MARKET WATCH MARKET WATCH Margin Patrick French RP Feed Components Patrick.French@ feedcomponents.com Income Over Feed Cost Operating Income Ration Cost Mailbox milk price Sep Mar May Jul Nov Sep Mar May Jul Mar May Jul Sep Oct Nov Jan 2010 Jan 2011 Jan 2012 $0 $4 $8 $12 $16 $20 $24 $28 Midwest Milk Price, Feed Costs, and Returns from 2010-2012 ($/cwt) High: $5.90 Low: $0.93 Income Over Feed Cost Operating Income Ration Cost Mailbox milk price Sep May Mar Jul Nov Sep May Mar Jul May Mar Jul Aug Oct Nov Jan 2010 Jan 2011 Jan 2012 -$2 $2 $6 $10 $14 $18 $22 $26 $30 Northeast Milk Price, Feed Costs, and Returns from 2010-2012 ($/cwt) High: $5.90 Low: -$0.08 Income Over Feed Cost Operating Income Ration Cost Mailbox milk price Sep Mar May Jul Nov Sep Mar May Jul Nov Sep Oct Mar May Jul Jan 2010 Jan 2011 Jan 2012 $0 $4 $8 $12 $16 $20 $24 $28 Northwest Milk Price, Feed Costs, and Returns from 2010-2012 ($/cwt) High: $6.04 Low: $0.56 Sep May Mar Jul Nov Sep May Mar Jul Nov May Mar Jul Sep Oct Jan 2010 Jan 2011 Jan 2012 Income Over Feed Cost Operating Income Ration Cost Mailbox milk price -$2.00 $1.50 $5.00 $8.50 $12.00 $15.50 $19.00 $22.50 $26.00 California Milk Price, Feed Costs, and Returns from 2010-2012 ($/cwt) High: $5.14 Low: -$0.62 10 Progressive Dairyman Issue 9 • June 11, 2012 MARGINS CONTINUE TO REBOUND Milk price and feed costs drive margins at the farm level. Certainly, sources of revenue other than milk – and expenses other than feed – impact profitability, but not at the same magnitude. To gauge the economic health of the dairy industry in the different regions, we have calculated margin based on mailbox milk price of several states and estimated the market cost of a ration. Because feed prices change constantly and no one feed is a good indicator of total feed cost on a dairy, a ration was standardized to 10 percent rumen-degradable protein, 6 percent rumen-undegradable protein, 32 percent neutral- detergent fiber, 40 percent non-fiber carbohydrates and 5 percent fat. Nutrient costs are derived using the nutrient composition and monthly average market prices for a basket of feeds available in the region. Income over feed cost (IOFC) is calculated as the mailbox milk price less the feed cost of producing a hundredweight (cwt) of milk assuming a feed efficiency of 1.45. Operating income is IOFC less non-feed operating costs that are published biannually by USDA’s Economic Research Service. Milk price and income hit their lows this summer but continue to improve as we move from fall to winter. Most of the improvement in margin is from an increase in milk price. Income tracks milk price more closely than feed cost, but feed costs can’t be ignored because very similar milk prices in February and August of this year result in IOFC that differ by $1 to $2 dollars per cwt. Margins have improved considerably as we move into the holiday season. October data is preliminary, but it appears that IOFC is in the $10- to $11-per-cwt range. is is the highest level in several months and a considerable improvement over last year. With mailbox milk prices returning to $19- to $20-per-cwt, management practices with a focus on feed management and optimizing feed efficiency will be needed to further improvement in margins. ough absolute margin dollars is most important at the end of the day, margin percent has increased almost 50 percent – meaning that almost 50 cents of each milk income dollar is left after feed expense has been covered. PD
SepMar May Jul Nov SepMar May Jul Mar May Jul Sep OctNovJan2010
Jan2011
Jan2012
$0
$4
$8
$12
$16
$20
$24
$28 MidwestMilk Price, Feed Costs,and Returns from 2010-2012 ($/cwt)
High: $5.90 Low: $0.93
Income Over Feed Cost
Operating IncomeRation Cost
Mailbox milk price
SepMayMar Jul Nov SepMayMar Jul MayMar Jul Aug OctNovJan2010
Jan2011
Jan2012
-$2
$2
$6
$10
$14
$18
$22
$26
$30NortheastMilk Price, Feed Costs,
and Returns from 2010-2012 ($/cwt)High: $5.90 Low: -$0.08
Income Over Feed Cost
Operating Income
Ration Cost
Mailbox milk price
SepMar May Jul Nov SepMar May Jul Nov Sep OctMar May JulJan2010
Jan2011
Jan2012
$0
$4
$8
$12
$16
$20
$24
$28NorthwestMilk Price, Feed Costs,
and Returns from 2010-2012 ($/cwt)High: $6.04 Low: $0.56
SepMayMar Jul Nov SepMayMar Jul Nov MayMar Jul Sep OctJan2010
Jan2011
Jan2012
Income Over Feed CostOperating Income
Ration CostMailbox milk price
-$2.00
$1.50
$5.00
$8.50
$12.00
$15.50
$19.00
$22.50
$26.00 CaliforniaMilk Price, Feed Costs,and Returns from 2010-2012 ($/cwt)
High: $5.14 Low: -$0.62
10 Progressive Dairyman Issue 9 • June 11, 2012
MARGINS CONTINUE TO REBOUND
