Dairy Outlook: October 2017

October dairy outlook: little potential for increases in milk price; feed prices trending downward; harvests provide breathing room to milk margin/IOFC for Pennsylvania producers.
Dairy Outlook: October 2017 - Articles

Updated: November 1, 2017

In This Article
Dairy Outlook: October 2017

Robert Goodling, Penn State

Positive Margins

The market sees very little potential for increases in the milk price. In looking at Table 2: 12 month Pennsylvania & US All Milk Price, Feed Cost, and Milk Margin, you see that milk price improved slightly month over month as feed prices moved in the opposite direction, so milk margin continued to improve and is at the highest level in over a year. This improving margin should continue through the end of the year and provide some breathing room for Pennsylvania producers that have seen very thin margins over the past two years. Additionally, on a significant number of dairy farms, the corn crop is yielding excellent silage tonnage and grain. This bumper crop of corn will allow silos and bunkers to be filled with less acres, allowing more snaplage or shelled corn to be harvested. For Pennsylvania dairy farms hit hard with last year’s drought, the ability to feed their own corn grain, rather than purchase grain, will provide a welcome boost to the milk margin through next year!

Another positive trend is the year over year milk production increase in Federal Order 1 had slowed by mid-summer. The market administrator’s bulletin shows an average of 75 million lbs. of milk has been pooled in the order each day during 2017! And, for most of 2017, there were 2-4 million lbs. of additional milk pooled each day compared to the same time in 2016. However, by late summer, that trend had almost disappeared. While this slowing of the milk supply has provided a small bit of relief to marketers and manufacturers in the Northeast, we expect that in Pennsylvania, with abundant crops, and cooler autumn weather, the milk spigot will re-open.

Future Outlook Challenging

If you look at Figure 2: 24 month Actual and Predicted Class III, Class IV, and Pennsylvania Average Mailbox Milk Price Graph, you will see that the price is expected to decline at least $1.50/cwt by next summer. When you remove that $1.50 from this month’s milk margin, the predicted margin (if crop prices stay exactly the same) is nearly as low as we have experienced over the past year. So, the predicted drop in milk prices provides enough of a challenge for profitability without any consideration of price movement on feed. However, the futures price for soybean meal is trending upward. This upward pressure on soybean meal price seems incredible considering that we are in the midst of harvesting our 4th consecutive record national soybean crop. And, USDA has just announced that on farm stocks of soybeans are much, much higher than last fall. Normally, these factors would be very bearish on price, yet the potential for export for plant protein, the demand for domestic crush, as well as the record numbers of livestock and poultry in our country are factors that continue to support the soybean meal price. Based on the predicted hit to margins from lower milk prices, it will be critical for dairy producers to keep downward pressure on feed costs and not allow market variations, especially in protein, to further damage the significantly stressed margins we predict by late spring and summer of 2018.

Organic Markets Trembling

Pennsylvania has a number of dairies producing milk in compliance with organic standards. All those involved in organic milk markets were closely watching USDA’s response to an investigation of Aurora Dairy. This dairy has over 20,000 cows milking on a number of farms in Colorado and Texas and has become the leading producer of organic milk in the country. USDA investigated Aurora on the basis of complaints that they were managing their herds in ways that violated the national organic standards for milk production. USDA just announced that they have concluded their investigation and found no violations of the organic standards by Aurora. This finding has implications in the organic dairy industry. Over the past couple of years, the organic milk markets have suffered from the same basic factor that has plagued conventional milk markets—namely producing more milk than is needed by the market. As a result, prices decline. In Pennsylvania, there are a few dairy farms that are in the 3 year transition to organic that are being allowed to continue, but cooperatives and companies handling organic milk are not starting any new herds on that 3 year timeline. Currently, there is simply no need for additional organic milk.

In the past, organic milk was produced by small farms, and the premium for that specialized product helped many small farms maintain profitability, even with increased costs of production. If organic milk production standards can now be met on large scale production operations, as Aurora has now proven to the satisfaction of USDA, then organic milk will continue to be plentiful, prices will trend lower, and the status of organic milk will become more of a commodity, rather than a distinctive product. The organic dairy market is quietly trembling with this disruptive vision of the future.

