Buckeye Dairy News: Volume 6 Issue 3
Dairy Policy and Milk Marketing
Dr. Cameron Thraen, Milk Marketing Specialist, Ohio State University,
Additional milk marketing information by Dr. Thraen
He who hesitates is lost and this applies to the milk markets as well!
In the March 2004 issue of the Buckeye Dairy News, I titled the article "Are You Playing Blackjack With Your Milk Price?" In that article, I discussed the need to watch the markets and make a decision about pricing your milk or waiting to see what the market would provide by way of a price.
In this article, I will assess what has happened over the last two months. First take a look at the chart below. This is the chart that was published back in the March issue of the Buckeye Dairy News.
By the time the article appeared in the March issue, it was too late to do much about the March 2004 price, but the April 2004 through January 2005 prices were a different matter. The announced April 2004 price was $19.66/cwt. If you had used the futures contract to lock in your milk price at the time of my article, you would have left something in the neighborhood of $5.06/cwt in Class III value on the table. The May 2004 price is yet to be announced, but the current futures price is trading around $20.35/cwt. Had you locked in May, you would have left another $5.00/cwt on the table. Now, back on March 5, the average Class III price for the months of June through September looked about $15.45/cwt. Today these prices average $14.98/cwt. You would be ahead of the game by $0.47/cwt on four months of production. For the remaining period, October through January 2005, the earlier period averaged $13.30/cwt. The current Class III futures prices for these months average $12.87/cwt. You would have been ahead by $0.43/cwt shipped.
So, how would you have done over the entire period? On the two months of production, April and May, you would be feeling pretty bad. You would have left $5.00/cwt on the table. For the remaining eight months, you would be ahead by $0.45/cwt shipped. What should you have done in this situation? Perfect foresight would have told you to do nothing for April and May, and lock in June through January. Unfortunately, none of us possess perfect, or anywhere near, really good foresight into the future. By not doing anything for the April and May prices, we will feel really good about our decision. By not doing anything about the June through January 2005 price, we will feel like an opportunity has gotten away. The moral of this story is that you must have a proactive plan to price your milk out into the future. Working by the seat of the pants will not suffice. It is too difficult. As the second chart shows, the current Class III futures contract settle prices through April 2005 are sliding substantially back toward more normal price levels. The Chicago cheese market and butter market are beginning to slide backward and this showing up in the Class III settles prices giving back most of the premiums that they held just a week back. I project that this cash price slide will continue to erode the milk price over the remaining months of 2004 and into 2005. So, now is the time to answer the following question: What am I going to do about my milk price? Will I continue to be a reactive pricer or will I adopt a more proactive price management plan?
For an up-to-date look at anticipated dairy product and milk component prices connect to the Ohio Dairy Web 2004 and click on Cam's Price Outlook.
Dealing With an Uncommon Feed Market
Dr. Normand St-Pierre, Dairy Management Specialist, Ohio State University
I recall just a few months ago when the soybean meal market jumped above $250/ton. I received numerous phone calls and emails requesting help on how to deal "with these obscene soybean prices". I imagine that most dairy producers wouldn't mind still paying $250/ton for soybean meal. But the rapid changes in soybean and corn prices have opened many opportunities for judicious ingredient substitutions in dairy diets. There are bargains out there!
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. Price estimates for net energy lactation (NEL, $/Mcal), rumen degradable protein (RDP, $/lb), digestible rumen undegradable protein (D-RUP, $/lb), non-effective NDF (ne-NDF, $/lb), and effective NDF (e-NDF, $/lb) are reported in Table 1. Compared to January 2004, the cost per unit of net energy is up by 44%, RDP is up by 29%, D-RUP is up by 27%, ne-NDF is down by 6.5¢/lb, and e-NDF is also down by more than 4.0¢/lb. Thus, although the sticker shock associated with soybean meal has focused our attention on the protein prices, it is the energy that has seen the most dramatic increase. In fact, we have tracked down the NEL cost in the Midwest market all the way back to 1981, and we have never seen a cost exceeding $0.09/Mcal before. We shall expand more on this later.
