At first glance one might think that the mood on dairy farms would be brightening by recent increases in milk prices and declines in feed costs, but in reality margins remain excruciatingly tight, said Sarina Sharp, analyst with the Daily Dairy Report.
“It appears that milk revenue this year will be lower than what milk futures are implying, and many dairy producers are already operating in the red. The impact from low milk prices is clear. The U.S. dairy herd has shrunk by more than 100,000 head since March 2023, and auctioneers are getting ready to sell a lot of herds and facilities this spring. Without a substantial increase in Class III prices and relief from steep deductions, the U.S. dairy industry will continue to contract,” Sharp Said.
Class III futures in late February indicated that 2024 milk prices would remain inadequate to pay all of a dairy’s bills, Sharp said, even though futures have recovered somewhat from January’s lows.
“Class IV futures, however, remain well above the average cost to make milk,” Sharp noted. “And the steep discounts on spot milk that watered down milk checks through the first half of 2023 are now a distant memory. In fact, over the past week, spot milk traded at an average premium of $1.38/cwt. in the Central region, up sharply from a $6.25 discount at this time last year.”
On the cost side, feed expenses have also moderated, and corn and soybean meal futures project further declines. The income-over-feed formula from the Dairy Margin Coverage program showed that the drop in soybean meal prices has saved dairy producers about 46ȼ per hundredweight of milk compared to December, Sharp noted. Feed costs will likely keep dropping.
“Even so, all is not well on the farm, and a quick glance at milk futures, spot milk premiums, or income-over-feed margins understates the depths of the malaise,” Sharp said. “Despite a recovery in spot milk values and a reduction in the use of overproduction penalties, many producers face steeper discounts today than they did in the past. The reasons are complicated and vary widely from region to region and producer to producer.”
First, the large spread between Class III and Class IV values has encouraged depooling, benefitting the minority of producers who belong to a cooperative with Class IV manufacturing. At the same time, depooling penalizes producers in the region who do not belong to a cooperative. Second, tight milk supplies and growing cheese production capacity have slowed the flow of milk to dryers, reducing the share of U.S. milk sold at the higher Class IV price, she noted.
“While Class IV values are more than sufficient to pay the bills, most producers earn a smaller share of Class IV revenue than they did in previous years,” she said.
Dairy processors and cooperatives have also been struggling, and while they often absorb a short-term loss, given today’s persistent deficits, they have passed some losses along to producers in the form of new pricing formulas, lower premiums paid for components, or basis deductions, she added.
For more on milk prices, read:
- Will Milk Prices Rebound? 8 Important Market Signals to Watch
- DMC Delivers its First Strong Payment of 2024
- Producers Can Now Enroll in Dairy Margin Coverage for This Year
- Milk Production Drops for The Seventh Month in A Row
- America’s Heifer Shortage is Preventing Expansion. Is the Big Money for Beef-on-Dairy a Factor?
- 2024 Milk Production Forecast Reduced, All-Milk Price Looks More Encouraging
- What Can Producers Expect for Profits in 2024?
