Alan Zepp, risk management program manager at Pennsylvania's Center for Dairy Excellence, provided a dairy market update and discussed risk management options during his monthly “Protecting Your Profits” conference call on May 25.

Natzke dave
Editor / Progressive Dairy

Zepp recapped current market conditions likely to influence milk prices going forward, noting there’s plenty of uncertainty ahead.

Milk and dairy product supplies are large and building. On the feed side of the equation, soybean meal futures (up $120 per ton in last six weeks) and corn futures (up $0.40 to $0.50 per bushel) have jumped, and the weather picture is clouded by El Niño & La Niña. 

Based on latest USDA estimates, U.S. cow numbers totaled 9.331 million in April, the highest number since December 2008, and monthly milk production per cow was the highest April total on record.

Current Class III and Class IV milk prices are about 25 percent less than the three-year average. Domestic dairy product prices remain above global counterparts. Chicago Mercantile Exchange (CME) cheese prices are 8 percent higher than the global average, while CME butter prices are 30 percent higher than the global average and 60 percent higher than in Europe. Global milk powder prices remain 45 percent below the three-year average and the lowest level in 12 years.

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Milk production in the European Union continues to grow, especially in the Netherlands and Ireland, while Oceania production is down slightly.

Risk management options

April’s Margin Protection Program for Dairy (MPP-Dairy) margin will be announced May 31. The first half of the next pay period calculation, for March, was about $7.47 per hundredweight. Using local feed price estimates, Zepp said the Pennsylvania margin using the MPP-Dairy formula was closer to $7.07 per hundredweight.

Based on current futures prices, Zepp said expected MPP-Dairy margins will average $7.12 per hundredweight for the March-April pay period; $5.81 for May-June; $6.27 for July-August; $7.51 for September-October and $8.19 for November-December. Looking into the first half of 2017, margins are in the $8.00 per hundredweight range.

Under LGM-Dairy, producers can insure milk income over feed cost margins for a 10-month period. The May 27-28 sales period offers coverage for July 2016 through April 2017. The policies are available through certified crop insurance companies.

The current 10-month (July 2016-April 2017) LGM-Dairy margin is expected to average $5.33 per hundredweight. As of May 25, the cost of a zero deductible policy was $0.68, with a $1 deductible policy costing about $0.22 per hundredweight.

Looking at the last three months of the available insurable period (February through April 2017), the forecasted income margin under LGM-Dairy is $6.29 per hundredweight margin. LGM-Dairy coverage would be $0.94 for a zero deductible policy and $0.36 for a $1 deductible policy.

In comparison, a March 2017 Class III $15.25 per hundredweight “put” was trading at $0.94 on May 24. A March 2017 Class III $14.25 per hundredweight “put” (similar to a $1 deductible LGM-Dairy policy) would cost $0.50 per hundredweight.

In both cases, LGM would also provide coverage if there are unexpected rise in feed costs, Zepp said.

One reminder: By law, producers already enrolled in USDA’s Margin Protection Program for Dairy (MPP-Dairy) can’t participate in LGM-Dairy.

Find Zepp’s archived "Protecting Your Profits" podcast on the Center for Dairy Excellence website.  PD

Dave Natzke