Author: Kenny Burdine

Dairy producers continue to struggle with decreasing farm level milk prices and high feed costs. For the first five months of 2023, the US All Milk price averaged $21.16 per hundredweight (cwt), which was more than $4 per cwt lower than the first five months of 2022. In fact, the US All Milk dropped below $20 per cwt in May for the first time since October 2021. Lower milk prices are never a welcome change, but they are especially problematic in the current feed price environment. While farm level milk prices were considerably lower for the January-May time period this year compared to last year, feed prices were actually higher. Using the Dairy Margin Coverage (DMC) feed ration as a proxy for feed cost to produce a cwt of milk, feed costs were almost $1 per cwt higher during the first five months of this year. Needless to say, this combination puts a serious squeeze on dairy producers. The figure below shows both US All Milk Price and Dairy Margin Coverage (DMC) feed costs since January of 2014 and the recent convergence of the two lines is very obvious. (Note: Dairy-DMC did not exist for this entire time period, but the chart was intended to give historical perspective).

While I would prefer market conditions be different, times like this are good opportunities to discuss risk management strategies. Dairy producers should consider all risk management opportunities available to them including Dairy Revenue Protection, Livestock Gross Margin (LGM) for Dairy, forward contracts, futures and options, etc. But the Dairy Margin Protection (DMC) program is a relatively inexpensive way to get some margin protection, especially on an operation’s first 5 million lbs of milk production history. Because it is readily available and inexpensive, I suggest to producers that DMC should be their first layer of risk protection. In fact, producers that enrolled in the DMC program at the highest level ($9.50 per cwt) have received a payment in each of the first five months of 2023. 

The chart below tracks DMC margin back to January of 2014 and one can easily see decline in margins over the last several months. The last point on that chart is May of 2023 for which the DMC actual margin was $4.83. While it can’t be seen in the chart, one would have to go back to 2012 to find a lower DMC margin than that, had the program existed back then. In terms of the payment level for May 2023, participating producers received a payment of $4.67 for that month’s share (1/12) of the production history they chose to cover. While a dairy producer would be better off if prices were such that a DCM payment was not triggered, a payment of this magnitude absolutely makes a difference. 

Many risk management tools today are market based. By that, I mean that available coverage levels and costs evolve with market conditions. Examples of this would include Livestock Risk Protection and Livestock Gross Margin Insurance, as well as crop insurance for which reference prices are determined by February futures. But DMC really is a countercyclical tool. The margin levels that can be purchased are available regardless of market conditions. In fact, producers may enroll in DMC at times when the likelihood of payouts is extremely high. There is considerable price and cost risk going forward this year.  Historically large corn acres planted, 94 million, combined with trend yields would produce a record large corn crop and lower prices.  But drought worries may cut into those yields, substantially boosting prices. Today’s futures market indicates some slightly higher Class III milk prices in the coming months.  Every operation should consider all available tools when putting together their risk management plan, but it’s hard to imagine that DMC-Dairy would not be one of the tools in their risk management toolbox.

USDA released the April Cattle on Feed report on Friday, April 21^st. This monthly publication estimates the number of cattle on feed at feedlots with a capacity of over 1,000 head and serves as a measure of likely beef production over the next several months. While the cow herd has been decreasing in size for several years, an increase in the number of heifers in the beef system kept on-feed numbers running relatively high for much of 2022. Finally in the fall, the long-expected shift occurred, and on-feed numbers have been running below year-ago levels since then.

In Friday’s report, April 1, 2023, on-feed inventory was estimated to be down about 4.5% from April 1, 2022. While this might not immediately raise any eyebrows from casual observers, this on feed number was higher than expected and really came down to March placements being greater than most pre-report estimates. The net effect was that total on-feed inventory was virtually unchanged from March 1 to April 1, which was counter to what many expected. 

Heifers continue to make up a historically large proportion of cattle on feed.  Fewer heifers were reported on feed than on April 1, 2022.  While steers on feed declined by 6 percent, heifers on feed were only down about 1.7 percent from last year.  That indicates that there has not been a large movement in holding back heifers yet. 

There are some possible explanations for the larger-than-expected March placements number. First, March is a month when cattle are often moved off wheat pasture and continued dry weather combined with high wheat prices, likely impacted movement of feeders. Secondly, live cattle imports from Mexico were higher in March. So far this year, feeder cattle imports from Mexico are up about 95,000 head from last year.  But it’s worth remembering that feeder cattle imports in 2022 were the fewest since 2008.  Finally, there is still a lot of carry on the feeder cattle board, meaning that feedlots have been aggressively buying feeders ahead, in anticipation of the rising price levels suggested by deferred live cattle futures. Put simply, I absolutely think that feedlot placements bears watching in the coming months, but I suspect the larger placement number last month has more to do with timing than a major shift in market fundamentals. 

