In addition to the market fundamentals, speculation is playing an increased role in commodity markets. In the early stages of an economic recovery, commodity prices usually rise, and more non‐agricultural speculators are long in agricultural futures, driving prices up to some degree.
Income over feed costs
Penn State’s measure of income over feed costs fell by $1.26/cow/day in January to $6.65/cow/day, or 15.9% from its December levels. The PA all‐milk price fell by $1.50/cwt., but feed cost rose by 28 cents/cow/day, further adding to the impact of the decrease in milk price. This feed price increase will continue in February, since corn and prices have risen since January. However, the milk price will be up in February by more, so the February IOFC will be higher, probably by more than it dropped in January. Income over feed cost reflects daily gross income less feed costs for an average cow producing 65 pounds of milk. Figure 1 and Table 2 showing the monthly data are appended.
The allocation of the revenue per hundred pounds of milk is shown in Table 3. The milk margin is the estimated amount from the Pennsylvania all milk price that remains after feed costs are paid. As with income over feed cost, this measure shows that January was down from December. Without question February will be better than January, and if milk prices rise as the market expects, the milk margin will be even higher in the Spring. The price forecasts in Table 1 should more than offset higher feed prices.
The USDA’s Risk Management Agency’s Dairy Gross Margin program has its monthly window of availability February 25‐26. This allows a dairy producer to protect a version of our milk margin measure from adverse price changes. Given the outlook for milk prices, some form of risk management in 2011 should be seriously considered.
Source: Jim Dunn, Professor of Agricultural Economics, Penn State University