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December 14, 2017

Hunker Down

 |  By: Dairy Talk

I wish I had better news in this, my last blog for 2017. But lackluster global demand and huge inventories of dairy products both here and in the world’s warehouses paint a less than stellar picture for milk prices heading into the new year.

The United States Department of Agriculture’s December World Agriculture Supply and Demand Estimate pretty much summed up 2017 performance and prospects for the new year. USDA estimates the 2017 U.S. all-milk price will come in at about $17.65/cwt.

As one Minnesota farmer summed up on a recent conference call: That’s 50¢ to $1 on either side of breakeven for most farmers, at least here in the Midwest.

With these breakeven prices, USDA also projects lower milk production per cow going into 2018. But even less milk does not bode well for milk prices. USDA is projecting an all-milk price range of $17.65 to $17.45.  To point out the obvious, even the top end of the range is 20¢ lower than the 2017 average, and the mid-range of the projection is 60¢ lower than the 2017 average.

To add to the misery, skim milk powder exports (SMP) nose-dived in October, the last month for which we have data. Exports of non-fat dry milk and SMP were down by a third, but these sales were compared to October 2016 which saw record sales. “It’s not a crisis for us, but we’re not making up ground or stealing market share,” Alan Levitt, VP of communications and market analysis for the U.S. Dairy Export Council told the DairyReporter.

But it will become a crisis if those lackluster sales continue. The good news is the value of October U.S. dairy products came in at $466 million, down just 1%. In October, U.S. exports equaled 15.2% of U.S. milk production on a milk solids basis. Imports were running at 3.5% of production. Year-to-date through October, exports were running at 14.3% of production.

On the legislative front, it appears Congress is set to increase funding for the Livestock Gross Margin-Dairy program, upping the cap from its current $20 million. Farmers who were enrolled in the Dairy Margin Protection Program (MPP) can now participate in LGM-Dairy if they did not sign up for the MPP in 2018. Congress also appears ready to tweak the MPP in the 2018 farm bill, though exactly what those changes will be remains to be seen. Most likely, smaller dairy farms will get a break on MPP premiums, making it more attractive to sign up for higher levels of coverage.

Lastly, a final review of the American Farm Bureau Federation’s Dairy Revenue Insurance program is now underway. Should that review withstand scrutiny, dairy farmers will have yet another risk management option available, likely next summer.

Most of these risk management tools only work, however, if the market offers opportunities to lock in margins. But Class III and IV prices throughout 2018 look bleak, barely supporting USDA’s all-milk price projections for next year. The message: Farmers have to be ready to pounce on opportunities if and when the market offers them.