Higher Dairy Prices Likely by the End of the Year02/26/2019
No doubt, the past four years have been challenging for dairy producers, and 2018 was likely the most difficult of all, with low prices and lost export markets from ongoing trade wars. However, there is hope on the horizon that conditions will get better, eventually.
While global milk supplies have been slow to contract, and the plant-based industry continues to highjack market share, global milk supplies are coming into better balance. Growth in milk production has slowed here in the U.S. and in most major countries around the world, as herd size contracts. The burdensome European Union stocks of surplus dry dairy products that have weighed on the international marketplace for so long have finally been sold off.
Most industry analysts, academia and the USDA have forecast higher dairy prices for later this year. The second half of the year, and especially the fourth quarter, is expected to generate most of the year’s modest increase.
Some are looking for a gradual price improvement near $1.50 per hundredweight — possibly more.
Due to the government shutdown, the USDA’s Milk Production Report was not available for this column, but the February Livestock, Dairy and Poultry Outlook was released. Because of the tightening of world supplies, USDA raised global price estimates for 2019. This raised the forecast for U.S. exports. Price forecasts in this latest report were raised for butter, whey and nonfat dry milk. The forecast for cheese was lowered a bit. Therefore, the 2019 all-milk price was raised 45 cents this month to between $16.90 and $17.60 per cwt.
Dairy margin coverage
Many are calling the 2018 Farm Bill one of the most producer-friendly pieces of legislation ever. The dairy-related portions of the bill appear very positive and promising. The old Margin Protection Program for Dairy has been scrapped for a new and much-improved Dairy Margin Coverage (DMC) program. This new DMC plan should be attractive to all sizes of dairy farms, especially smaller ones.
DMC is a voluntary program that will trigger a payment when the national average income-over-feed-cost margin drops below the farm’s selected coverage level. Program payments, if necessary, will be made monthly. Congress has recognized that feed costs vary by region, and USDA will begin factoring in these variations to strengthen the integrity of its margin calculations.
Under the new plan, margin choices are expanded for all sizes of farms, and there are deep discounts for premium rates on the first 5 million pounds of production — about the size of a 220-cow herd.
Premium rates for the $4-per-cwt margin are free of charge for all farms and herd sizes by merely signing up. Beyond this are Tier 1 and Tier 2 levels of coverage. Tier 1, for the first 5 million pounds of production, ranges from $4.50 to $9.50, and costs between 2.5 and 15 cents depending on the amount of insurance protection selected. Most analysts agree that this is less expensive and offers improved coverage over the previous program. Tier 2 premium rates are designed with significantly lower costs to encourage participation at the $4.50 and $5 coverage levels for farms with greater than 5 million pounds of production. Maximum margin coverage for Tier 2 is $8.
Of interest to larger farms, the new bill lifts the old restriction prohibiting them from participating in both the new DMC and the Livestock Gross Margin Insurance Program for Dairy (LGM-Dairy). If that’s not enough, farmers will also be able to enroll in the new Dairy Revenue Protection Program. Using these programs in tandem could offer larger farms options of insurance protection and flexibility never experienced until now.
There will be new one-time signup bonuses to encourage producers to enroll in the program. The signup bonus is a 25% reduced premium incentive at all coverage levels for farms that lock in for the entire length of the new farm bill.
Refunds of up to 75% will be available on the premiums paid by producers who participated in the old Margin Protection Program from 2014-17. Premiums paid in 2018 are not eligible. These refunds will be issued in two ways at the producer’s discretion: A producer can elect to take the refund as a 75% credit toward the purchase of new coverage in the DMC during the full length of the farm bill, 2019-23; or, a producer can elect to take the refund as 50% of the repayment in cash.
Other new programs
In addition, the new farm bill calls for an improved Class I milk formula in Federal Milk Marketing Orders. In response to work by the National Milk Producers Federation and the International Dairy Foods Association, the new Class I mover will be the simple average of the advanced Class III and advanced Class IV prices, plus a factor of 74 cents. Over time, this formula should take some of the extreme volatility out of fluid milk price and will benefit processors, retailers and cooperatives in forward planning.
There will also be a newly created Dairy Product Donation Program that will serve as an incentive for producers and processors to work with charitable organizations to donate milk to people in need and to lessen food waste.
The new bill also creates a Dairy Business Innovation Initiative to provide resources to producers, new business startups, new product innovations and market development.
There will also be a new Priority Trade Promotion, Development and Assistance Program that will help to access, develop, expand and maintain export markets for U.S. products overseas.
More flavored milk
Other than the farm bill, there are several other things happening that should have a positive effect for dairy soon. Among these is USDA’s decision to allow flavored milk back in schools.
Also, there is a new bill designed to reintroduce whole milk in schools called the Whole Milk for Healthy Kids Act, H.R. 832. It was introduced by Rep. Glenn “GT” Thompson, R-Pa., and House Agriculture Committee Chairman Collin Peterson, D-Minn. If enacted, these efforts could go a long way to reinvigorate fluid milk consumption in schools and at home, as youngsters are reintroduced to good-tasting dairy beverages.
Latta is a political and economic consultant for Northeast Dairy Foods Association Inc.
Source: Greg Latta, American Agriculturist