Milk Prices Softening, But Margins Still Good

7/26/2014 7:00 AM
By Charlene M. Shupp Espenshade Special Sections Editor

While milk prices are still strong — almost $4 per hundredweight higher than a year ago — they have softened from their springtime highs.

It’s why in this month’s Protecting Your Profits call, Alan Zepp, risk-management specialist for the Center for Dairy Excellence, said farmers have a great opportunity to protect their potential profits.

He pre-recorded his call this week to discuss market conditions ahead of this week’s LGM-Dairy sign-up period, which concludes today.

“Current future market prices do not project any indemnity payment for 10-month policies,” he said, but “that could change in 2015.”

Current margins are higher than the 3- and 5-year averages Zepp said. “Going forward, the projected margins are the highest since 2008.”

Since the June call, the Farm Service Agency has announced that farmers will be able to continue to purchase Livestock Gross Margin for Dairy insurance and still transition to the Farm Bill’s Margin Protection Program, or MPP, Zepp said.

Producers will be able to sign up for the new program when it comes available but cannot start coverage until their LGM-Dairy contract is completed in 2015.

“Essentially, this means you can use LGM-Dairy ... and still sign up for the Margin Protection program,” Zepp said. However, depending on the month the contract ends, there could be a delay in picking up MPP coverage.

The Margin Protection Program established a margin formula based on the two-month averages for January-February, March-April, May-June, July-August, September-October and November-December.

If the contract ends in the middle of a formula period, producers will have to wait a month until picking up MPP coverage.

Milk prices are still in good shape. June’s all-milk price was $23.30 per hundredweight, Zepp said. Corn prices are around $4 per bushel, and alfalfa and soybeans are in the $3 range. The Class IV price is at $23.49 and is driving the Class I price because it’s higher than the Class III price of $21.46.

According to a milk marketing report released by the National Milk Producers Federation, milk production has risen not because of growth in the national dairy herd but by improved milk production per cow.

However, things are beginning to change. Zepp said that though cows are being culled in record numbers, the herd is not shrinking but is starting to grow. May culls were the lowest in some time.

To conclude his talk, Zepp reminded listeners about the volatility of milk markets and showed graphics of the trends of margins and indemnity payments over the past decade.

Very few payments were made in times of high margins, but the opposite is true during low margins. And while the market could continue to show strong returns, it is not a guarantee.

“We might be getting into a period where indemnities will occur in the future,” Zepp said. “Whether you use LGM-Dairy (or) forward pricing tools, now is the time to use these potential margins to protect potential profits.”

Farmers need to have a plan. “Not acting is speculating,” Zepp said.

He encouraged farmers needing assistance with developing a risk-management plan to contact the Center for Dairy Excellence.

Zepp’s call is posted as a webinar at www.centerfordairyexcellence.org and at http://bit.ly/lancasterfarming_334.


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11/1/2014 | Last Updated: 10:45 PM