Money
January 16, 2017

Profitability Could Improve Substantially This Year

 |  By: Robin Schmahl

The year certainly looks promising if we base it on underlying cash prices and current Class III futures. USDA raised their milk price estimates significantly on the latest World Agricultural Supply and Demand report as well. If current USDA price estimate come to fruition, average milk prices will be $1.80-$2.00 above last year. If the average price estimate is used for corn, soybean meal, All-milk, and using the recent alfalfa hay price of $130.00 per ton, an average income over feed cost would be $10.18 for 2017. The average income over feed cost based on the Margin Protection Program calculation for the first 11 months of 2016 was $7.90. This would be an incredible improvement of profitability. Certainly we hope it would improve more than that, but that is a substantial change for the positive. Of course, income over feed costs will vary throughout the year with some months better than others. This gives something to look forward to and be excited about. This would provide a foundation on which each individual operation can then build and improve on through the use of marketing. Even though the outlook for milk prices and profitability looks much improved, we must not become complacent. The tendency is to forego a risk management plan when market prices look good. However, when prices look good it is the time to raise the bar and improve your return on investment. Options and option strategies will assure a price floor while leaving the upside open to take a higher price if it develops for milk. Options and option strategies will also work well for protecting feed prices from going higher while leaving the bottom open for a lower price.   

There are always things taking place that can affect prices. Weather could affect planting of the next crop which could result in a significant price increase if acres cannot be planted or dry conditions reduce production potential. Weather can affect milk production either positively or negatively having an impact on milk supply. Export potential can either increase or decrease depending on politics and prices. There are a host of other things that could also have an impact.

Exports will be the real key to milk price potential this year. Some other countries are down on milk production leaving less available for the export market. If U.S. prices can be competitive with world prices and the U.S. Dollar declines somewhat, we could see a large increase of international interest in our dairy products which would require increased milk production to satisfy demand.

USDA estimates U. S. milk production this year to increase 4.6 billion pounds over last year resulting in a record 217.1 billion pounds. Reasonable feed prices and good milk prices could push this gain in production a bit further. Low cull cow prices will continue to leave culling confined to making room for replacements and not to generate extra income.

California has been plagued by a severe drought for some years which increase the cost of milk production. Deeper wells were drilled and other measures were implemented to conserve water. Milk output remained below the previous year for many months as farmers dealt with the drought. That has been changing with improved moisture last year in some areas and recent good rains over the past month or so. Snow pack has also improved causing some relief to the water supply outlook for this year. In fact, the drought is considered to be virtually over in Northern California with Southern California seeing recent strides to improving water supply. This will relieve the concern and should help to improve milk output in the state.

Upcoming reports:

 

  • December Livestock Slaughter Report on January 19
  • February Class I Federal Order price on January 19
  • December Cold Storage report on January 24
  • December Milk Production report on January 24
  • December Agricultural Prices report on January 31
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