Record Breaking Margins Continue for Dairy

3/1/2014 7:00 AM
By Charlene M. Shupp Espenshade Special Sections Editor

Dairy farmers find themselves in a profitable place this winter with milk prices and margins breaking records and feed prices dropping.

Alan Zepp, risk-management specialist for the Center for Dairy Excellence, said some farmers have expressed frustration because they have not received an indemnity payment from their recent LGM-dairy policies, but he said he looks at this as a good thing.

Milk prices are good and the policies did their job by placing a floor under milk prices but allowing farmers to capture the higher price, Zepp said.

“LGM-dairy did not pay an indemnity is a good thing” because it indicates profitable milk margins, he said.

Zepp spoke Wednesday during his monthly protecting your profits conference call.

“I think this is a great time to use risk-management tools to protect against risk,” he said. “Not protecting prices may be a bigger gamble.”

Those tools include LGM-dairy, milk and feed price contracting, and in the near future, dairy margin insurance.

The January 2014 margin is currently at $18.04, one of the highest on record. Projections are for the prices to continue to climb, with February coming in at $20.06 and March at $18.60.

“This is higher than any months we have on record since 2000,” Zepp said.

Risk management will also begin to change as USDA begins to develop the rules for the new dairy margin insurance as part of the recently passed Farm Bill. The margin insurance program will run through 2018.

Zepp said the rules have to be developed and finalized by the USDA’s Farm Service Agency. The final rules should be available by September.

One of the questions he has regards flexibility in the risk-management program. Farmers will only be able to participate in either LGM-dairy or the new dairy margin insurance program, according to the Farm Bill.

However, there are no guidelines on whether farmers could switch between the two programs annually.

There is an annual $100 administrative fee for farmers to participate in the margin insurance program, which suggests that farmers would have the ability to change programs.

The MILC or Milk Income Loss Contract program, will conclude once the new margin insurance is in place. The dairy price support program has already been eliminated.

LGM-Dairy and the dairy margin insurance programs have different calculators to develop their margin protection levels.

For example, the base rations follow slightly different market prices. Zepp adjusted the ration components used the dairy margin insurance feed calculations in the LGM-dairy formula for a more direct comparison between the two programs. Both programs follow the same trend lines, he said.

As for milk prices, Zepp said that exports are driving the rally. The U.S. exported 15.5 percent of its milk, causing the Class IV price to continue to serve as the milk price driver.

Class I, or fluid milk prices, are based on either Class III or Class IV prices, depending on which is higher.

“Strong powder prices are holding up other prices,” he said.

Zepp said he expects that trend to continue. He also expects Class III prices to continue climbing “unless market fundamentals cause prices to head south.”

The February LGM-dairy policy sign-up period concludes today. The next Protecting Your Profits call will be March 26, ahead of the March sign-up.

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