Based on early May wholesale prices, central Ohio commodities can be partitioned into the three following groups:BargainsAt BreakevenOverpriced
Corn, ground, shelled
Distillers dried grains
Brewers grains, wet
Expeller soybean meal
48% soybean meal
Wheat branBeet pulp
44% soybean meal
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.
One must remember that SESAME compares all commodities at one point in time, early May in our case. Thus, the results do not imply that the bargain feeds are cheap on a historical basis. As a matter of fact, all commodities would be considered expensive on a historical basis. There are some feeds that are relatively more expensive than others.
In Tables 2 and 3, we report the results for all 26 feed commodities. The lower and upper limits mark the 75% confidence range for the predicted (break-even) prices.
We can use estimated nutrient costs to benchmark feeding costs. Refer to the article "Using Nutrient Cost to Benchmark Your Nutrition Costs" in the January 2004 issue of Buckeye Dairy News. Table 4 reports the nutrient costs for a 1500 lb cow producing 77 lb of milk at 3.5% fat and 3.0% protein for September 2003, January 2004, and May 2004.
From this table, one can see that the costs of nutrients have gone up by approximately $0.53/cow/day since January (or equivalently of $0.69/cwt of milk). The $0.53 increase is the result of $1.00/day increase in NEL, $0.10/day in RDP, and $0.16/day in D-RUP, but a drop of $0.46/day in the cost of e-NDF and a drop of $0.26/day in ne-NDF. Thus, the proper usage of energy sources combined with a wise selection of byproduct feeds can result in substantial savings in feed costs. Savvy buyers will keep a close watch to the commodity market during the summer month as we can expect rapid changes in prices due to seasonal changes in supply and demand of some commodities (e.g., wheat midds and wet brewers grains).
Table 1. Estimates of nutrient unit costs - OH, May 2004.
Nutrient nameEstimates NEL - 3X (2001 NRC)$0.095020** RDP$0.084275~ Digestible RUP$0.330053** Non-effective NDF (ne-NDF)$-0.064981** e-NDF$0.020673
- A blank means that the nutrient unit cost is likely equal to zero.
- ~ means that the nutrient cost may be close to zero.
- * means that the nutrient cost is unlikely to be equal to zero.
- **means that the nutrient cost is most likely not equal to zero.
Table 2. Estimated break-even prices of commodities - OH, May 2004.
NameActual ($/ton)Predicted ($/ton)Lower limit ($/ton)Upper limit ($/ton) Alfalfa Hay, OH Buckeye D140150.55129.82171.27 Bakery Byproduct Meal137174.58164.53184.63 Beet Sugar Pulp, dried160121.30105.01137.59 Blood Meal, ring dried580566.38538.52594.24 Brewers Grains, wet4040.9937.5144.48 Canola Meal, mech. extracted213209.95196.55223.35 Citrus Pulp, dried132131.65122.91140.39 Corn Grain, ground dry117172.40162.79182.00 Corn Silage, 32 to 38% DM4050.6943.6258.31 Cottonseed, whole w lint215222.53195.92249.15 Distillers Dried Grains, w sol151204.17190.87217.47 Gluten Feed, dry140172.57162.52182.61 Gluten Meal, dry415449.18428.97469.39 Hominy130153.77145.09162.44 Meat Meal, rendered350361.83342.50381.16 Molasses, sugarcane125123.44115.04131.83 Soybean Hulls13082.8860.06105.70 Soybean Meal, expellers380363.62349.46377.77 Soybean Meal, solvent 44% CP336295.02276.37313.67 Soybean Meal, solvent 48% CP345335.07318.18351.95 Soybean Seeds, whole roasted380348.15332.42363.89 Tallow420389.71357.09422.33 Wheat Bran119112.1496.87127.41 Wheat Middlings113131.89118.55145.22
Table 3. Estimated break-even prices of outliers - OH, May 2004.
NameActual [$/ton]Predicted [$/ton] Feathers Hydrolyzed Meal335463.84 Fish Menhaden Meal, mechanized630463.40
Table 4. Benchmarks of nutrient costs - Ohio.1
NutrientSeptember 2003January 2004May 2004------------------------------ $/cow/day -------------------------------- NEL2.942.313.31 RDP-0.060.330.43 D-RUP0.390.610.77 e-NDF0.930.690.23 ne-NDF-0.19-0.04-0.30 Vitamins and minerals0.200.200.20 Total18.104.22.168 Cost/cwt milk5.475.326.01
1Costs are for a 1500 cow producing 77 lb of milk at 3.5% fat and 3.0% true protein.
