There has been significant strength in milk futures over the past 1 1/2 weeks with new contract highs being made across the board. It certainly is good to see most Class III futures in the mid to upper $19.00’s and Class IV futures well into the $20.00’s. This is a testament to continued strength of underlying cash primarily in the butter and power markets and optimism for cheese and dry whey markets.
Class IV futures have really come to life with nearly steady gains since late September. In fact, futures over the past 1 1/2 weeks have risen over $1.00 per cwt in reaction to the gains of butter and nonfat dry milk prices. Class III futures have risen in reaction to the strength of barrel cheese and dry whey prices, but the laggard has been block cheese. Over the past three weeks block cheese price has only risen 5 1/4 cents. The strength has come from the increase of barrels, dry whey and optimism. Barrels are regaining the loss suffered during October through mid-November while dry whey have reached a new high since it began trading on the CME daily spot market in March 2018. In fact, dry whey is at the highest price since August 2007.
The optimism stems from the recent pattern of heavy culling and lower milk production per cow. It this continues, milk supply could tighten at a time when both domestic and world demand is strong. Even though we have been hearing about the difficulties of shipping and congestion in the ports, dairy exports have been doing well. Cheese exports in October were 43.7% above October 2020 with butterfat export 107.1% above a year earlier with year-to-date cheese exports up 11.3% and butterfat exports up 132.5%. This is providing support to prices as buyers seem are willing to look further ahead to potential demand during the first quarter of next year and are already taking steps to increase ownership now rather than wait until later. This is certainly making for an interesting market. Prices seasonally decline as demand slows after the holidays, but current uncertainty of supply over the next months may keep prices supported longer than usual.
However, that does not mean that one should become complacent and not takes steps to utilize the tools available for price protection. USDA recently announced the signup period for the Dairy Margin Coverage program (DMC) for 2020. Signup is to begin December 13th and continue through February 18th. This is a very important program for the protection of income over feed prices. Over $1.0 billion will be distributed to farmers under the DMC program in 2021 alone. We should not expect a repeat of that in 2022 but being involved in the program does provide some aspect of income protection. The chart shows income over feed prices through October and the months during which income over feed fell below $9.50 since January 2019 resulting in a payment for those that had chosen the $9.50 level.
Granted, the program is geared toward small to medium sized farms, but all farms can take advantage of the program up to the $9.50 level for up to 5 million pounds of milk annually. This year will be a bit different as producers will have the opportunity to increase production history by enrolling supplemental pounds of milk based on a formula using milk sold in 2019. The formula consists of 2019 pounds of milk marketed minus established production history initially determined for 2011, 2012, and 2013, and multiplied by 75% providing for an increase up farm milk production of 5 million pounds. This will provide additional payments retroactive to January 2021 and will continue through 2023. Farms will need to sign up for this supplemental milk production enrollment before they sign up for 2022 DMC.
USDA has also changed the income over feed calculation using only the premium/supreme hay price rather than a blend of alfalfa and premium/supreme hay. This change will be made retroactive to January 2020 and amounts to an extra $3.19 per cwt that will be sent to farmers who have been in the program. Going forward, it will add and average of 20.5 cents to the feed price calculation.
As a reminder, the DMC program can be utilized with any other marketing program and strategy that is used for risk management. Contract your Farm Service Agency to make sure you are taking full advantage of the program.
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.
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