Do you know your margin?

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What is your margin of milk price minus feed cost? While this is an extremely important number, most dairy producers only have a vague idea of what their margin is. Granted, it is not something that we calculate every day and it keeps changing with every monthly milk pricing. But knowing your margin of income over feed cost is a major component to the dairy provision in the new farm bill. How much margin should you insure? How do I determine how much margin protection I should sign up for, if I should at all?

Let's compute an example: For this example, we will use a 100-cow milking herd that raises its heifers. For a 100-cow herd, we have 80 cows milking that currently cost us $7 per head per day to feed. We also have 20 dry cows that cost us $2 per head per day to feed and there are 100 calves and heifers ranging in age from less than one month to 24 months of age. Feed costs for heifers vary with age but we will use $2 per head per day to feed on the average for all the young stock. This gives us a total cost per day for feed for all of our animals of $800 per day. If the cows are milking an average of 80 pounds per day, they are producing 6400 pounds of milk per day or 64 cwt. This gives a feed cost of $12.50 per cwt of milk produced. If your margin is milk price minus feed cost, what does that leave you for a margin to pay your other expenses? Most producers are somewhat surprised at how high the feed cost is when dry cows and heifers are included. Even if you think you can feed your milking cows for less, maybe even at $1 per head per day, your feed cost will still be $11.25 per cwt of milk.

As we look at the margin protection plan in the farm bill, we see where this comes into the future of our price support system. The old milk pricing support plan has changed. No longer will there be a minimum price level, no MILC plan, no export enhancement. You will need to make several decisions:

  1. Do I want to participate in this program? Y/N
  2. If yes, at what level of margin do I feel comfortable with? ($4.00 to $8.00)
  3. What percent of my production do I want to protect? (25% to 90%)

Take a look at the folliowing table:

Table 1. Premiums are a cost per cwt. Source: National Milk Producers Federation.

Margin protection program premiums
Margin level covered First 4 million pounds 2014-2015 First 4 million pounds after 2015 More than 4 million pounds
$4.00 Free Free Free
$4.50 $0.0075 $0.010 $0.020
$5.00 $0.0187 $0.025 $0.040
$5.50 $0.0300 $0.040 $0.100
$6.00 $0.0412 $0.055 $0.155
$6.50 $0.0675 $0.090 $0.290
$7.00 $0.1627 $0.217 $0.830
$7.50 $0.2250 $0.300 $1.060
$8.00 $0.4750 $0.475 $1.360

Premiums will be fixed for five years at the amounts shown in the tables, but will be discounted by 25% in 2014 and 2015 for volumes up to 4 million pounds.

For our example, this farm milks 100 cows per year and produces 2.5 million pounds. There is a cost advantage for the first 4 million pounds of a farms production. This 4 million pound cost break applies to the whole farm’s production for a milk production permit, not the number of operators or farm partners. There is also a margin protection cost advantage up $6.00 and a 25% percent cost reduction for all producers for 2014 and 2015. This is an incentive for all producers to try the new margin protection plan for their farm. You will be about at the 4 million pound level if you milk 150 cows averaging 22,000 pounds per cow per year.

For our example, this farm milks 100 cows per year and produces 2.5 million pounds. There is a cost advantage for the first 4 million pounds of a farms production. This 4 million pound cost break applies to the whole farm's production for a milk production permit, not the number of operators or farm partners. There is also a margin protection cost advantage up $6.00 and a 25% percent cost reduction for all producers for 2014 and 2015. This is an incentive for all producers to try the new margin protection plan for their farm. You will be about at the 4 million pound level if you milk 150 cows averaging 22,000 pounds per cow per year.

Since the year 2000, we have observed three-year cycles in the milk price, with the lowest margins in 2009 and 2012. The old milk pricing program clearly did not do enough to protect farmer's income. The cycles would indicate that 2015 could be another difficult year. For this reason, it would seem prudent to have some margin protection in place. If the milk price cycle is low again in 2015, you will have the opportunity to evaluate how well the amount of coverage works for you at a lesser cost than in subsequent years.

I am sure there will be more information coming from the FSA offices as we get closer, but this will provide you with information to begin your planning process.


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