The past week has not been good for Class III milk futures nor the outlook for milk prices. The underlying cheese prices have declined, putting pressure on milk futures. It seemed that the selling was due to the bearishness of the September Milk Production report which showed U.S. milk production up 0.1% from September 2023. The report also showed a significant revision in August milk production resulting in output up 0.4%. It is unclear if this caused cheese buyers to step back or if it was just a matter of supply and demand. After all, the milk produced in September had already been processed, consumed, or stored.
It will be interesting to see the reaction of the marketplace due to the decrease in cheese inventory compared to a year ago. American cheese inventory in September was 8% below a year ago with total cheese inventory down 7%. American cheese inventory was the lowest monthly inventory since November 2020 and the lowest September inventory since 2020. Butter was the opposite with inventory up 14% from a year ago. This may limit the upside price potential for butter for the foreseeable future.
In my last article, I mentioned how Livestock Risk Protection (LRP) insurance is an area of risk management the dairy operation should consider implementing. The utilization of beef on dairy to supplement farm income by boosting the value of calves has become an important aspect of the dairy operation. Beef prices are high and should remain that way for some time based on the tightness of the beef herd. However, there are always risks that can change the market quickly and high prices should be protected.
If you have implemented a program of beef-on-dairy, the utilization of LRP should be considered as a way to manage risk and insure the value of the calves that you will be marketing. There are choices for taking advantage of the flexibility of LRP insurance for calves. These choices are for steers weighing from 100-599 pounds, heifers weighing from 100-599 pounds, dairy animals weighing from 100-599 pounds, unborn steers and heifers weighing from 100 – 599 pounds, and unborn dairy weighing from 100 – 599 pounds.
Each category can be chosen for these weight categories up to a year in advance. Price quotes are available every day except major livestock report days or holidays. So, the question is, “Which category is best?” The answer is based on your operation. If you choose steer weights of 100 – 599 pounds on 10 head that are expected to be born and 2 of those calves are heifers, you then have over-insured. If prices were lower by the time of the endorsement date and there was a claim, the claim would be reduced by 20% with the payment made for the 8 head of steers. However, you would be required to pay the full insurance premium.
The reverse is true if you insured 10 heifers at 100 – 599 pounds and 8 of those calves would be heifers and 2 steers, the indemnity payment would be reduced by 20% if there was a claim. The important thing to keep in mind is that you want to avoid over-insuring, but if it does happen it would not take you completely out of an indemnity payment if prices were lower. It would reduce your payment, but you would still need to pay the full insurance premium. You could write two endorsements based on what you might think your percentage of each might be by the end of the endorsement if you choose to insure them as feeder cattle. You do not need to insure all of your expected calves as you can insure any number of animals.
The better idea might be to insure unborn steers and heifers from 100 – 599 pounds and then all your bases would be covered. It would not make any difference what the mix would be with payment made on all insured calves as long as the number was not lower than the amount that was insured. However, if you insured 10 head of steers and heifers and only 8 were born and the price was lower and there was an indemnity payment, you would still be paid but only for the 8 head.
It is important to know that the calves you sell nust average 100 pounds or higher to receive full indemnity if there is a claim. You could have 5 calves sold at 90 pounds and 5 sold at 110 pounds and you would receive full payment if there was a claim due to lower prices. If the average was lower and they all averaged 90 pounds, your claim payment would be reduced by 10%.
There is a window of time for the calves to be born providing much flexibility. They can be born up to 60 days and sold before the endorsement end date or can be held after the date if the choice is made to hold to make sure they reach the proper weight. If you decide to hold them and feed them out and sell them later as feeder cattle or fed cattle, you also have the option to do that and still be paid for the endorsement period if there had been an indemnity payment due to a claim. A document must be submitted that you have chosen to retain ownership of the animals. There are also provisions if a calf is aborted or dies or if the pregnant cow dies. Notification needs to be made within 72 hours and full coverage will be maintained.
This makes LRP a flexible and important part of risk management for the dairy operation. Those unborn calves are worth protecting. One should not wait until they are born and then take whatever the market will give you. LRP is similar to a put option. If the price drops, the value is protected. If the price increases, you sell the calves at a higher price. The other attractive aspect is that you can insure a few head or up to 25,000 head per crop year. This and other provisions make it very attractive for a small farming operation as well as a large operation.
We are licensed to sell LRP and would be glad to help you take advantage of this program. If you would like further information or to get started to utilize LRP, please call us at 877-256-3253 or email rschmahl@agdairy.com.
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Robin Schmahl is a commodity broker with AgDairy, the dairy division of John Stewart & Associates Inc. (JSA). JSA is a full-service commodity brokerage firm based out of St. Joseph, MO. Robin’s office is located in Elkhart Lake, Wisconsin. Robin may be reached at 877-256-3253 or through the website www.agdairy.com.
The thoughts expressed and the basic data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed herein are subject to change without notice. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There is risk of loss in trading commodity futures and options on futures. It may not be suitable for everyone. This material has been prepared by an employee or agent of JSA and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions
