Today, $20 milk covers less margin

Today, $20 milk covers less margin

by Gary Sipiorski
The author is the dairy development manager for Vita Plus of Madison, Wis. He is a member of the board of directors with Citizens State Bank of Loyal, Wis.

It was not too many years ago that dairy farmers’ eyes would glaze over when someone would start a rumor about $20 milk. Based on the current Chicago Mercantile Exchange (CME) quotes (as I write this column), Class III $20 milk is showing up once again.

And now, as Paul Harvey would say, “here is the rest of the story!” What was not imagined in the past was how expenses and inflation would erode milk checks. The figure shows milk prices going back to 1976. You will notice a lack of volatility in the 1970s and early 1980s because the milk price was closer to parity. This meant milk prices provided a generous margin over the cost of production (COP).

In that era, there also was a milk support price of $13.50. Jimmy Carter was elected president in 1976 and Walter Mondale, a Minnesotan, was vice-president. During the presidential campaign, they promised the dairy industry a 50-cent boost in the price of milk every six months. They kept their promise. Maybe my grandmother was right when she would say, “those were the good old days.”

The figure gives an interesting picture of what dairy producers have seen and felt. The upward sloping line in the figure indicates the rising COP. It is a trend line. The actual COP fluctuates more. As you move to the right as years progress, the COP keeps $20 milk from giving dairy producers a large margin. The good news is to complete the chart in mid-2011 the market is moving to and beyond the $20 pay price line.

What can you do?
“Average feed cost per hundredweight is driven by three factors: marginal cost of milk production and production level, cost of maintenance of the cow, and all of those feed management factors,” notes University of Minnesota’s John Fetrow.

The table puts some numbers behind that quote. It highlights daily milk production at 25-pound intervals and compares that production to a variety of costs. The final calculation which contains the take-home message gives income over feed costs.The message is pretty clear: blatant cost cutting does not work. To reduce the feed cost per 100 pounds of milk (cwt.), additional production is crucial.

There is another important message. If you feed for a production level, you must obtain it. Let’s face it, if it were that simple, everyone would produce over 100 pounds of milk per cow. Being on top of cow comfort, breeding, health, feeding, and other management factors makes proper feeding work. In general, the dairies that get ahead financially understand the message: Production is the key.

It is even more important than ever to constantly monitor cost of production and to maximize milk production. If market positions are going to be taken, it is absolutely necessary to know the true COP. Sure, $20 milk is important in today’s world, but $20 is not what it once was for our industry.

This article appeared on page 539 of Hoard's Dairyman's August 25, 2011 issue