Table 1: 12 month Pennsylvania & U.S. All Milk Income, Feed Cost, Income over Feed Cost ($/milk cow/day)

¹ Based on corn, alfalfa hay, and soybean meal equivalents to produce 75 lbs. of milk (Bailey & Ishler, 2007)

² The 3 year average actual IOFC breakeven in Pennsylvania from 2014-2016 was $8.97 ± $1.76 ($/milk cow/day) (Beck, Ishler, Goodling, 2017).

Table 2: 12 month Pennsylvania & U.S. All Milk Price, Feed Cost, Milk Margin ($/cwt for lactating cows)

¹ Based on corn, alfalfa hay, and soybean meal equivalents to produce 75 lbs. of milk (Bailey & Ishler, 2007)

² The 3 year average actual Milk Margin breakeven in Pennsylvania from 2014-2016 was $12.41 ± $2.38 ($/cwt) (Beck, Ishler, Goodling, 2017).

Figure 1: 12 month PA Milk Income and Income over Feed Cost

² The 3 year average actual IOFC breakeven in Pennsylvania from 2014-2016 was $8.97 ± $1.76 ($/milk cow/day) (Beck, Ishler, Goodling, 2017).

Figure 2: 24 month Actual and Predicted* Class III, Class IV, and Pennsylvania Average Mailbox Price ($/cwt)

* Predicted values based on Class III and Class IV futures regression (Gould, 2017).

To look at feed costs and estimated income over feed costs at varying production levels by zip code, check out the Penn State Extension Dairy Teams DairyCentsor DairyCents Proapps today.

Data sources for price data:

All Milk Price: Pennsylvania and U.S. All Milk Price (USDA, 2017)

Predicted Class III, Class IV, and Pennsylvania Mailbox Price (average of the Eastern and Western PA mailbox Price) (Gould, 2017)

Alfalfa Hay: Pennsylvania and U.S. monthly Alfalfa Hay Price (USDA, 2017)

Corn Grain: Pennsylvania and U.S. monthly Corn Grain Price (USDA, 2017)

Soybean Meal: Feed Price List (Ishler, 2017) and average of Decatour, Illinois Rail & Truck Soybean Meal, High Protein prices, National Feedstuffs (Gould, 2017).

References:

Bailey, K. and V. Ishler. “ Dairy Risk-Management Education: Tracking Milk Prices and Feed Costs”. Penn State Extension. Accessed 9/20/2017.

Beck, T.J., Ishler, V.A., & Goodling, R. C. 2017. “Dairy Enterprise Crops to Cow to Cash Project,” the Pennsylvania State University. Unpublished raw data.

Dairy Records Management Systems. “DairyMetrics Online Data Report system”. Accessed 9/14/2017.

Gould, B. 2017. “Predicted Mailbox Prices (Eastern Pennsylvania”). Understanding Dairy Markets website. University of Wisconsin-Madison. Accessed 9/5/2017.

Gould, B. 2017. “National Feedstuffs: Soybean Meal, High Protein”. Summary of USDA AMS Grain Reports. Accessed 9/5/2017.

Ishler, V. “ DairyCents Mobile App”. Penn State Extension. #App-1010.

Ishler, V. “ DairyCents Pro Mobile App”. Penn State Extension. #App-1009.

Ishler, V. “Feed Price List”. Personal Communication. Accessed 8/17/2017.

Microsoft 2016. “Forecast.ets function, Office Help Website .

USDA NASS, 2017. Agricultural Prices, Quick Stats version 2.0. Accessed 9/5/2017.

The Dairy Outlook Newsletter is supported by an Annual USDA RMA grant.

Dairy Outlook: November 2017

Monthly summary of historical and predicted milk price, feed cost, income over feed cost (IOFC), and milk margins for Pennslyvania and U.S.

Authors

Dairy Business Management Dairy Nutrition

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Dairy Herd Management Dairy Cattle Nutrition Dairy Feed Management Dairy Cattle Feed Management Dairy Business Management Dairy Cattle Business Management

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Dairy and Farm Safety

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Data and Records Management Dairy Profitability and Management Dairy Genetics and Reproduction

More by Robert C. Goodling, Jr.