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Dairy margins may be slipping in the new year

If the futures markets are accurately forecasting the future, dairy could be in store for a rough patch. While the combination of a strong All-Milk price and four months of falling feed costs held Dairy Margin Coverage (DMC) program payments at bay in November 2022, that may not be the case in the new year.

Before looking into the future, let's take a quick look in the rearview mirror. DMC's "milk margin above feed costs" was $10.89 in November. That's $1.39 per hundredweight (cwt.) above the $9.50 threshold to initiate DMC payments. That's a good situation as dairy farmers would rather receive a favorable return on their milk.

The rather strong November showing for the DMC margin was based on a $14.71 per cwt. feed cost that fell for the fourth month in a row. Even at that figure, feed costs remain well above the $12.66 feed cost that opened 2022 this past January.

Here are the drivers in the November DMC feed cost equation:

$6.49 per bushel com, which fell consistently from a $7.37 high in June.

$436.75 per ton soybean meal that dropped four straight months after peaking at $510.90 per ton in August.

$331 per ton for premium alfalfa hay, also down from a 2022 high of $343 in August.

The $25.60 per cwt. All-Milk price and those aforementioned falling feed prices combined to hold DMC payments at bay in November. But what does the future hold?

Milk prices may be falling faster than feed costs

While feed prices have been easing as of late, milk prices have been shifting even faster. Here are three checkpoints in the CME dairy futures:

The January to June 2023 Class III six-month bundle:

  • December 1: $20 average

  • December 20: $19.10 average

  • January 4: $18.60 average

The January to June 2023 Class IV six-month bundle:

  • December 1: $19.95 average

  • December 20: $19.95 average

  • January 4: $19.30 average

While New Zealand's Global Dairy Trade (GDT) is a better metric of prices in the Southern Hemisphere, it's also an indicator for future dairy prices as the island nation is the world's largest dairy product exporter. To that end, the GDT has been down five of the last seven sessions in bimonthly activity dating back to October 4.

On December 20, the seven-product bundle fell 3.8%. Then, that same bundle fell another 2.8% at the beginning of 2023 during January 3 trading activity.

Given this situation, price risk mitigation will be a very vital consideration in 2023. For more insight on DMC and Dairy Revenue Protection, read "What we have learned about protecting milk prices?" The DMC signup for 2023 has been extended to January 31, 2023. To sign up, go to your local Farm Service Agency (FSA).

Corey Geiger

January 5, 2023



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