2014-15 DAIRY SITUATION AND OUTLOOK Christopher A. Wolf Agricultural, Food and Resource Economics Michigan State University October 29, 2014
HIGHLIGHTS OF LAST YEAR All time high cash butter price Highest milk price over feed margins Large production responses Major new dairy policy
ADD CLASS IV MILK PRICE GRAPH
SEPTEMBER MILK PRODUCTION NUMBERS US : 9.2767 million milk cows; +4.0% milk production; +3.4% milk/cow Michigan: 395,000 milk cows; +6.9% milk production; +3.1% milk/cow CA +2.9% milk production; same cows WI +3.2% milk production; same cows
MAY-JUL 2014 INTERNATIONAL MILK PRODUCTION SITUATION US +2.4% over 2013 EU +4.2% NZ +18.4% Australia +6.2% Argentina -6.0% Brazil +13.8%
$2.14 $1.92 Note: Oceania at $1.79
$1.81 Note: Oceania at $1.32
Dairy Provisions of the Agricultural Act of 2014 REPEALED CREATED Milk Income Loss Contract Program Dairy Product Price Support Program Dairy Export Incentive Program Dairy Forward Pricing Program Dairy Price Support Program ( dairy cliff ) Livestock Gross Margin for Dairy Cattle Margin Protection Program for Dairy Producers Dairy Product Donation Program Potential California Federal Order 23
THE MARGIN PROTECTION PROGRAM Voluntary program based on U.S. income-overfeed-cost margin Makes payments when the avg. difference between the US All-Milk price and a national feed ration index falls below the user-selected coverage option Protects dairy producers from severe downturns in the milk price, rising livestock feed prices, or both No production or payment limitations
ELIGIBILITY REQUIREMENTS Must have commercial milk marketed or sold in US The owners must be US citizens or legal resident aliens (green card holders) Must certify compliance with conservation provisions If the operation participated in MILC then it met these requirements 25
MPP-Dairy: Four Key Elements 1. Actual Dairy Production Margin 2. Production History 3. Covered Production History (%) 4. Coverage Levels & Premiums ($/cwt) 26
27 Actual Dairy Production Margin Approximates milk revenue over all feed costs on the farm Single, national formula, that cannot be customized Actual Dairy Production Margin = U.S. All-Milk Price - 1.0728 x NASS Corn Price ($/bu) - 0.00735 x AMS Soybean Meal (Central IL) ($/ton) - 0.0137 x NASS Alfalfa Hay ($/ton) Based on feed ration per cwt of milk: 30 pounds of shell corn 106.4 pounds of corn silage 14.7 pounds of soybean meal 27.4 pounds of alfalfa hay
MARGIN CALCULATIONS FOR 2014 Period ALL MILK Price CORN Price SBM Price (AMS-C. IL) ALFALFA HAY Price FEED Cost MILK- FEED Margin $/cwt. $/bu. $/ton $/ton $/cwt. $/cwt. 2014.01 $23.50 $4.42 $479.54 $185.00 $10.80 $12.70 2014.02 $24.90 $4.35 $409.25 $188.00 $10.25 $14.65 Jan/Feb $13.68 2014.03 $25.20 $4.51 $497.82 $191.00 $11.11 $14.09 2014.04 $25.30 $4.71 $514.01 $206.00 $11.65 $13.65 Mar/Apr $13.87 2014.05 $24.20 $4.71 $519.38 $224.00 $11.94 $12.26 2014.06 $23.30 $4.37 $501.79 $222.00 $11.42 $11.88 May/Jun 28 $12.07
Actual Dairy Production Margin: Historical 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 Average Margin 2007-2014: $8.13 29
30 Actual Production History and Covered Production History Actual Production History is the highest amount of milk marketed by the operation in 2011, 2012, or 2013 Each year of participation, an operation s production history will increase based on national growth in milk production. Each year, producers may choose coverage percentage of 25% to 90% of their production history, in 5% increments.
