Milk Prices, Costs of Nutrients, Margins and Comparison of Feedstuffs Prices

Mr. Alex Tebbe, Graduate Research Associate, Department of Animal Sciences, The Ohio State University

Milk Prices: Past, present and future

Looking back on 2017, Class III milk prices have been more stable (Figure 1A) and higher than 2016 (average: $16.20 vs. $14.90/cwt), but they were still 8% lower than the 5 year average ($17.55/cwt).  The Class IV milk price was also consistently about $1.60/cwt higher compared to 2016 (average: $15.44 vs $13.76/cwt) and lower than the 5 year average ($17.03/cwt; Figure 1B).

For the current issue, the Class III component price for September closed at $16.36/cwt and then increased to $16.69/cwt in October. The November Class III futures price are relatively unchanged at $16.41/cwt, but it is projected to jump up about $0.50/cwt come December. All in all, we can expect the Class III milk price to average around $16.50/cwt, and producers can expect a mailbox price somewhere between $17.75 to $18.25/cwt for the remainder of the year.   

Whether the Class III milk price will stay above $16/cwt in 2018 is the current question up for debate. Unfortunately, I do not think this will happen. The reason being is global milk production continues to increase while the value of exported milk products is declining, and fast.

In regards to increasing milk production, this “consequence” is compounded by both parts of the equation – increased cow numbers and annual cow production. In 2017, the number of cows being milked in the US was about 1% or about 100,000 cows greater than the previous year (USDA, 2017). Annual milk production per cow also increased 200 lb/cow (22,900 vs 22,750 lb/cow/year), causing total milk produced to be 1.5% or 4 billion lb greater than 2016. The European Union and New Zealand also have increased their total production by about 4 billion lb, now leading us to the question – do we have a place for all of this extra milk?

Looking at the export market, both the total value and total amount of milk products exported in the US were consistently higher from January to June 2017 compared to these months in 2016. However in July and August, total milk value exported became similar and was significantly lower in September. The 2018 CME Class III and IV futures are reflecting the sudden dip now trading below $14.50 and $14.00/cwt, respectively, and suggest a bearish market is upon us. Inevitably, this will not be good for the domestic milk price.

Figure 1: The monthly Class III (A) and IV (B) milk prices for Federal Order No. 33 during the 2016 and 2017 years.

Nutrient Prices

As in previous issues, these feed ingredients were appraised using the software program SESAME™ developed by Dr. St-Pierre at The Ohio State University to price the important nutrients in dairy rations, to estimate break-even prices of many commodities traded in Ohio, and to identify feedstuffs that currently are underpriced as of November 28, 2017. Price estimates of net energy for lactation (NE_L, $/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.

In light of a potential drop in milk price, nutrient prices continue to remain relatively low as they have been for the past three years. For MP, its current value ($0.44/lb) has increased slightly from September’s issue ($0.42/lb), but it is lower than the 5 year average ($0.48/lb). The cost of NE_L was decreased by 0.5¢/Mcal to 6.6¢/Mcal, which is lower than the 5-year average of 11¢/Mcal. The price of e-NDF also dropped from 7¢/lb to 3¢/lb, whereas ne-NDF is nearly identical to September at -6¢/lb (i.e., feeds with a significant content of non-effective NDF are priced at a discount).

To estimate the cost of production at these nutrient prices, I used the Cow-Jones Index for cows milking 70 lb/day or 85 lb/day at 3.7% fat and 3.1% protein. In the September issue, the average income over nutrient costs (IONC) was estimated to be $10.68/cwt for cows milking 70 lb/day and $11.06/cwt for cows milking 85 lb/day. For November, the IONC for our 70 lb/day and 85 lb/day cows is about $1/cwt higher than September at an estimated $11.63/cwt and $11.94/cwt. These IONC may be overestimated because they do not account for the cost of replacements or dry cows; however, they should be profitable when greater than about $9/cwt.

Table 1. Prices of dairy nutrients for Ohio dairy farms, November 28, 2017.

Economic Value of Feeds

Results of the Sesame analysis for central Ohio on November 28, 2017 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 or were adjusted to reflect their true (“Corrected”) value in a lactating diet. One must remember that SESAME™ compares all commodities at one specific point in time. 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, November 28, 2017.

For convenience, Table 3 summarizes the economic classification of feeds according to their outcome in the SESAME™ analysis. Feedstuffs that have gone up in price, or in other words moved a column to the right, since the last issue are red. Conversely, feedstuffs that have moved to the left (i.e., decreased in price) are green. These shifts (i.e., feeds moving columns to the left or right) in price are only temporary changes relative to other feedstuffs within the last two months and do not reflect historical prices.

Table 3. Partitioning of feedstuffs, Ohio, November 28, 2017. 

As coined by Dr. St-Pierre, 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. For example, your nutritionist might be using some molasses in your rations for reasons other than its NE_L and MP contents.

Appendix

For those of you who use the 5-nutrient group values (i.e., replace metabolizable protein by rumen degradable protein and digestible rumen undegradable protein), see Table 4 below.

Table 4. Prices of dairy nutrients using the 5-nutrient solution
for Ohio dairy farms, November 28, 2017.