As farmers put 2017 cropping plans into action, softening dairy markets continue to require attention on dairy risk management strategies too, according to Alan Zepp, risk management program manager at Pennsylvania's Center for Dairy Excellence (CDE).
“In December, we thought we were past the bottom of this cycle, but we’ve had a relapse,” Zepp said during his monthly “Protecting Your Profits” conference call. “How long is this dip going to last, nobody knows. The fundamentals would say it isn’t going to turn around very quickly.”
Risk management options
Zepp provided a dairy market update and discussed risk management options during the program, recorded and available on the Center for Dairy Excellence website. He provided an update on the Margin Protection Program for Dairy (MPP-Dairy), Livestock Gross Margin-Dairy (LGM-Dairy) and puts and options on the Chicago Mercantile Exchange (CME) futures market.
While current Class III milk futures prices are about $1.50 per hundredweight (cwt) below the five-year average, the milk income over feed cost margin (using MPP-Dairy feed price factors) is about $1 per cwt higher than the five-year average, Zepp said.
The MPP-Dairy January-February 2017 pay period margin was announced March 30 at $10.82 per cwt, well above the highest indemnity payment trigger level of $8 per cwt.
Current projections indicate MPP-Dairy margins will bottom out in May-June 2017, at about $8.50 per cwt. Although conditions can change, it appears unlikely there will be no MPP-Dairy indemnity payments through the end of the year.
Producers using LGM-Dairy and/or the futures market would likely see some returns on their risk management strategies, Zepp said.
Under LGM-Dairy, producers can insure milk income over feed cost margins for a 10-month period. The March 31-April 1 sales period offered coverage for May 2017 through February 2018, with policies available through certified crop insurance companies.
As of March 28, the cost of a zero-deductible LGM-Dairy policy for the 10-month period was 62 cents per cwt, with a $1 deductible policy costing about 18 cents per cwt.
Based on conditions as of March 28, the insurable 10-month LGM-Dairy margin averaged $8.14 per cwt. As milk prices have softened, so has the insurable margin. Zepp said 10-month insurable margins averaged $8.68 per cwt in February; $9.09 per cwt in January; and $9.47 per last December.
CME Class III puts/options
For producers using the futures market individually or through their co-op, the June 2017 Class III CME futures price closed at $15.93 per cwt on March 28; a $16 per cwt “put” was trading at 61 cents per cwt, with a $15 put (equal to the $1 deducible LGM-Dairy policy) costing 21 cents per cwt.
Market fundamentals reviewed
Zepp provided a look at dairy market fundamentals:
• February 2017 U.S. butter inventories were the highest for the month since 1993. Domestic cheese inventories are about 10 percent higher than 10 years ago, and milk powder stocks in the European Union are still historically high.
• As of March 28, average 2017 Class III milk futures prices were projected to average $16.13 per cwt, down about $1 per cwt compared to a month earlier, when they averaged $17.30 per cwt. 2017 average Class IV prices were projected at $15.04 per cwt, compared to $15.62 per cwt a month ago.
• When factoring in current feed futures prices (based on current MPP formulas), 2017 margins will average about $10.12 per cwt. The recent softening of milk prices has pulled the projected margin down about 60 cents per cwt, from $10.75 per cwt a month ago.
• While domestic consumption continues to carry the U.S. market, growth in exports will be necessary to absorb increasing milk supplies. The U.S. dollar remains strong relative to other currencies, negatively impacting export competitiveness. However, that’s been offset somewhat by U.S. dairy product prices, which have now aligned and/or dipped below global prices.
Comparing U.S. and global prices: CME cash cheddar blocks traded at $1.44 per pound, while the cheddar price on the latest Global Dairy Trade (GDT) auction was $1.54 per pound, and the cheddar price in Germany was $1.63 per pound. CME milk powder price was 82 cents per pound, with New Zealand skim milk powder trading at 88 cents per pound, and German milk powder at 90 cents per pound. Looking at butter, the CME cash price was $2.10 per pound, compared to $2.06 per pound in the European Union and $2.23 per pound at the GDT.
• While the U.S. remains the only country/region among the five major exporting areas to increase milk production over the past 6 months, year-over-year milk production is projected to grow globally starting in late summer and early fall.
Find Zepp’s archived Protecting Your Profits podcast on the Center for Dairy Excellence website. Next month’s call is scheduled for April 26, with the next LGM-Dairy policy sales period set for April 28-29.
A reminder: By law, producers already enrolled in MPP-Dairy can’t participate in LGM-Dairy.
- Progressive Dairyman
- Email Dave Natzke