DairyProfit Update for Oct. 17, 2012

November Class I base highest since September 2011

The November federal order Class I base milk price is $20.70/cwt., up $1.82 from October 2012, $2.25 more than November 2011, and the highest Class I base since September 2011.

Year-to-date, the 2012 Class I base average is $17.10/cwt., down from $19.19/cwt. for the same period in 2011. It compares to $15.21/cwt. for January-November 2010 and $11.25/cwt. for the same period in 2009.

LGM-Dairy sales period is Oct. 26-27

Dairy producers, crop insurance agents and others supporting Livestock Gross Margin-Dairy (LGM-Dairy) margin insurance have been frustrated over the performance of policies issued last fall, noted Alan Zepp, risk management specialist with the Pennsylvania Center for Dairy Excellence. Because LGM-Dairy has only been available intermittently over the past few years, most producers chose to cover all 10 of the available months. The indemnities on these policies were reduced by the positive margins last December and January. Default-value actual margins fell from February through August, with May and June each more than a dollar below their expected margins. It appears that September and October’s actual margins will be well above what markets expected last fall, reducing the 10-month indemnity for these policies.

The frustration with the performance of recent LGM-Dairy policies is understandable, Zepp said. However, with the next sales period set for Oct. 26-27, LGM-Dairy is still a useful tool to manage price volatility.

With the expiration of the 2008 Farm Bill, the Milk Income Loss Contract (MILC) program, nor new 2012 Farm Bill dairy policy are available to protect a dairy producer’s cash flow. Contact your crop insurance agent now if you are interested in October LGM-Dairy coverage. Find an agent at www.rma.usda.gov/tools/agent.

Tighter hay supplies forecast

U.S. all-hay production in 2012/13 is forecast at 121.97 million short tons, down from 131.14 million tons in 2011/12, according to USDA’s latest Feed Outlook report. Total harvested area for 2012/13, at 57.6 million acres, is up 3.5% from the 2011/12 estimate of 55.6 million acres. The increase in harvested acres is more than offset by declines in yields for other hay and alfalfa hay and mixtures. 

Roughage-consuming animal units (RCAU) are projected to be 67.07 million in 2012/13, down from 67.91 million in 2011/12. Despite reductions in RCAUs, the all-hay production decline results in a net drop in hay supply per RCAU of 0.12 tons to 2.14 tons per RCAU, compared to 2.26 tons per RCAU in 2011/12. 

Production of alfalfa hay and alfalfa mixtures is forecast at 55.57 million tons, up 1% from the August forecast, but down 15% from last year. Based on Oct. 1 conditions, the estimated yield is adjusted upward by a modest 0.03 tons per acre relative to the August forecast. The 2012/13 alfalfa hay and mixtures yield is forecast to be 2.95 tons per acre, a 0.45-ton-per-acre reduction in yield relative to the 2011/12 estimate of 3.40 tons per acre. If realized, the forecast yield will be the lowest since 1988. Harvested area is down 2% from the previous year at 18.8 million acres, with major declines attributed to Montana, Wisconsin and Wyoming. 

Other hay production is forecast at 66.4 million tons, an increase of 1% from both the August forecast and the previous year. Based on Oct. 1 conditions, yields are expected to average 1.71 tons per acre, up 0.02 tons from August, but down 0.10 tons from the previous year. Harvested area, at 38.8 million acres, is up more than 6% over the 2011/12 estimate of 36.4 million acres. 

Higher milk prices, lower feed prices expected to slow herd contraction

USDA’s monthly Livestock, Dairy & Poultry Outlook report, released Oct. 17, projects 2012 milk production at 199.6 billion lbs., a reduction from September’s forecast. Forecast production in 2013 was raised in October to 199.7 billion lbs. based on the higher forecast yield per cow and a slower decline in cow numbers compared with earlier 2013 forecasts.

The September Milk Production report indicated  producers were culling at a slower pace than earlier projected. An improving feed outlook along with higher milk prices may have reduced the urgency to reduce herd size. The October forecast places the dairy cow herd at 9.225 million head in the current year and 9.125 million head in 2013.

Higher product prices result in higher expected milk prices (to see a table of quarterly and annual milk price projections, click here). The Class III price was boosted to $17.55-$17.65/cwt. for this year and to $17.75-$18.65/cwt. next year. The Class IV price is forecast at $16.00-$16.20/cwt. for 2012 and to $16.75-$17.75/cwt. for 2013. The all milk price is projected at $18.50-$18.60/cwt. in 2012 and $19.00-$19.90/cwt. in 2013.

USDA’s monthly Livestock, Dairy & Poultry Outlook report largely reflects information contained in the World Ag Supply & Demand Estimates report, issued Oct. 11. As such, it does not reflect what happened to cash cheese, butter and milk powder prices and Class III milk futures prices on Oct. 16-17. During those two trading days, cheddar barrels dropped 13.25¢/lb.; cheddar block prices dropped 9¢/lb.; butter declined 5.5¢/lb.; and Grade A nonfat dry milk dropped 4¢/lb. Also on Oct. 16-17, November 2012 Class III futures prices declined 85¢/cwt.; December Class III futures were down 51¢/cwt.