (CME) Group futures market price paths for feed inputs and milk price.  The IOFC time path over the coming 12 months suggests that the least favorable period will be January through March, 2013 and then recover through the remainder of 2013 (Figure 1).  The figure depicts the mean, median, and upper 75% and lower 25% bands for this projection.

The lower 25% boundary is the most pessimistic outlook, showing that a combination of low milk price and high feed input prices, will result in an IOFC path dropping to nearly $5/cwt before recovering to only the $6.75/cwt range late in 2013.  This time path for IOFC reflects continuing drought in the corn belt and higher feed cost. The optimistic 75% boundary depicts an IOFC time path reflecting stronger milk prices and lower feed input prices.  The low point is just above $6.00/cwt and steadily recovers over the year to reach $9.00/cwt by late 2013.  This time path reflects a return to more normal crop conditions with lower feed cost and higher milk prices.

You can find updates for this IOFC forecast chart on my website:

Thraen Figure 1
Figure 1.  The 2013 projected income over feed cost (IOFC) based on the proposed Dairy Security Act.