St-Pierre: The swirling winds of milk price and feed costs

Milk Prices: The Swirling Winds

It looks like we might have a spring after all.  As we all wait anxiously for our fields to dry off enough to allow field work, sowing, and planting, we are left to ponder about what direction the swirling dairy winds will be taking for the balance of the year.  As I often wrote, predicting milk prices beyond a 3-month horizon is risky at best.  However, we can look at the current status of the major factors influencing dairy prices to get an idea of where prices are heading, assuming no unforeseen events.

What traders are saying.  One can always look at the futures Class III prices to get an indication of where people trading contracts think milk prices will settle for the balance of the year.  As of this writing, Class III futures are averaging $15.40/cwt for April, May, and June, and $16.23/cwt for the balance of the year.  These translate to mailbox prices in the $16 to 17/cwt for Ohio producers.  Not great, in fact below the average total cost of producing milk in Ohio, but above the average cash cost of production.  Both the Class III and IV futures have dropped in the last 3 to 4 weeks following an upsurge from the mid-January lows.  This upsurge was the result of factors occurring completely outside our borders.

The New Zealand drought.  In late 2014, Fonterra (the dominant milk company in New Zealand) announced that milk production in New Zealand would be dropping considerably due to a drought over most of the country.  Although there were some areas experiencing below normal rainfall, some postulated that the apparent drought was nowhere as severe as what was being inferred.  But world buyers became worried of possible lower production from the world's largest exporter.  Prices of products traded on the Global Dairy Trade (a global electronic auction system operated by Fonterra) began to rise, leading U.S. domestic buyers to presume that higher dairy prices were forthcoming.  Well, whether the drought was real or not, cyclone Pam has brought plenty of rain to New Zealand.  Combined with the European Union soon abandoning its quota system (April 1), and the incoming spring flush in the U.S., buyers now think that there should be plenty of milk around in the incoming months.  Plus, the Chinese have stopped buying.

Economic hiccup in China.  We are not talking of an economic disaster in China, but clearly its rate of economic growth has noticeably slowed down.  Also, there is a general consensus that China misread the world milk supply last year and bought way too much dairy products, thinking that product availability would become even tighter later on.  Apparently, not even 1.3 billion people could consume that much stuff, so the flow of dairy imports from China has slowed down considerably.  To make things worse, the world once again likes our dollar.

The good old greenback is once again in demand.  As you likely have read, economic growth in Europe has come to a near halt.  Governments and central banks are intervening, using some of the same fiscal tools as those that were used in the U.S. just a few years ago, including lowering interest rates, and well, printing money (quantitative easing).  Meanwhile, Russia's economy has been sickened by the economic sanctions resulting from its involvement in the Ukrainian conflict, and oil exporting countries have seen their revenues from oil exports cut in half from where they were last summer.  All of a sudden, the U.S. economy doesn't look so bad anymore.  Because most people anticipate the Feds to raise interest rates, many world investors suddenly have a keen interest for the potential yield and the security of the greenback.  Consequently, the U.S. dollar has appreciated over the past year by 13% vs. the New Zealand dollar, by 15% vs. the Australian dollar, and nearly 25% vs. the Euro.  This is good if you are planning a vacation overseas but not so good if you are trying to export dairy products and you are competing with these countries for foreign markets.

Rays of sunshine.  Of course, milk prices are only one part of the profit equation.  Cow productivity and the costs to produce milk are arguably as important.  We have had a miserable winter from a human standpoint in the central and eastern U.S., but our cows have generally done well during these cold days.  We also are finding out that the 2014 corn silage crop was on an average much better than what we had in 2013.  The quality of our feeds looks quite good.  On the crops side, the South American corn and soybean crops are reportedly huge.  In North America, although a few areas of the U.S. are dryer than normal, the subsoil moisture reserves range for the most part from good to excellent.  Unless an unpredictable event occurs, the domestic and international stockpiles of grains and oilseeds should become even larger, resulting in moderate to potentially low feed costs for the foreseeable future.  Of course, things can change in a hurry, but as things stand for now, what we have in terms of price and dairy profitability should remain pretty much the same for the balance of the year.

The Cost of Feeding Cows: Nutrient Prices

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 as of March 19, 2015.  Price estimates of net energy lactation (NEL, $/Mcal), metabolizable protein (MP, $/lb – MP is the sum of the digestible microbial protein and digestible rumen-undegradable protein of a feed), non-effective NDF (ne-NDF, $/lb), and effective NDF (e-NDF, $/lb) are reported in Table 1. Compared to its historical 6-year average of about 10¢/Mcal, NEL is now marginally inexpensive at 8.5¢/Mcal.  This is important because a cow producing 70 lb/day of milk requires in the neighborhood of 34 Mcal/day of NEL.  At this time last year, the average cost of a Mcal of NEL was 13¢.  Thus, the daily cost of supplying dietary energy to lactating dairy cows has dropped by about 35% in 12 months.  For MP, its current price (56¢/lb) is 2 times greater than its 6-year average (28¢/lb), but 9¢/lb less than at this time last year.  Thus, we are currently in a period of slightly below average energy prices but still considerably above average protein prices.  The cost of ne-NDF is currently discounted by the feed markets (i.e., feeds with a significant content of ne-NDF are priced at a discount), and the discount of -7¢/lb is near the 6-year average (-9¢/lb).  Meanwhile, unit cost of e-NDF is more than 3 times its 6-year average, being priced at 9¢/lb compared to the 6-year average (3.3¢/lb) but below what it was at this time last year (11¢/lb).  Fortunately, a dairy cow requires only 10 to11 lb of e-NDF, so the daily cost of providing this nutrient is about $0.95/cow/day (i.e., 10.5 lb × $0.09 per lb).  So from a historical basis (i.e., using averages from the last 6 years as the bases of comparison), feeds and their nutrients are still expansive but not as much as last year.

