Dairy Market Update

Dr. Cameron S. Thraen, Associate Professor and OSUE State Dairy Markets and Policy Specialist, Department of Agricultural, Environmental and Development Economics, The Ohio State University

National U.S. Dairy Margin Update

At the time of this issue of Buckeye Dairy News, the concern looking forward is the falling U.S. cheese, butter, and skim milk powder prices and the likely impact on the Market Protection Program (MPP) in the coming year.  At the end of January 2015, U.S. dairy commodity prices have made a significant realignment with lower world prices for all major dairy commodities. It is natural to assume that this downward realignment will result in dramatically lower income over feed cost (IOFC) margins for 2015.  While it is correct that lower commodity prices will pull down the U.S. All Milk Price and the overall margin for 2015 will not come near the record margin set in 2014, this does not translate into a catastrophically lower IOFC margin. 
Why?  Because the feed price side of the MPP margin has experienced an even greater decline with a 2014 record grain harvest in the U.S.  To pull the U.S. All Milk Price low enough to trigger significant MPP payments, my analysis suggests that Class 3 and Class 4 prices would have to fall by at least an additional $1 to $1.25/cwt over what the futures market is currently forecasting for 2015.  This would require U.S. dairy commodity prices falling below world prices quite early in 2015 - an outcome not very likely. Remember, ‘high prices cure high prices’ and equally ‘low prices cure low prices’. To trigger MPP-Dairy payments at the $4 level would require world dairy prices at the 2009 level, also not at all likely.

Margin Protection Program Forecast

A look at the current MPP margin forecast based on the futures market prices as of January 26, 2015 shows the median margin to stay above $7.00 /cwt through the next 15 months. Taking into account the inherent uncertainty in the forecast horizon, the national margin will be in the zone of $6 to $8 and most likely near the $7.00 mark before recovering midsummer 2015 (Chart 1).

Chart 1

Chart 1. Forecast margin for the Margin Protection Program.

Table 1 below shows the probability of the MPP margin falling below each of the forecast program trigger margins for each of the critical two-month periods over the coming 12 months.  At this time, the probability that there would be a payment triggered at the $8.00 level in the  2015 production year runs at 51% for January-February, 76% for March/April, and 68% for the May-June calculation.  Out beyond this spring period, the forecast trigger margin probability declines.  At trigger levels below the $8 mark, the probabilities are even smaller.  Remember, at trigger levels above $6.50, the cost of margin protection becomes relatively expensive, regardless of the magnitude of the MPP production history.

Table 1. MPP-Dairy Decision Tool Forecast 2015 – 2016.
Table 1

If you wish to follow the Dairy Markets and Policy MPP margin forecast go to the DMaP website and click on MPP Decision Tool (http://dairymarkets.org/MPP/).  You will find detailed information on MPP cost and likely payouts by farm production history on my website: http://aede.osu.edu/research/ohio-dairy-web/dairy-security-act.

Participation in the Margin Protection Program: Ohio by County

With the official sign-up completed, the USDA Farm Services Agency (FSA) is beginning to release data on dairy farm participation.  For the state as a whole, 999 farms signed onto MPP-Dairy for 2015.  Of these, 613 elected to secure only the minimum coverage at $4.00.  By comparison in the last year of the Milk Income Loss Contract (MILC) program, 1,512 Ohio dairy farms participated according to the USDA FSA.

The following Table 2 and Chart 2 show the MPP-Dairy numbers for Ohio by county.  Table 2 shows the top 10 counties by MPP sign-up.  Wayne county with 478 licensed dairy farms and 114 MPP sign-ups secured the number one position, followed by Mercer, Holmes, Columbiana, and Stark counties to complete the top five.  The top 10 counties account for 51% of the licensed dairy farms in Ohio and 51% of the total number of farms participating in MPP-Dairy.  These top 10 counties account for 49% of those farms participating, choosing to purchase above the minimum level of $4.00.

Chart 2 shows the participation rate (the number of applications divided by the number of licensed dairy farms) by Ohio county.  Some caution is warranted as a high participation percentage is directly influenced by the reported number of licensed dairy farms in a county.  For example, Scioto County has 100% participation as both of the two dairy farms in that county signed-on for MPP-Dairy. 

Also influencing the participation rate figure is the number of dairy farms in a county that would have a strong, non-financial concern with participation in this government program.  Consider Hardin County as an example.  With 97 licensed dairy farms, only four dairy farms chose to participate in this program.  This appears to be a very low rate of interest in this new safety-net program.  However, the number of dairy farms in Hardin County that are classified by holding a Grade M license is 91.  These farms are likely to be of Amish or Mennonnite ownership and therefore may have non-financial reasons for not participating. 

This may also explain why the participation in MPP-Dairy is lower than that for MILC.  For example, early on in the debate over the MPP-Dairy, the program was identified as an insurance program.  This label was later dropped and the program was defined as a margin protection safety-net.  However if the MPP-Dairy program was perceived as an insurance program, some members of the Ohio dairy community may have elected to not participate for this reason.

We can get a fix on the participation rate for the entire State by removing all Ohio dairy farms with a Grade M license from the total number of farms. Of course, this provides an upper bound on the total participation rate as not all Grade M farms are Amish or Mennonnite.  Doing so suggests that the participation rate for Ohio is nearer to 51% and not the 34% reported by the USDA FSA and elsewhere [see: Comments on Summary Enrollment Data for MPP, DMaP BP 15-01 @ http://dairymarkets.org]. 

Table 2.  Margin Protection Program – Dairy: Top Ten Ohio Counties 
Table 2

You can find a complete listing for all Ohio counties on my OhioDairy Web 2015 website.  At this time, data on the election of buy-up coverage is available only for the number of applications received electing to buy-up but not by actual buy-up level.  As these data are released, I will make it available on my website: http://aede.osu.edu/research/ohio-dairy-web/dairy-security-act.

Chart 2Legend

Chart 2. MPP-Dairy 2015 participation rate by Ohio county.