A phrase we hear often is, “What a difference a year can make.” As parents, we sometimes use that phrase to describe the growth of a toddler or even the way a teenage boy can grow 5 inches in 12 months.
Sometimes it’s used to describe changes in the economy or in the weather. For those of us in dairy, that phrase could describe what we are seeing right now in the commodity markets.
A year ago, when USDA posted the May 2022 margin early in July 2022, the all-milk price was at its highest on record at $27.30 per hundredweight.
Although feed prices were also at significantly high levels, the margin that month published through USDA’s Dairy Margin Coverage Program was at $12.51 per hundredweight, the highest on record since the program began in 2019.
Dairy farm families enjoyed high margins in much of 2022, with the all-milk price averaging $25.56 for the year.
Just a few days ago, USDA published its May 2023 margin. The all-milk price has fallen $8 in the past 12 months to $19.30 per hundredweight.
Although the all-milk price was not at historical lows, higher than average feed prices are squeezing the margin down to the lowest level on record at $4.83 per hundredweight. That’s a difference of $7.68 per hundredweight.
USDA is projecting Dairy Margin Coverage margins to fall even lower, with June and July approaching the catastrophic level of $4 per hundredweight.
It’s All About Economics
Basic economics tells us that commodity prices can be affected dramatically by movements on either the supply or demand side of the equation. Several factors on both sides have caused milk prices to erode over the past few months.
USDA’s latest Milk Production Report reported a 0.6% growth in total U.S. milk production in May from a year ago. That increase in milk production was the result of 13,000 more dairy cows in the nation’s dairy herd combined with 10 pounds more milk per cow than in May 2022.
On the positive side, cow numbers are starting to level out after increasing to a high of 9.446 million in March and then falling 13,000 to stay at 9.43 million for the past two months.
While milk production growth is modest, challenges on the demand side are making the increased supply seem more burdensome.
The latest USDA Cold Storage report shows U.S. cheese inventories at the end of May at 1.49 billion pounds, down about 1.5% from a year ago but up 22 million pounds, or about 1.4%, from April.
Butter inventories were at 367 million pounds, up more than 45 million pounds, or 14%, from a year ago and up more than 35 million pounds, or nearly 11%, from last month.
While stocks are still growing, butter and cheese production is starting to slide, with total cheese output in April down 0.2% from a year ago and 4.9% below March at 1.17 billion pounds. Butter production also fell month-to-month to 195 million pounds, still up 7.6% from a year ago.
Domestic disappearance of butter and cheese are increasing, as of April.
Headwinds are also coming from overseas with U.S. dairy export volumes, on a milk solids basis, down 13% to 185,476 metric tons in April. The decline is the worst year-over-year monthly decline in four years.
The value of total exports fell 17% to $697.6 million. Butterfat exports had the largest decline, down 75% on a volume basis.
Despite the steep declines in April, year-to-date export volumes are still only 0.3% behind year-ago levels.
Managing Through Uncertainty
While economics can explain what’s going on with milk prices right now, it doesn’t make it feel any better for dairies trying to manage accounts payable with the tighter margins. For those who enrolled in USDA’s Dairy Margin Coverage program, that should help, especially if the farm is under the 5-million-pound cap for Tier 1 coverage.
At the maximum $9.50 margin coverage, May’s $4.83 margin will trigger an indemnity payment of $4.67 per hundredweight and smaller indemnity payments down to the $5 per hundredweight margin coverage level.
That is about $3,890 per 1 million pounds of production history enrolled in the program. The May margin adds an additional $0.37 of net benefit to April’s, with the net benefit for 2023 so far at $1.16 per hundredweight.
Current projections show indemnities each month this year.
Whether the farm has coverage or not, it’s likely most dairy families are looking hard at ways to lower costs and increase revenue right now. Although many markets still have base excess programs in place, historically, the best way to increase revenue is through that additional 10 pounds per cow.
USDA’s May Milk Production Report shows significant opportunity for this in Pennsylvania, with our herd average well below national levels, at 1,885 pounds per cow compared to 2,108 pounds nationally. That is a difference of about 7 pounds per cow per day.
Sometimes it is the little details — like pushing up feed more often or monitoring reproduction more closely — that can add up to significant improvements in milk production.
This time of year, heat abatement — like adding fans in housing and holding areas, or sprinklers over the feed rail — can also make a big difference in milk production per cow.
Over the past two years, the center offered a Dairy Excellence grant that many farms used to improve heat abatement in their dairies. Some of those farms reported as much as 10 to 15 pounds more milk per cow over the summer just because of the improved heat abatement.
That grant opportunity will open again this fall and offers $5,000 in matching funds to make low-cost improvements that enhance efficiency, cow comfort or milk production.
There’s no doubt that 2023 is a much different year than 2022. Lower milk prices, drier weather patterns and increased interest rates are all playing into the uncertainty that exists on many dairy farms right now.
Whatever you do to manage through the uncertainty, it’s important to remember there are resources — like the USDA Dairy Margin Coverage program or the programs we offer through the center — that can help.
If you want to learn more, call us at 717-346-0849 or email info@centerfordairyexcellence.org.
