Dairy Policy and Market Watch

Dr. Cameron Thraen, Milk Marketing Specialist, Ohio State University,
Additional milk marketing information by Dr. Thraen

Policy Watch

The real pressing issue for Federal Order 33 producers is the depooling of milk caused by the joint effect of advanced pricing for Class I and the volatility currently exhibited in the cheese and butter markets. I have written about this issue over the past two months and it still remains a serious issue for our Federal Order. Let me illustrate. Back in January of 2004, the total pounds of Class I milk pooled equaled 584.1 million. The Class I price for January, set by dairy commodity prices back in the first two weeks of December 2003, was $13.85/cwt. Class I utilization was a reported 38.6%. Milk used in Class III and pooled during January 2004 was 648.4 million pounds, 111% of the Class I pounds. January Class III price was $11.61/cwt. The Uniform price paid to producers for January 2004 was announced at $12.51/cwt. This is the Class III price plus a positive $0.90 / cwt return to producers for the added value of Class I and Class II milk utilization.

Now fast forward to April 2004. Class I milk pooled was 544.1 million pounds. Class III milk pooled on Federal Order 33 dropped a whopping 93% to 44.7 million pounds. Class III utilization for pooled milk diminished to a miniscule 5.1%. Class I utilization soared to 62.3%. The Uniform or Blend price paid to producers pooled on the Federal Order 33 was only $15.88 / cwt. The rapidly rising cash market prices for cheese and butter set the stage for an announced April 2004 Class III price of $19.66/cwt. The only way to reconcile this discrepancy between the Uniform price and the Class III price is to reduce the Class III price by the difference of $3.78/cwt. The return to producers for the added value of Class I and Class II milk utilization was now a negative $3.78/cwt.

The same scenario was replayed in May 2004. Class III utilization increased a very small amount to 5.5%. The Class I utilization declined to 54.6%. The Uniform price increased to $18.99 / cwt. However, this was still not enough of an increase in the Uniform price. With the announced Class III price still riding high at $20.58/cwt, the only way to reconcile a Class III price which exceeds the Uniform price is by a negative producer price differential. The announced May 2004 producer price differential was a negative $1.59 / cwt.

In just two months, those milk producers who remained tied to the Federal Order 33 pool lost $5.37/cwt on milk shipped during April and May. This exceeds the cumulative $2.07/cwt they earned during the January through March months by $3.30 / cwt. A good question to be asking about now is where did this money go? Into the pockets of those milk producers whose milk was depooled during this two month period? Into the pockets of those dairy firms who choose not to pool milk on Federal Order 33 during the April and May months? Clearly this $3.30/cwt is real money; otherwise, why bother to depool in the first place? I cannot directly answer the question as to where this money went. If your milk is typically pooled in Federal Order 33 and you belong to a dairy cooperative and did not see at least some of this money, you should be asking questions. If you are an independent producer and did not see some of this money, you also know where to go to ask questions.

Besides the obvious equity issues stemming from the negative producer price differential, why is this an important issue for Federal Order 33 producers? Producers, and their representatives, operating in Federal Order 30 are attempting to close the door on Class III depooling in that order. Cass-Clay Creamery, Inc, Dairy Farmers of America, Foremost Farms, USA, Land O'Lakes, Mid-West Dairyman's Company, and four other cooperatives representing producers in Federal Order 30 have filed a petition with the USDA / AMS / Dairy Programs requesting an emergency hearing on pooling requirements for Federal Milk Marketing Order 30. If they succeed in closing the door on depooling in Federal Order 30, you can be certain that Federal Order 33 will become a target for a renewed interest in outside Class III milk to be pooled and depooled on our Federal Order. If this happens, you can expect to find yet more erosion in the average value of the Federal Order 33 producer price differential and even larger negative impacts from depooling when market conditions return, such as we witnessed last year July through October and again in April and May of this year. And, unless real changes are made in the Federal Order provisions, this will happen again.

Market Watch

For a complete update on current market conditions, futures, and options markets, and policy issues of importance to Ohio and Federal Order 33 producers go to my website, Ohio Dairy Web 2004, and click on Cam's Price Outlook.

We have just set a new record for milk price in the U.S. The June blend price for Ohio hit $20/cwt. This would be a devastating low price in Japan but not here. For us, this is a new record high. It is very tempting at times like these to relax the intensity of our management, especially the controlling function of management. Most (if not all) of our dairy farms have gone through severe economic times during the last two years. It is normal and expected to take a "breather" when you have survived "the perfect storm". But, while you enjoy more favorable milk prices, you shouldn't lose your vigilance regarding feed costs. Across markets, feed prices are currently very high and could be taking away some or even all the benefits of higher milk price.

I used the software SESAME^TM to estimate nutrient prices and break-even prices of 25 feed commodities available in Ohio in early July. Table 1 reports estimated nutrient prices. Effective NDF (e-NDF) and digestible-rumen undegradable protein (D-RUP) prices are up compared to May 2004, whereas net energy lactation (NE_L) rumen degradable protein (RDP) and non-effective NDF (ne-NDF) prices are down somewhat.

Based on wholesale prices, central Ohio commodities can be partitioned into the three following groups:

A properly balanced ration cannot be made using exclusive ingredients in the "Bargains" column. But, you should try to maximize the use of feed ingredients in the "Bargains' column, minimize the use of those in the "Overpriced" column, and use as needed those in the "At Breakeven" column. Details on the estimated break-even prices (labeled "predicted") and 75% confidence limits on break-even prices are reported in Table 2.

But what about forage prices? In the past, we have used SESAME to estimate what various forages were worth. We realized, however, that while the method used was sound, it didn't properly value forages of either excellent or poor quality. This is because forages, beyond being primary sources of nutrients, vary in quality, and forage quality affects production through changes in dry matter intake. Dr. Bill Weiss at OARDC studied this problem. Based on his research and that of others, he has worked out different equations to correct the break-even price of forages based on the quality (NDF content). These equations have been incorporated in SESAME (Version 3.01 - to be released in mid-August) and their output now appears in the standard SESAME report. This column will be reporting the corrected prices of qualities of grass hay, four qualities of mixed hay, and four qualities of legume hay. The nutritional composition of each hay is from the latest publication of the National Research Council on Nutrient Requirements of Dairy Cattle (2001). Results are reported in Table 3. The corrected break-even price of an immature legume hay (35% NDF) is $82/ton, more than that of a mature legume hay (51% NDF) at a milk price of $18/cwt. For grass hay, the difference between immature (50% NDF) and mature (69% NDF) is even more pronounced, amounting to $95/ton. This underlines the substantial economic value associated with forage quality and the importance of an accurate feed analysis when purchasing hay.

Table 1. Estimates of nutrient unit costs - OH, July 2004.

- 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, July 2004.

Table 3. Break-even prices of forages - OH, July 2004.