We are now fully four months into the fiscal year 2004 Milk Income Loss Contract (MILC) program payments. For the first three of these months, milk prices were high enough to send the MILC payment rate into the negative zone and set payments at zero. The first MILC non-zero payment for FY-2004 is this current month of January and the rate is $0.828/cwt. Front and center on every dairy producer's financial planning radar screen for the remainder of the fiscal year is the need to plan for the most likely pattern of milk prices and the associated MILC payments. There are a few simple rules that you need to keep in mind.
Rule One: If your rate of milk production is such that it takes all 12 months of the fiscal year to reach the marketing cap of 2.4 million pounds, then you should already have started your payments. There is no benefit to timing your start month to catch the highest MILC payment rates.
Rule Two: If your rate of production is such that it takes less than the 12 months of the fiscal year to reach your marketing cap of 2.4 million pounds, then you need to sit down and evaluate the most likely pattern of milk prices and MILC payments to determine when you should commit to your start month. There are a number of key factors that you need to consider when making this decision. First, how many months does it take you to reach the full marketing cap? If you meet this with a single months shipping, then you have a market timing challenge. If your objective is set the start date so as to receive the maximum payment, then you have to accurately forecast the lowest point for the Class I price mover and that, in turn, requires accurately forecasting the lowest combination of Grade AA butter, cheddar cheese, and whey prices for the first two weeks of the month preceding the month that you expect to receive the MILC payment.
Rule Three: If your production rate is such that it takes two to six months to reach the cap, then you must think about the average payment received over the months you are eligible for the MILC payment. You do not want to focus exclusively on the month that you think will be the lowest Class I mover and therefore the highest MILC payment. If you do, you may well miss setting your starting date so that you receive the highest average payment, taking into account both the payment rate and the number of days of shipment in each eligible month.
Now consider a concrete example. For this exercise I will use the current 2004 price forecast, as published by Bill Brooks, eDairy/Down's-O'Neill Economist, for butter, cheese, nonfat dry milk, and whey prices. I will use these as the basis for calculating the forecast Class I mover and MILC payment rates. Let's look at four possible cases that you may identify with, and for each, I will calculate the total MILC payment, the month to start receiving the MILC payment, and the average payment.
Case I: Remaining nine months to meet the MILC cap. The MILC payment start month is January 2004. The total MILC FY-2004 payment is $25,475, and the average payment is $1.063/cwt. If you identify with this case, then you need to be eligible to receive your MILC payments for all of the remaining FY-2004 months.
Case II: One month to meet MILC cap. The MILC payment start month is April 2004. The total MILC FY-2004 payment is $32,292, and the average payment is $1.346/cwt. Forecast prices used to calculate the April Class I mover reach their lowest FY-2004 point during the first two weeks of March. You need to be signed-up and eligible to start receiving payment for April milk shipments.
Case III: Three months to meet the MILC cap. The MILC payment start month is April 2004. The total MILC FY-2004 payment is $31,217, and the average payment is $1.301/cwt. This is the same as Case II. With milk prices hitting bottom in early March, the MILC payment rates will peak and then begin to decline over the next nine months.
Case IV: Five months to meet the MILC cap. The MILC payment start month is March 2004. The total MILC FY-2004 payment is $29,941, and the average payment is $1.248/cwt. Here you need to consider the impact of averaging the MILC payment. Waiting until the peak payment rate forecast for April will cost you on the months further out. If you identify with this situation, then you need to be eligible to receive MILC payments beginning with March 2004.
If you would like to work out scenarios that more closely match your production rate you can do so by downloading the MILC_CALC Microsoft Excel Workbook from my Ohio Dairy Web 2004 website. Look on the front page for the link to MILC_CALC. Download this to your computer, and using Microsoft Excel and this workbook, you can do your own tracking of the likely MILC payment rates as market price forecasts change. The workbook contains all instructions for its use and even allows you to use the CME Class III and Class IV futures prices as forecasts. And, of course, it is provided free of charge for educational purposes only.