June 3, 2019

Weather And Politics Will Impact Producer Margins

 |  By: Robin Schmahl

The past two weeks have been filled with much volatility in many commodity markets due to weather and news events. The explosion of grain futures will have a significant impact on income over feed cost for the month of May. A record slow planting progress has changed grain prices very quickly with corn futures moving nearly straight up for two weeks.

New crop December corn moved to new contract highs as there is substantial concern over how much will be planted, the impact on late planted crops, how much prevent planted acres will be, how much might be replanted, and how many acres might be switched to soybeans in order to get something planted in the fields when they dry out. Traders have not even yet considered that late planted corn will pollinate in August when it is generally not a good time to pollinate. Add to that the risk of frost before crops will be mature. This will make for a very volatile market without adding the drama from the tariff war with China and now the potential of tariffs to be put back on Mexico. 

The substantial increase of feed prices and stable milk prices will change the income over feed cost significantly. Income over feed cost for April was $8.96 and the strongest is has been so far this year. The April income over feed cost matches the level it was for October 2018. The change will happen dramatically due to the recent changes in the grain complex.

Income over feed should decline substantially for the month of May. Under the Dairy Margin Coverage program that will open for sign-up this month, if the $9.50 level of coverage is chosen for milk volume up to 5 million pounds, the payment so far will be $4.03 per cwt for the first 4 months of the year.  Unfortunately this amount, as well as the next 2 to 3 months, will not be available until after the sign-up period. Thus, producers may not receive the amount of money available under this program until possibly late August or September. That certainly does not help matters now. 

For now, we have to deal with the markets at hand and those markets will be volatile. So far, dairy prices have not been affected very much by the concern over planting problems. It has not been affected by the potential fallout of initiating tariffs on Mexico. Our southern trading partners may retaliate and it certainly has impacted the ratification of the USMCA agreement. This could have a significant impact on dairy trade with Mexico if this continues or escalates. 

Although it looks as if higher milk prices will unfold as the year progresses, higher milk prices may be at the expense of dairy farms going out of business rather than improving demand and increasing exports. That is certainly not the way we desire to see milk prices increase.