Table 1. Prices of dairy nutrients for Ohio dairy farms, mid-March 2015.

Economic Value of Feeds.  Results of the Sesame analysis for central Ohio in mid March are presented in Table 2. Detailed results for all 27 feed commodities are reported.  The lower and upper limits mark the 75% confidence range for the predicted (break-even) prices.  Feeds in the "Appraisal Set" were those for which we didn't have a price.  One must remember that Sesame compares all commodities at one point in time, mid March in this case.  Thus, the results do not imply that the bargain feeds are cheap on a historical basis.  For convenience, Table 3 summarizes the economic classification of feeds according to their outcome in the Sesame analysis.

Table 2.  Actual, breakeven (predicted) and 75% confidence limits of 27 feed commodities used on Ohio dairy farms, mid-March 2015.

Table 3. Partitioning of feedstuffs, Ohio, mid-March 2015.

Bargains

At Breakeven

Overpriced

Bakery byproducts
Corn, ground, shelled
Corn silage
41% Cottonseed meal
Distillers dried grains
Feather meal
Gluten feed
Hominy
Soybean meal – expeller
Wheat middlings

Alfalfa hay – 40% NDF
Blood meal
Cottonseed, whole
Meat meal
48% Soybean meal
Roasted soybeans

Beet pulp
Brewers grains, wet
Canola meal
Citrus pulp
Fishmeal
Gluten meal
Molasses
Soybean hulls
44% Soybean meal
Tallow 
Wheat bran

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.  In addition, prices within a commodity type can vary considerably because of quality differences, as well as non-nutritional value added by some suppliers in the form of nutritional services, blending, terms of credit, etc.  Also, there are reasons that a feed might be a very good fit in your feeding program while not appearing in the "bargains" column.

What's Left in Your Pockets: Milk Margins

The national income over feed cost margin program implemented in the last Farm Bill, better known as the Dairy Margin Protection Program (DMPP), uses national prices for milk, corn, soybean meal, and alfalfa hay to calculate a national dairy margin per hundredweight of milk.  Insurance payments are triggered by a two-month average margin for consecutive pairs of months.  This program does not factor in regional differences in prices, as well as differences in the range of feed commodities available in different markets.  These issues can be addressed by considering the whole basket of feed commodities in a given market, from which the costs of major nutrients can be priced; this is what is done in Sesame.  We have named this approach the Cow-JonesTM.  For Ohio, our benchmark cow produces 70 lb/day of milk at 3.8% fat, 3.1% true protein, and 3.7% other solids.  Based on the recommendations from the National Research Council (NRC, 2001), this cow requires 33.7 Mcal/day of NEL, 5.04 lb/day of MP, 10.66 lb/day of e-NDF, and 3.55 lb/day of ne-NDF and would consume 50.8 lb/day of dry matter.  Using the current approximate net farm price of $16.50/cwt for milk, we can calculate income, feed costs (really the average cost of providing the required nutrients and milk margins, better known as income over feed costs).  Table 4 reports these results for March 2015 (milk price being estimated at this point in time).

Table 4.  Income, feed costs, and milk margins for Ohio, March 2015.1

 

$/cow/day

$/cwt

Income

11.55

16.50

Feed (nutrient) costs
6.37
9.10
Milk margins
5.18
7.40

1Calculated for a benchmark cow weighing 1,500 lb and producing 70 lb/day of milk at 3.8% fat, 3.1% true protein, and 5.7% other solids.

One should note that the milk margins do not include the cost of feeding dry cows and replacement heifers.  There are good reasons why the cost of feeding replacement heifers should not be considered (it is areplacement cost, similar to that of replacing a piece of machinery).  As for the costs of feeding dry cows, they should be included, but as it turns out, they represent about $0.50/cwt in a herd where lactating cows average 85% of its mature animals population (i.e., lactating and dry cows).  Hence, the milk margins including the dry cows would be about $6.90/cwt, which is $0.60/cwt below what we think is the average break-even margins in Ohio ($8.00/cwt lactating cows only; $7.50/cwt lactating and dry cows combined).  Fortunately, many producers have prepaid some expenses in 2015 from 2014 income.

Appendix

A few people have asked that I publish the results using the 5-nutrient group (i.e., replace metabolizable protein by rumen degradable protein and digestible rumen undegradable protein).  A table containing these results is provided herewith.

Table 5. Prices of dairy nutrients using the 5-nutrient  solution for Ohio dairy farms, mid-March 2015.

 
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