Summer Coliform Mastitis,
As I write this column, outside temperatures are well above 80oF in Ohio and we are just in early May. Is this unusual? Well, considering that the average of our daily maximum temperature is approximately 70oF in central Ohio during the first half of May, these daily highs are certainly above average. But, it is not unusual to experience a "heat wave" where temperatures exceed 80oF in early May. Actually, it would be very unusual not to have at least three days where temperatures exceeded 80oF in the first two weeks of May. If we look at weather data for Central Ohio, in 67 out of the last 70 years, we have experienced three or more days of daily maxima exceeding 80oF in the first two weeks of May. Factoring the relative humidity, which averages 55% in mid-afternoon, we quickly realize that our cows do experience episodes of heat stress in Ohio during the month of May. On an average year, there are eight days during the month of May where the temperature-humidity index (THI) exceeds 70, putting our cows under heat stress. And heat stress is expensive, costing $19.0 to 33.5 million per year to Ohio's dairy producers. You can greatly reduce these losses by:
1) Starting now. If you have fans, clean them up. The crud that accumulates on the blades and screens can easily reduce their efficiency by 50%. If you have sprinklers, verify each nozzle, clean the water line, and don't wait until it gets really hot to see if the sprinkler system works. If you have movable sidewalls, windows, etc., it is time to open them up. From now on, your cows are considerably more likely of getting too hot than of getting too cold.
2) Starting at the right place. Have a close look at your operation and identify where your cows are most challenged by thermal stress. On some farms, this is in the yard where cows have to stand by an uncovered feed bunk to slowly get cooked by solar radiation. A simple and inexpensive shade cloth can really make a difference in these instances. In general, however, our holding pens are the biggest culprit when it comes to heat stress. In older parlors with lower ceilings and low sidewalls, it is very difficult to move out of the facilities the heat produced by a bunch of milking cows stacked tightly with less than 15 ft2 per cow. It takes fans (and a lot of them) to control heat stress in a holding pen: somewhere around one 36" fan per 120 to 150 ft2 (or roughly one fan per 10 cow capacity in the holding area). Adequate use of sprinklers (one minute on per five-minute cycles) can be very effective at reducing heat stress as long as adequate outside air can be drawn into the holding area. Otherwise, the water evaporating from the cows' backs saturates the air, resulting in one big sauna and a gigantic heat-stress mess.
Alleviating heat stress does not have to be overly expensive. Returns on investments generally exceed 3:1 (a $30/cow per year in equipment depreciation, interest, and maintenance plus the operating costs results in an additional $100 in gross returns).
Just don't wait!
Heat Stress - Where Should You Start?Mrs. Dianne Shoemaker, Dairy Extension Specialist, OSU Extension (top of page)
"The highs will be higher and shorter (in duration); the lows will be lower and last longer than the highs." A major cause is consolidation coming at us hard and fast, driven primarily by food companies. This prediction of what dairy farmers can expect in the future was made by David Kohl, Professor Emeritus, Virginia Polytechnic Institute at the recent NE Ohio Dairy Management Conference. Any dairy person familiar with the numbers on their farm should not find this hard to believe. Kohl also made another important observation: "...when prices are high, prepare for the lows...don't do anything stupid."
"Be Clean on Credit"
Absolutely, the first priority with improved income is to make sure all accounts are current. Interest charges on open accounts at 1.8 to 2% per month may sound minor but are equivalent to annual rates of 20 to 24%. For example, if a farm owed $10,000 to a feed mill, did not make any payments and simply accumulated 2% per month interest charges (not a situation the feed mill would support), in 12 months, the amount owed would be the original $10,000 plus $2,795 in interest. None of which is deductible on Schedule F until it is actually paid.
