May 2018 Dairy Outlook: An Oasis or a Mirage?

Long term survival of a dairy operation will hinge on management’s ability to find ways to push the cost of production below $17.50/cwt while maintaining some level of reinvestment in the operation. ( Wyatt Bechtel )

Milk futures prices have taken on a decidedly positive movement over the past month. As can be seen in Table 3 of this article, predicted Pennsylvania Mailbox milk prices for the last 4 months of 2018 and the first 2 months of 2019 will average about $2.00/cwt above this month’s milk price. In fact, if those predicted prices hold, we would not have experienced that level of sustained prices for several years! Many in the industry are looking at those 4th quarter prices with the same longing of a weary desert traveler looking at an oasis on the horizon that has the promise of water.

But as we know, sometimes the oasis is more of a mirage than reality, and the promise of water to the weary traveler never comes true. One aspect of the markets that make the 4th quarter prices somewhat of a mirage is feed prices. Take a look at Tables 1 and 2 in this article. Notice that margins continue to be suppressed in March, even though milk prices improved, due to higher feed costs. The escalating price of soybean meal and corn have yet to be fully included in these calculations, so higher feed costs will keep downward pressure on margins (and profitability) even as milk prices improve through the 3rd quarter of 2018. We do expect improved margins by the 4thquarter of this year and the first quarter of next year, but the margins will not directly follow milk prices due to higher feed prices.

Even with a much improved predicted price in the 4th quarter, Table 3 show a 2018 average PA mailbox price of $17.19 / cwt. Very few Pennsylvania dairy producers have a cost of production under that number. In fact, the majority of Pennsylvania dairy operations are struggling to push their cost of production below $18.00/cwt. Long term survival of a dairy operation will hinge on management’s ability to find ways to push the cost of production below $17.50/cwt while maintaining some level of reinvestment in the operation.

Some relief for the checkbook

The dairy economy over the past 30 months has not been kind to checkbooks, but the recently announced revisions to the MPP program look like an opportunity to gain a few dollars for many producers. Producers should definitely visit their FSA office by mid May to make a decision on signing up for the program. Spring field work has been delayed due to the cool, wet spring, and many dairy producers have yet to even empty their manure storages for the spring. However, the pressure of spring field work should not prevent producers from making a trip to the FSA office this month. Penn State Extension is providing some on line discussions on the new MPP programs. More information on these discussions is available at:

Margin Protection Program Question and Answer Webinars

Outlook Tables and Graphs

Table 1: 12 month Pennsylvania and U.S. All Milk Income, Feed Cost, Income over Feed Cost ($/milk cow/day)

¹Based on corn, alfalfa hay, and soybean meal equivalents to produce 75 lbs. of milk (Bailey & Ishler, 2007)

²The 3 year average actual IOFC breakeven in Pennsylvania from 2015-2017 was $9.00 ± $1.67 ($/milk cow/day) (Beck, Ishler, Goodling, 2018).

Table 2: 12 month Pennsylvania and U.S. All Milk Price, Feed Cost, Milk Margin ($/cwt for lactating cows)

¹Based on corn, alfalfa hay, and soybean meal equivalents to produce 75 lbs. of milk (Bailey & Ishler, 2007)

²The 3 year average actual Milk Margin breakeven in Pennsylvania from 2015-2017 was $12.33 ± $2.29 ($/cwt) (Beck, Ishler, Goodling, 2018).

Figure 1: 12 month PA Milk Income and Income over Feed Cost

²The 3 year average actual IOFC breakeven in Pennsylvania from 2015-2017 was $9.00 ± $1.67 ($/milk cow/day) (Beck, Ishler, Goodling, 2018).

Figure 2: 24 month Actual and Predicted* Class III, Class IV, and Pennsylvania Average Mailbox Price ($/cwt)

*Predicted values based on Class III and Class IV futures regression (Gould, 2018).

Table 3: 24 month Actual and Predicted* Class III, Class IV, and Pennsylvania Average Mailbox Price ($/cwt)

Month Class III Price Class IV Price Average PA Mailbox Price
Mar-17 $15.81 $14.32 $17.91
Apr-17 $15.22 $14.01 $16.43
May-17 $15.57 $14.49 $16.32
Jun-17 $16.44 $15.89 $17.17
Jul-17 $15.45 $16.60 $17.40
Aug-17 $16.57 $16.61 $18.25
Sep-17 $16.36 $15.86 $17.83
Oct-17 $16.69 $14.85 $17.49
Nov-17 $16.88 $13.99 $17.61
Dec-17 $15.44 $13.51 $17.04
Jan-18 $14.00 $13.13 $16.01
Feb-18 $13.40 $12.87 $15.57
Mar-18 $14.22 $13.04 $16.08
Apr-18 $14.51 $13.55 $15.65
May-18 $15.07 $14.72 $16.50
Jun-18 $15.55 $15.39 $17.08
Jul-18 $16.01 $15.72 $17.49
Aug-18 $16.33 $16.00 $17.79
Sep-18 $16.55 $16.08 $17.95
Oct-18 $16.56 $16.12 $18.79
Nov-18 $16.46 $16.11 $18.73
Dec-18 $16.38 $16.07 $18.67
Jan-19 $16.05 $15.90 $18.41
Feb-19 $15.96 $15.79 $18.31
 

*Italicized predicted values based on Class III and Class IV futures regression (Gould, 2018).

To look at feed costs and estimated income over feed costs at varying production levels by zip code, check out the Penn State Extension Dairy Teams DairyCents or DairyCents Pro apps today.

Data sources for price data

  • All Milk Price: Pennsylvania and U.S. All Milk Price (USDA, 2018)
  • Predicted Class III, Class IV, and Pennsylvania Mailbox Price (average of the Eastern and Western PA mailbox Price) (Gould, 2018)
  • Alfalfa Hay: Pennsylvania and U.S. monthly Alfalfa Hay Price (USDA, 2018)
  • Corn Grain: Pennsylvania and U.S. monthly Corn Grain Price (USDA, 2018)
  • Soybean Meal: Feed Price List (Ishler, 2018) and average of Decatur, Illinois Rail and Truck Soybean Meal, High Protein prices, National Feedstuffs (Gould, 2018).

References

 

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https://www.youtube.com/watch?v=utuqFWgr_yk
https://www.youtube.com/watch?v=ie08A9cI44A
https://www.youtube.com/watch?v=sE8wej3j1yo
https://www.youtube.com/watch?v=_9kiCpwQI0Q
https://vimeo.com/204725868
https://goo.gl/3zS6tY
https://goo.gl/rwhvMK
https://goo.gl/iQmjji
https://goo.gl/r5ACyA
https://goo.gl/4qvAR6
https://goo.gl/7vH6iV
https://goo.gl/MxVGPu
https://goo.gl/uyMQtW
https://goo.gl/EvjQJa