Milk price and feed costs drive margins at the farm level. Certainly, sources of revenue other than milk – and expenses other than feed – impact profitability, but not at the same magnitude. To gauge the economic health of the dairy industry in the different regions, we have calculated margin based on mailbox milk price of several states and estimated the market cost of a ration. Because feed prices change constantly and no one feed is a good indicator of total feed cost on a dairy, a ration was standardized to 10 percent rumen-degradable protein, 6 percent rumen-undegradable protein, 32 percent neutral-detergent fiber, 40 percent non-fiber carbohydrates and 5 percent fat. Nutrient costs are derived using the nutrient composition and monthly average market prices for a basket of feeds available in the region. Income over feed cost (IOFC) is calculated as the mailbox milk price less the feed cost of producing a hundredweight (cwt) of milk assuming a feed efficiency of 1.45. Operating income is IOFC less non-feed operating costs that are published biannually by USDA’s Economic Research Service.
Milk price and income hit their lows this summer but continue to improve as we move from fall to winter. Most of the improvement in margin is from an increase in milk price. Income tracks milk price more closely than feed cost, but feed costs can’t be ignored because very similar milk prices in February and August of this year result in IOFC that differ by $1 to $2 dollars per cwt.
Margins have improved considerably as we move into the holiday season. October data is preliminary, but it appears that IOFC is in the $10- to $11-per-cwt range. This is the highest level in several months and a considerable improvement over last year. With mailbox milk prices returning to $19- to $20-per-cwt, management practices with a focus on feed management and optimizing feed efficiency will be needed to further improvement in margins. Though absolute margin dollars is most important at the end of the day, margin percent has increased almost 50 percent – meaning that almost 50 cents of each milk income dollar is left after feed expense has been covered. PD
MARKET WATCHMARKET WATCHMARKET WATCHMARGINA 1st in 2012: ≥$6 MARGIN for 2 straight Months
Nov2009
Dec OctSepMarFeb Apr May Jun Jul Aug Sep Oct NovJan2010
Dec Jan2011
MarFeb Apr May Jun Jul Aug Sep Oct Nov NovDec Jan2012
MarFeb Apr May Jun Jul Aug$2$3$4$5$6$7$8$9
$10$11
Calculations for H.R. 3062, “Dairy Security Act”(National margin)
$21.50 cwt $6.77 bu $488.46 ton $212 ton[ ] [ ]+ +price of corn x 1.0728( ) x 0.0137price of alfalfa( )price of soybean meal x 0.00735( )
The margin graph above assumes several factors:
• Prices for corn, soybean meal, alfalfa and all-milk used to calculate the margin shall be determined as the monthly revised commodity prices published by USDA’s National Agricultural Statistics Service, not preliminary prices.
• World prices used to calculate supply management program overrides would use “Oceania prices” for cheddar and skim milk powder as published by USDA’s bi-weekly prices included in Dairy Market News – International Reports.
Note: � e graph does not attempt to predict a potential milk price increase based on a reduction in milk supply.
.55¢ .55¢ $1.14 $1.14
What the graph means? � e margin indicated in the graph
above will be closely watched by those producers who would eventually sign up for proposed government-sponsored margin protection. Producers who seek this protection at any level will be required to participate in the Dairy Market Stabilization Program, a temporary supply management program triggered when milk margins are less than $6 per hundredweight for two consecutive months or less than $4 for one month.
Green sections – Times when the diff erence between milk price and feed cost was above $6. Supply management was not in eff ect.
Yellow sections – Times when the diff erence between milk price and feed cost was below $6 but when supply management had not yet been announced or taken eff ect.
Red sections – Times when supply management would have been in eff ect for anyone receiving basic or supplemental margin protection. Supply management would begin one month after reaching the trigger margins mentioned above. Estimated margin payments per hundredweight for basic margin protection (times when margins are below $4, on 80 percent of production history) are indicated above.
Orange sections – Times when the milk margin would have triggered supply management but was suspended based on one of six scenarios in the program. For consecutive months prior to October, the U.S. feed margin was below $5 and at the same time the U.S.-world cheese price ratio would have exceeded 107 percent, triggering suspension of supply management in October. � e price ratio didn’t improve in November either. PD
