Michigan Farm News

Market Outlook: Dr. Jim Hilker

Markets & Weather

Christopher Wolf | February 22, 2018

Chris Wolf

High farm milk prices of 2014 are a distant memory.  Michigan dairy farmers continue to take it on the chin with low farm milk prices and increasing financial stress.  Unfortunately, the outlook for 2018 is likely more of the same. 

EU milk production grew in 2017 with relatively high farm milk prices while U.S. milk production slowed with tight farm margins.  International markets continue to absorb about 14 percent of U.S. production.  These exports are heavily weighted toward powders and concentrates. 

So while exports take a minority of U.S. dairy products, they are the market that has largely absorbed the growth in U.S. milk production and as such are the marginal price of U.S. milk.  Major dairy exporting countries have accumulated significant stocks of milk powders, meaning milk protein prices are likely to remain low in 2018.  Both nationally and internationally, butterfat markets are tight while dairy protein is relatively abundant. 

The U.S. All Milk price in 2017 averaged $17.60 per hundredweight which, while not great, does not necessarily appear catastrophic when accompanied by $3.40/bu corn.  However, Michigan dairy farmers have received lower prices than historic relationships would suggest the past couple of years.

The driving force has been growth in Michigan milk production.  Since 2000, it has grown by an average of more than four percent with four years during that period exceeding 6 percent growth. In 2007, Michigan produced almost 7.2 percent more milk than in 2006.  For comparison, U.S. milk production grew by an average of 1.6 percent over the same period with a high of 3.6 percent in 2005.

Michigan situation

Milk market coordination requires Michigan cooperatives and processors to account for day-to-day and seasonal variation in milk supply and demand.  Because milk production peaks in the spring while consumption peaks in the fall and winter, dairy products must be converted to storable commodities. Similarly, the amount of milk going into the bottle varies across seasons and even days of the week.

This requires processing capacity that may sit idle at times or run 24 hours a day at other times.  This balancing capacity is expensive to build and maintain.  Compensation for balancing is achieved through blend-pricing in milk marketing orders and over-order premiums negotiated by cooperatives.  However, this compensation might not be sufficient to maintain or grow balancing capacity.

The growth in Michigan milk production in recent years has led to a situation where production at times exceeds available processing capacity.  When milk supply is long, some amount of milk either ends up sold at distressed prices (below minimum class prices) or may be dumped. 

Distressed milk sales can result in much lower farm milk prices in addition to excessive hauling costs to find the market.  Similarly, when milk is dumped the cost is shared across producers.  When possible in recent years, butterfat is skimmed from the milk and the remaining liquid and solids-not-fat as are dumped. 

The Mideast order, of which Michigan is a part, is not the only milk marketing order with dumped milk, as the Northeast order has also witnessed it.  The cost of excess milk production in Michigan can be best understood by examining the relationship between Michigan farm milk prices and that of surrounding states.

Markets and Weather Figure 1

Figure 1. MI, IN and OH All Milk Price less U.S. All Milk Price, 2000-2017

Figure 1 displays the annual average All Milk price for Michigan, Indiana and Ohio relative to the U.S. All Milk price from 2000 through 2017.  Thus, a positive value indicates the state average price was higher than the U.S. All Milk price while a negative value indicates it was below the U.S. price. 

Michigan typically had a slightly lower average All Milk price than Indiana and Ohio as compared to the U.S. price, but the discount has grown significantly since 2015 as milk production has outstripped processing capacity. 

From 2000 through 2014, the Michigan All Milk price difference averaged +$0.43/cwt while it has dropped to an average of -$0.96/cwt below the U.S. price for 2015 through 2017.  As the figure indicates, Indiana and Ohio prices have also declined but not nearly as precipitously as the Michigan price.

Dairy policy changes

The Bipartisan Budget Act of 2018 was recently passed and signed into law.  The Act contains significant changes to dairy policy.  The Margin Protection Program for Dairy Farmers (MPP-Dairy) has not functioned as many hoped when it was created in the 2014 farm bill.  Recall that the policy defined an income-over-feed-cost margin and let farmers purchase margins of $4 to $8 per hundredweight.  Dairy farmers became disenchanted with a program that collected premiums but rarely paid out indemnities. The result is that enrollment and production participation declined.

The Budget Act makes several changes in MPP-Dairy.  It redefines the income-over-feed-cost indemnity pay periods as monthly rather than bi-monthly.  When calculated as two-month averages, some low margins were offset by an adjacent high margin month.  Thus, calculating indemnities monthly is likely to result in more payments to participants.

The premiums that farmers pay to participate have also been changed.  The original program defined two “tiers” of milk production such that premiums were lower for the first 4 million pounds of annual production covered. 

The new program increases Tier 1 discounted premiums to 5 million pounds.  It further lowers Tier 1 premiums substantially.  Table 1 displays the old and new Tier 1 premiums as well as the Tier 2 premiums, which are unchanged. For the first 5 million pounds of production history covered, farmers will be able to choose $5/cwt coverage for no premium and $8/cwt coverage for just over 14 cents per hundredweight. 

Table 1. MPP Dairy Premiums

Margin Coverage Level

Old Tier 1 Premium

New Tier 1 Premium

 

Tier 2 Premium

(unchanged)

Covered production

<4 million lbs.

Covered production

<5 million lbs.

$/cwt

4.00

None

None

None

4.50

0.010

None

0.020

5.00

0.025

None

0.040

5.50

0.040

0.009

0.100

6.00

0.055

0.016

0.155

6.50

0.090

0.040

0.290

7.00

0.217

0.063

0.830

7.50

0.300

0.087

1.060

8.00

0.475

0.142

1.360

Sign-up for 2018 MPP-Dairy with these modifications will be made available for dairy farmers soon retroactive to January.   The law mandates at least 90 days for sign-up.  At that time, producers will have some idea what the first two—or perhaps three—months of 2018 look like as far as margin, which should assist in program decision-making.

The Budget Act also removes the cap on premium subsidies for livestock insurance products including those that apply to dairy.  Thus, Livestock Gross Margin for Dairy should be available in all periods.  This change may also encourage new livestock and dairy products.

As of this writing, the projection is for a mediocre milk price year—an average of $17 to $17.50/cwt for the U.S.  While farm milk prices are weak in the first half of the year, the expectation is for a modest price recovery in later summer into the fall months.  However, “basis” issues are likely to continue to plague Michigan farm milk prices.

Index

 

Blogs & Columns

 

Columns

Measuring operational efficiencies

Dollars and Sense

GreenStone FCS | November 9, 2017 

In today’s challenging economic times, it is more important than ever to monitor the operational efficiency of your operation.
 

Apply for building permits at your own risk

Law of the Land

Varnum LLP | September 19, 2017 

Matt ZimmermanIt is generally well accepted that a building permit is not required for buildings used for agricultural purposes if the building does not include retail trade.
 

Understanding operating loans

Dollars and Sense

GreenStone FCS | September 7, 2017 

Martin KarperskiFarming is a capital-intensive business, with land, equipment and facilities that can run into millions of dollars.
 

Tips to prepare now for H-2A next year

Law of the Land

Varnum LLP | July 6, 2017 

Kimberly Clark pngAs more employers plan to use the H-2A program, completing the following items this year will make an easier transition to H-2A employment.
 

Dairy: an unenviable position

Dollars and Sense

GreenStone FCS | June 6, 2017 

Ben SpitzleyThe dairy industry is facing a challenging time, a cyclical downturn that’s lasted longer than in previous cycles, and is expected to continue for at least the near-term.