Equally important is to pay off outstanding credit card balances. Credit card use is growing in the agricultural sector. Nationally, Kohl stated that more than 70% of people regularly carry an unpaid balance on credit cards. With increased use come horror stories of credit card misuse and abuse. Besides the amazing story of an older farmer running up credit card debts of $80,000 twice in three years (gambling, a trophy wife, and obviously a slow learner), Kohl particularly got the attention of younger members of the audience with examples such as the following:
If a credit card holder has a $2000 balance on a credit card with an 18% interest rate and only makes minimum payments, it will take 16 years to pay off the balance (without making additional charges!). Conversely, if that same minimum monthly payment was invested in a mutual fund generating an 8% return for the same 16 years, the investor would save and earn more than $12,000.
Make a habit of checking your credit rating regularly. Items can mistakenly land on your credit report, which if left uncorrected, can damage your credit rating and ability to get loans approved.
Make budgeting and strategic planning part of how you do business. Most important, let information and facts, not emotion, guide these activities. It is particularly important to be careful of investing in land. Remember that cash flow and earnings pay the bills and pay back debt, not necessarily ownership of land.
This is a particularly challenging issue where land values are rapidly increasing out of agricultural use value because of its' desirability as a location to build the "Ken and Barbie" houses (those huge fancy multi-zillion dollar houses) that are crowding out agriculture on the fringes of urban and suburban development. Kohl did note that eventually the homeowners will discover that these huge houses on multiple acres "own" them with their demanding and costly upkeep�but not soon enough to keep new construction from gobbling up farm ground and driving up land prices.
Budget additional expenses and income for the year. Currently, high feed prices will pick off some of the additional income on many farms. High fuel prices will also take their toll as we enter spring planting and forage harvest.
Pay down lines of credit. Not only will you save interest on the balance, but you are rebuilding credit reserves to help you through the next downturn.
Put some money back - checking accounts that pay interest, certificates of deposit, or whatever investment vehicle pushes your buttons. It needs to be safe, should generate some return, and be readily available for your use during the next down cycle.
"Don't do something stupid"
One of the biggest challenges during market peaks is to not do something stupid with the money. New paint disease is particularly contagious when milk prices are high. I guarantee that someone in your community will start buying stuff. Who cares? Their decisions (which may or may not be good) should not guide yours. Ask several questions before purchasing:
1) Is this a purchase that we were planning before milk prices increased?
2) How will this ________ machine, tractor, cow, building, or 4-wheel-drive king-cab super truck (fill in the blank) increase my farm's profitability?
3) How will we pay for this when milk prices are back to average or below average?
4) Will this purchase compromise our cash reserves?
If this purchase was not in the long term plans and won't increase the farm's bottom line, reconsider. If how the purchase will be paid for in less than optimal milk price times is unclear, just don't do it.
Be aware of what is happening in your industry. Start to think in terms of higher and shorter highs, lower and longer lows. Integrate information-based short term and strategic planning into your business priorities. Carefully monitor cash flow and credit. Fill in any chinks in the mortar of your dairy business's foundation. With careful planning and restraint, the current milk prices give us a chance to do just that.
Kohl Speaks at Northeast Ohio Dairy Conference
Mark your calendars for December 2 and 3, 2004. On those two days, you will want to be in Columbus for the fourth biannual Ohio Dairy Management Conference. The organizers are lining up an outstanding set of speakers to cover a wide array of applied topics such as (more details will follow shortly):
- Components of successful heat detection
- Modern milk marketing
- Biological testing for metabolic problems
- Human resource management
- Fresh cow protocols
- Planning on expansion
- Short dry periods
- Milking frequency in early lactation
- Hoof health
- Transition cow management
- Working with your family
OSU team members took part in the North American Intercollegiate Dairy Challenge (NAIDC), April 2-3, in Altoona, Pennsylvania. Created to inspire students and enhance university programs nationwide, the NAIDC is a dairy management contest that incorporates all phases of a specific dairy business in a fun, interactive, and educational forum. Students, Lauren Ward and Chad Knueve (Front Row); and Calvin Keller and Cynthia Smith (Back Row) participated in the two-day program of farm evaluation and oral presentation, along with 24 other teams from 22 universities. The dairy farm enterprise that the OSU team evaluated constituted of 540 cows, cows were milked three times-a-day in a double-8 parallel parlor, and the cows averaged 24,550 lb of milk per year. The team received a Silver Award and was coached by Dr. Maurice Eastridge.