U.S. Dairy Producers Shy Away from Insurance
Depressed global milk production propelled dairy prices to all-time highs this year. Class III milk posted its highest-ever showing in May, at $25.21/cwt. Hot on its heels, Class IV peaked in June at $25.83. With just six weeks to go, the futures project a Class III average of $22.04 this year, a bit behind the record $22.34 set in 2014. Class IV is likely to reach nearly $24.50 for 2022, the highest-ever annual average.
Amid unpalatable feed and energy costs, and tightening environmental restrictions, global milk output is unlikely to surge in 2023. But it has already stabilized and will probably return to growth. Meanwhile, concerns are mounting about the global economy and its impact on dairy demand. If milk output outpaces consumption, dairy product prices may drop. For now, the futures call for milk markets to be historically elevated, albeit at levels well below 2022. Next year’s Class III prices average $20.27, while Class IV settled at $20.66 today.
Dairy producers are heading into next year with unusually light protection against declines in milk revenue. About 25% of national milk output is protected from lower margins through USDA’s Dairy Margin Coverage (DMC) program, which pays dairy producers when national average milk prices are too low to cover national average feed costs plus other expenses. Because only 5 million pounds of annual milk output is eligible for the DMC’s government subsidy, most dairy producers will purchase DMC protection to cover annual production from about 200 cows. For small farms, that is enough, but dairy producers with medium and large herds will need to explore other options for most of their milk.
Dairy producers have a three-year history of protecting roughly 25% of U.S. milk output through the Dairy Revenue Protection (DRP) program. This program allow them to buy floors under the quarterly average of Class III, Class IV, or dairy component prices at values up to 95% of the futures market. The government underwrites between 44% and 55% of the cost.
November 18, 2022