Progressive dairy products provides monthly online updates of important dates, reports and advice affecting risk management decisions.
With high milk futures prices, dairy farmers face increased pressure from lenders and others to protect milk prices or long-term revenue margins. According to Travis Glaser, certified crop insurance agent and owner of ARM Services LLC, profit protection is important, as long as it’s done with sound reasoning and an understanding of all the options.
Glaser, which partners with FarmFirst Dairy Cooperative on dairy risk management strategies, warns that some of the pressure on producers to lock in long-term price or margin protection will result in high premiums or margin calls, which will have a negative impact on the producer’s risk. strategy.
Glaser outlined several options available to dairy producers to protect milk revenues. He cautions producers to analyze costs with each of the strategies listed.
“In some cases it’s the opportunity cost; in other cases it is the cost of the premium,” he said.
- Price lock with milk processor futures can be cheap at 10-15 cents per quintal (cwt) but can prevent you from profiting from rising milk prices. In addition, since cooperatives are not required to pay the minimum prices of the Federal Milk Marketing Ordinance (FMMO), negative producer price differentials (PPDs) or other deductions may mean that you receive less than the contract price, Glaser said.
- Options Trading, buying put options and selling call options on the Chicago Mercantile Exchange (CME) allow you to build a fence around a desired milk price. But while allowing you to protect the bottom, it can also set a limit above, Glaser said. For producers who locked in prices months ago, margin calls add another layer of costs. Making multiple moves with a broker can also increase trading costs.
- Dairy Income Protection (Dairy-RP) helps provide a federally subsidized floor for milk revenues. However, some components of the program can prove costly, especially when it comes to bonuses for distant months, Glaser said. Quarterly averaging of milk prices and production also limits the ability to manage risk when month-to-month price or production changes occur.
At any time, sales are open for up to five future quarters. Closing of sales 15 days before the start of the quarter. For example, the purchase period for Dairy-RP coverage for the third quarter of 2022 ends on June 15. The market changes daily and Dairy-RP riders must be purchased between the CME market close and the next CME open.
Dairy-RP coverage cannot be purchased on days when major USDA dairy reports that could impact markets are released, including Dairy Production, Cold Storage and Dairy Reports ( see Calendar). Dairy-RP is also not available on days when the applicable futures contract increases or decreases in limit, or on days when trading on the Chicago Mercantile Exchange is closed due to holidays.
Click here or on the calendar above to see it full size in a new window.
Compensation payments are determined by calculating the difference between expected and actual earnings based on market prices, adjusted on a national or regional basis to account for differences between expected and actual milk production. Premiums do not become payable until the month following the end of the quarter.
- Livestock Gross Margin for Dairy (LGM-Dairy) also establishes a federally subsidized floor on your margin, covering both the price of milk and feed. Gross margin is the milk price minus the feed prices (corn and soybean meal). The dairy farmer can purchase a deductible policy of $0 or up to $1 deductible in 10 cent increments. Coverage under LGM-Dairy is available for up to 10 months. To qualify for a subsidy, at least two months of coverage must be purchased. LGM-Dairy pays the difference between the guaranteed gross margin and the actual gross margin, as defined in the policy provisions, for covered milk.
LGM-Dairy program sales periods are open on a weekly basis. Unlike Dairy-RP, LGM-Dairy is available even if a sell period falls on a USDA report day.
Milk prices for LGM-Dairy are three-day averages of Class III futures prices. Three-day averages of corn and soybean meal futures prices are used for the feed side of the policy. LGM-Dairy has flexibility in the amount of food included in the policy that it purchases.
Under current market conditions, Glaser prefers LGM-Dairy because the producer is eligible to protect their margins on a monthly basis, avoiding the quarterly average under Dairy-RP. In some states, premium costs for LGM-Dairy are cheaper than Dairy-RP.
Escalating feed costs ate into dairy revenue margins in February, but not enough to trigger payouts under the Dairy Margin Coverage (DMC) scheme. Read: February DMC margin drops but no compensation payout is triggered.
The average U.S. milk price announced in February 2022 rose 50 cents from January to $24.70 per cwt, the highest monthly average price since October 2014.
However, the higher average milk price was offset by higher average costs for alfalfa hay, corn and soybean meal. February feed prices yielded an average total DMC feed cost of $13.72 per cwt of milk sold, up $1.09 from January and the highest since the program’s inception DMC or its predecessor, the Margin Protection Program for Dairy Products (MPP-Dairy), dating to March 2014.
That left the February DMC margin at $10.98 per cwt, 56 cents lower than the January margin, which hit a 14-month high of $11.54 per cwt. Despite the decline, the margin remained above the DMC Tier I upper insurable level of $9.50 per cwt.
Many milk price comparisons are made with prices received in 2014. The two years, however, offer a substantial contrast in dairy revenue margins.
While the February 2022 dairy revenue on the feed cost margin under DMC was $10.98 per cwt, the September-October 2014 all-dairy average milk price under the MPP-Dairy program was slightly higher. at $25.30 per cwt, but gave a much larger margin at $15.51 per cwt. Average feed costs in September-October 2014 averaged $9.79 per cwt, with hay prices averaging $195.50 per ton, corn $3.52 per bushel, and meal soybeans of $453.61 per tonne.
USDA Dairy Production Report, Outlook
February 2022 milk production was down 1% from the same month a year earlier, but an eight-month decline in cow numbers has come to a halt, supported by rising milk prices. U.S. cow numbers are up 3,000 from revised January 2022 estimates, but still down 96,000 head from a year earlier and 137,000 head down from the May 2021 peak .
The USDA’s preliminary March milk production estimate will be released on April 20. Progressive dairy products for numbers and analysis.
The USDA’s monthly World Ag Supply and Demand Estimates (WASDE) report, released on April 8, revised up the US milk production estimate for 2022, citing projected growth in cow numbers . Despite the increase in production, the outlook for farm-level milk prices has improved.
From the previous month, the USDA raised the milk production forecast by 300 million pounds to 226.3 billion pounds. If achieved, 2022 production would be unchanged from 2021.
The projected average annual Class III price was increased $1.10 from last month to $22.75 per cwt. The Class IV projected price was increased by 35 cents to $24.05 per cwt. The all milk price forecast for 2022 has been raised to $25.80 a quintal, up 75 cents from last month.
Read: Economic Update: USDA raises milk production and price forecast for 2022.
- The next “Protect Your Profits” webinar will take place on April 27. A special edition of the Pennsylvania Center for Dairy Excellence (CDE) Protecting Your Profits webinar will focus on rising interest rates and the potential impact on dairy profitability. Zach Myers, Head of Risk Education at CDE, will host the monthly webinar, April 27, from noon to 1 p.m. EST. The program will feature Sam Miller, Managing Director of Agricultural Banking at BMO Harris Bank, who will discuss rising interest rates, inflation and how these could affect dairy farmers and the industry as a whole. Myers will also highlight Class III and IV milk futures price forecasts, as well as DMC margins.
Advance registration is not required. Each webinar is available via podcast or by phone. To participate, click here or call (646) 558-8656. When prompted, enter meeting ID 848 3416 1708 and passcode 474057.
- FMMO Uniform Price and Producer Price Differentials for March Milk Releases were released April 11-13. FMMO’s statistically flat milk prices rose in March, while the price gap between milk classes again impacted the pooling of handlers and the “Class I Mover”. Read: FMMO Uniform Prices, Class IV Unbundling In Progress.