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 five 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 USDA 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 the USDA’s Dairy Margin Coverage Program was at $12.51 per cwt., the highest on record since the program began in 2019. Dairy farm families enjoyed higher margins in much of 2022, with the all-milk price averaging $25.56 for the year.
Just a few days ago, the USDA published its May 2023 margin. The all-milk price has fallen $8 in the past 12 months to $19.30 per cwt. 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 cwt. That’s a difference of $7.68 per cwt. Currently, USDA is projecting DMC margins to fall even lower with a projected July margin of $3.85 per cwt falling below the catastrophic $4 per cwt margin coverage for the first time in program history.
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 May Milk Production Report released in June reported a 0.6-percent growth in total US milk production in May from a year ago.
That increase in milk production was the result of 13,000 head more dairy cows in the nation’s dairy herd combined with 10 pounds more milk per cow than there was 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 head to stay at 9.43 million for the past two months. June milk production numbers will soon be released.
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 released about three weeks ago shows US cheese inventories at the end of May at 1.49 billion pounds, down about 1.5 percent from a year ago but up 22 million pounds, or about 1.4 percent, from April. Butter inventories were at 366.69 million pounds, up more than 45 million pounds, or 14 percent, from a year ago and up more than 35 million pounds, or nearly 11 percent, from last month.
While stocks are still growing, USDA’s Dairy Products report released earlier this month shows butter and cheese production both mixed, with total cheese output down 0.2 percent from a year ago to 1.2 billion pounds in May, but up 2.8 percent above April. American type cheese production was up 4.2 percent from a year ago, while Italian type cheese production was down 2.2 percent. Butter production was up 8.1 percent from a year ago but down 1.2 percent from April to 194 million pounds produced in May. Domestic disappearance of butter, cheese, American cheese, and butter are all increasing, as of April.
Headwinds are also coming from overseas, with US dairy export volumes, on a milk solids basis, down 13 percent or 29,296 metric tons from a year ago in May. This was the third straight month of year-over-year declines with all dairy products falling below year-ago levels. Cheese exports were down 18 percent, while nonfat and skim milk powder exports were down 3 percent. Year-to-date dairy exports are down 4 percent, while the value of total dairy exports is down 7 percent from this time in 2022.
Managing Through the 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 DMC Program, that should help, especially if you’re 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 cwt. and smaller indemnity payments down to the $5.00 per cwt margin coverage level. That is about $3,891.67 per 1 million pounds of production history enrolled in the program. The May margin adds an additional 37 cents of net benefit to April’s, with the net benefit for 2023 so far at $1.16 per cwt. Current projections show indemnities each month this year.
Whether you have DMC or not, it’s likely most dairy farm families are looking hard at ways to lower costs and increase revenue in your business 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 the state’s 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 has offered a Dairy Excellence Grant that many Pennsylvania farms used to improve heat abatement in their dairies. Some of those farms reported as much as 10 – 15 pounds more milk per cow over the summer months 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 positively affect 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 DMC 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.