MARGIN PROTECTION COVERAGE LEVELS AND PREMIUMS: 2014-2015 Margin Coverage Level ($/cwt) Discounted Premium* 4 million lbs ($/cwt) Premium > 4 million lbs ($/cwt) $4.00 $0.000 $0.000 $4.50 $0.0075 $0.020 $5.00 $0.01875 $0.040 $5.50 $0.030 $0.100 $6.00 $0.04125 $0.155 $6.50 $0.0675 $0.290 $7.00 $0.1625 $0.830 $7.50 $0.225 $1.060 $8.00 $0.475 $1.360 31 * The discounted premium applies to sign-ups in 2014 and 2015.
MARGIN PROTECTION COVERAGE LEVELS AND PREMIUMS: 2016-18 Margin Coverage Level ($/cwt) Premium 4 million lbs ($/cwt) Premium > 4 million lbs ($/cwt) $4.00 $0.000 $0.000 $4.50 $0.010 $0.020 $5.00 $0.025 $0.040 $5.50 $0.040 $0.100 $6.00 $0.055 $0.155 $6.50 $0.090 $0.290 $7.00 $0.217 $0.830 $7.50 $0.300 $1.060 32 $8.00 $0.475 $1.360
33 Are the MPP-Dairy Premiums a good deal? Expected Margins Much Below Historical Average Expected Margins Near Historical Average Expected Margins Much Above Historical Average MPP Premiums are cheap. Depends on options and risk attitudes. MPP Premiums are expensive.
PREMIUM AND PAYMENT TIMING Premium payments have 2 alternatives: 100% at sign-up; or 25% min. by end of Feb., remainder by June 30 th of insured year Preliminary NASS prices reported at end of month. Revised final values issued at end of following month. MPP-Dairy uses final values Producers are always paid for 1/6 th of the covered amount when a payment is triggered in a bi-monthly period 34
WHEN ARE PAYMENTS TRIGGERED? (2013) Consecutive Two-Month Margin 2013 Two- Month Average Coverage Level & Payments $4.00 $6.50 January 6.29 February 5.72 6.01 0.00 0.49 March 5.24 April 6.00 5.62 0.00 0.88 May 5.77 June 5.36 5.56 0.00 0.94 July 4.85 August 6.68 5.77 0.00 0.73 September 7.97 October 9.85 8.91 0.00 0.00 November 11.04 December 11.04 11.04 0.00 0.00
OTHER MPP ISSUES Can participate in LGM-Dairy or MPP not both Sign up for 2014 (last 4 months) and 2015 September 2 through November 28, 2014 Sign up for 2016 and subsequent years will take place July 1 through September 30 of the preceding year Once a producer signs up for MPP, they are committed to at least the $4/cwt level in future years Higher coverage levels can be selected but $4/cwt is used if no coverage is selected Note this also means the $100 administrative fee will apply in future years 36
DMAP MPP WEBSITE http://dairymarkets.org/mpp 37
10/28/14 Class III Class IV Class III All Milk Futures market USDA Oct 23.90 21.80 Nov 21.28 17.62 Dec 2014 19.11 17.00 Jan 2015 18.08 16.85 Feb 17.33 16.66 Mar 17.10 16.42 Apr 16.93 16.38 May 16.91 16.45 Jun 17.04 16.59 Jul 17.06 16.96 Aug 17.30 16.95 Sep 17.38 17.19 17.25-18.15 18.95-19.85
19.5 2015 MI Mailbox Forecast 19 18.5 18 17.5 17 16.5 16 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
FACTORS TO WATCH Bullish Butter and cheese inventories remain low Drought in West continues High beef prices encourage culling Strengthening US economy Bearish US prices not competitive US dollar rising Low feed prices EU production quotas ending Russian purchases cut off Slowing Chinese purchases EU quotas ending
SUMMARY Milk prices (and margins) will be lower Cash butter and cheese prices declined in last week indicating Holiday demand concerns about stocks are diminishing US dairy exports are down and dairy imports are up Market correction to align prices with world prices might be messy