Dr. Normand St-Pierre, Extension Dairy Management Specialist, Department of Animal Sciences, The Ohio State University
The Ugly Side: Milk Prices
As I write this column in late October, the Class III futures have just closed at $23.89 for October, $21.25 for November, and $19.20/cwt for December 2014. For the next 12 months, the Class III milk futures are averaging $18.29/cwt, which (IF these are accurate predictors) should provide Ohio dairy producers with a mailbox price averaging around $19.00/cwt over the next 12 months. The problem is that I don’t think that the futures markets will turn out to be accurate in this instance. In my opinion, they are overly optimistic. Here’s why.
Last year, the U.S. exported over 16% of its milk solids production. Increased exports have been a major factor contributing to our unusually high domestic milk prices over the last 10 months. The problem is that our domestic prices for dairy products are currently not competitive with world prices. National prices used for class calculations in September were $2.35/lb for cheese (US$ 5181/metric tonne – MT), $2.85/ lb for butter (US$ 6283/MT), $1.47/lb for nonfat dry milk (NDFM, US$ 3242/MT), and $0.67/lb for dry whey (US$ 1477/MT). Compare these prices to those of our major competitors on the export markets. Yesterday, the November Eurex butter (i.e., European butter) closed at € 2968/MT (US$ 3800/MT). Meanwhile, New Zealand skim milk powder (SMP, the closest international standard for NFDM) is trading around US$2530/MT. So there is no way that our domestic prices can remain at their elevated levels if we want to remain in the dairy export markets – which we must unless we find a lot of American bellies to swallow 15% more milk solids. The cash markets have already reacted to the incoming surge of dairy products. As of yesterday (10/28), cheese blocks traded at $2.14/lb on the Chicago Mercantile Exchange (CME), while the cheese barrels were trading at $1.92/lb. Butter has fallen from its peak of $3.05/lb down to $1.80/lb yesterday. NFDM is trading on the CME at about $1.25/lb, and dry whey is selling at $0.65/lb on the AMS. I think that the cash prices we see on major exchanges (which are thin markets) will fuel through our average national prices much more quickly than the people trading futures contracts are anticipating. If I were a dairy producer right now, I would set myself for Class III prices in the $17/cwt range before the end of the year, and $15/cwt prices within the next 6 months. If I am wrong, then the outcome should be (more) pleasant than anticipated. If I am right, then even $3.50/bu corn won’t be sufficient to maintain profitable margins for many producers.
The Good Side: Nutrient Prices
All is not doom and gloom! Feed prices have taken a significant tumble in the last few months. This brings significant opportunities not only to lock in very good prices on major commodities (e.g., corn and soybean meal) but also to evaluate how byproduct ingredients could fit your feeding program and lower your feed costs.
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 October 20, 2014. 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 currently at a “fire sale” price of 2.6¢/Mcal. This is important because a cow producing 70 lb/day of milk requires in the neighborhood of 33 Mcal/day of NEL. So, supplying the dietary energy required to produce milk is currently very inexpensive. For MP, its current price (77.6¢/lb) is nearly 3 times greater than its 6-year average (28¢/lb). Although the protein markets (e.g. soybean meal) have been driven down in the last few weeks, their fall has been proportionally less than that of energy feeds (e.g., corn). Hence, protein prices are still relatively expensive. The cost of ne-NDF is currently discounted by the markets (i.e., feeds with a significant content of ne-NDF are priced at a discount), but the discount of -4.8¢/lb is less than its 6-year average (-9¢/lb). Meanwhile, unit costs of e-NDF are also at over 3 times their 6-year average, being priced at 11.6¢/lb compared to the 6-year average (3.3¢/lb). Fortunately, a dairy cow requires only 10 to 11 lb of effective NDF, so the daily cost of providing this nutrient is only about $1.22/cow/day (i.e., 10.5 lb × $0.116/lb).
Using these nutrient costs, we can estimate how much it should cost on an average to feed for a certain amount of milk production. Using a target cow milking 70 lb/day at 3.7% fat and 3.1% protein and eating 50.4 lb/day of dry matter, the average feed costs should currently be in the neighborhood of $5.85/cow/day, or $8.36/cwt. These costs neither include the costs of feeding the dry cows nor the replacement herd.
Table 1. Prices of dairy nutrients for Ohio
dairy farms, October 20, 2014.
Economic Value of Feeds
Results of the Sesame analysis for central Ohio on October 20, 2104 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 those for which we didn’t have a price. One must remember that Sesame compares all commodities at one point in time, mid March 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, October 20, 2014.
For convenience, Table 3 summarizes the economic classification of feeds according to their outcome in the Sesame analysis.
Table 3. Partitioning of feedstuffs, Ohio, October 20, 2014.
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. Also, there are reasons that a feed might be a very good fit in your feeding program while not appearing in the “bargains” column. For example, your nutritionist might be using some molasses in your rations for reasons other than its NEL and MP content.
A few people have asked that I publish the results using the 5-nutrient group (i.e., replace MP by rumen degradable protein and digestible rumen undegradable protein). A table containing these results is provided herewith.
Table 4. Prices of dairy nutrients using the
5-nutrient solution for Ohio dairy farms,
October 20, 2014.