May 21, 2019

Higher Prices Might Not Mean Higher Income

 |  By: Robin Schmahl

Milk prices are certainly looking better than they have for a while. Class III price for May will be the highest it has been since November 2017. Even though May prices have not yet been finalized, the trade generally has it pegged by the final two weeks of the month. The front-month contract then flat lines mainly adjusting to weekly AMS prices. Thus, we can be confident the May Class III price will be near $16.30.

Although that is certainly a victory, the market is still not out of the weeds. In 2017, there were 7 months of Class III prices above $16.00, but it was still a difficult year.  The difference that year was milk production continued to grow outpacing the previous year. It is different this year as milk production in March showed the first decrease from the previous year in quite some time. The April Milk Production report is expected to show the same due to lower cow numbers and slower growth during spring flush due to a cooler, wetter spring in many areas. Cow numbers will continue to decline for a while as farms continue to exit the dairy business even though the outlook for milk prices is better. Some farms are at a point of no return financially while others are just sick of it and will liquidate once cow prices improve. 

The weather may play a large role in what will take place this year as farmers just cannot get into the fields to plant corn or soybeans. Planting progress is seriously behind and has become a catalyst to push corn prices higher. Corn futures rallied about 45 cents per bushel over the course of one week as concern over planted acreage and potential decreased yields is growing by the day. Alfalfa is growing slowly as well which is delaying harvest. The delay due to wet weather is severely tightening the window for dairy farmers as corn and soybeans will need to be planted as well as hay harvested at the same time.

What this could all mean it that while it is great to see more strength of milk prices, feed prices may increase as well which may limit profitability of income over feed. If there is a substantial impact on corn production or a substantial impact on hay production or quality, higher milk prices - although nice to see – may not really put much extra money in the bank account.

This is why it is important to contract feed supplies when prices are favorable and hedge milk prices when prices are favorable. It is best this year to only establish floor prices in milk using Dairy-RP insurance or using put options in order to keep you upside price potential open. 

A lot can happen over the course of the rest of the year, but it appears price volatility will be greater than we have seen over the past year. There could be some significant swings in planted acres due to farmers taking prevent plant insurance claims or more acres being shifted over to soybeans in order to have something in the ground for the year. Some analysts are already reducing their estimates of corn acreage and increasing soybean acreage. Of course, dairy farmers will continue to plant corn for silage as cows will need feed and later planted crops can still do well. 

There are two sayings that have been around from a long time when it comes to corn. “Plant in the dust and the bins will bust” and “Rain makes grain”. The key is that crops need to be planted first in order for either of these to become a reality.