Last summer, I wrote a Southern Ag Today article about the strength of dairy prices. After a great deal of volatility during 2020 and 2021, prices for cheese, butter, and nonfat dry milk pushed farm level milk prices beyond what was seen in 2014. The US All Milk price actually exceeded $27 per cwt last April and May and just missed that level in June. Increases in feed cost definitely bit into those price levels, but margins were as attractive as they had been in several years. Since that time, milk price has fallen by about $4 per cwt. Feed costs have also decreased, but not by as much proportionally. The figure below shows both US All Milk Price and Dairy Margin Coverage (DMC) feed costs since January of 2014. (Note: Dairy-DMC did not exist for this entire time period, but the chart was intended to give historical perspective).

US All Milk Price and DMC Feed Cost

January 2014 to January 2023, $ per cwt

The last data point in the chart above is for January of 2023 and that is where I want to focus this discussion. Dairy margins have shifted in recent months such that the DMC margin for January of this year was $7.94, so payments will be made at the $9.50 coverage level. This is the highest level of coverage available to producers covering up to 5 million pounds of annual milk production history. This means that a payment of $1.56 will be made on one-twelfth of the year’s covered production. The January payment alone will cover over 80% of the total premium cost for 2023 and coverage is still in place for the remaining 11 months for which margins are not yet known.

The figure below shows the DMC Margin from January 2014 to January 2023. This is just the difference in the two series shown in the previous graph and tells the story very well. One can see the $2.96 decrease in margin from November of 2022 to January 2023 as well as the overall volatility in milk price over DMC feed costs had the program been in existence since 2014. Had DMC been around in 2009 and 2012, the margin would have been below $4 at times.

DMC is similar to many other risk management tools in that producers are typically better off if they don’t receive payments from it. Ideally, market conditions are such that the difference between milk price and feed costs allow for acceptable returns. But in times when that is not the case, DMC can provide solid risk protection. Dairy producers should consider all risk management opportunities available to them including Dairy Revenue Protection, Livestock Gross Margin for Dairy, forward contracts, futures and options. But because DMC is a relatively inexpensive form of margin protection on coverage up to 5 million lbs of production history, I typically view it as the first layer of risk protection in a dairy farm’s risk management plan.

DMC Margin – US All Milk Price Minus DMC Feed Cost

January 2014 to January 2023, $ per cwt

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Burdine, Kenny. “Dairy Margin Coverage Program Begins 2023 with Payment.” Southern Ag Today 3(11.2). March 14, 2023. Permalink

As we move into fall, we have a pretty good feel for the size of the 2022 corn crop. Acreage is down significantly from last year and yield estimates were reduced recently to 172.5 per acre. Barring a major shock on the demand side, feed prices are going to be a challenge for cattle operations this winter.

Perhaps the most important thing to remember is that cost of gain and value of gain are correlated. Feedlots prefer to place heavier feeder cattle when feed prices are high, so the price discount on higher weights gets smaller. This narrowing of price slides increases the value of additional pounds when feeder cattle are sold. Opportunities can still exist in high feed price markets depending on cattle price dynamics. Producers may find that opportunities to grow feeders still exist, especially if they can efficiently make use of alternative feeds. Along those same lines, producers need to make sure they distinguish between cost of feed and cost of gain. Cost per ton of feed really does not tell me much unless I know something about that feed’s ability to put weight on cattle. 

Finally, there are also implications for fall grazing. A quick glance at the drought monitor reveals how much variation exists across the country. While grazing costs have increased recently as well, they have not increased as much as purchased feed. So fall pasture is likely the most attractive feed that can utilize to add pounds. The current market also increases incentives to incorporate rotational grazing or strip grazing to increase the utilization of those forages.

Burdine, Kenny. “Livestock Feed Price Implications for Fall“. Southern Ag Today 2(39.2). September 20, 2022. Permalink

After dealing with incredible volatility for much of 2020 and 2021, dairy producers are benefiting from a sharply stronger milk market in 2022. Prices for cheese, butter, and nonfat dry milk are running significantly higher than last year and are fueling farm level milk prices. The US All Milk price set a record in March of 2022, then exceeded that level to set a new record the following month. From March to April, prices rose by $1.20 to a record level of $27.10 per cwt. Prior to March of this year, the record high milk price was set in September of 2014.

US All Milk Price

January 2014 to April 2022, $ per cwt

Like most all commodities, milk prices only tell part of the story this year. Dairy producers are dealing with higher production costs as feed, fuel, fertilizer, and other inputs are also much higher. While feed rations differ across all operations, the assumed ration for the Dairy Margin Coverage (DMC) program has become a common metric to estimate feed costs for dairy operations. DMC feed cost includes assumed quantities of corn, soybean meal, and alfalfa hay for a representative dairy operation. 

From April 2021 to April 2022, the estimated cost of the DMC ration has increased by $2.28 per cwt or 18%. The US All Milk price has increased by more than enough offset that increase over the last year, but considering the increase in feed costs does put the historical price levels in a slightly different perspective. While milk prices are setting record highs, estimated returns above feed costs have reached levels comparable to what was seen at times in 2019 and 2020. And, they are not at the levels that were seen during 2014.

DMC Margin – US All Milk Price Minus DMC Feed Cost

January 2014 to April 2022, $ per cwt

Burdine, Kenny. “Farm Level Milk Prices Set Record in Back-to-Back Months“. Southern Ag Today 2(26.2). June 21, 2022. Permalink