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What a difference a year makes

PD Editor Walt Cooley Published on 19 September 2012

One year ago, the difference between the value of milk and the cost of feed was much different than it is today. In this issue, we debut a new graphic that will follow the proposed national dairy margin, which is included in dairy reforms in the Farm Bill currently being considered by Congress. (Click here to view) This graphic will begin appearing in every issue as long as it continues to be proposed or until it becomes law.

Since this time last year, how that margin is calculated has also changed. In my opinion, this is important for producers to begin to watch: Does it accurately reflect your on-farm margin? If the program is passed, knowing the difference between the national margin and your real margin will impact whether you decide to seek margin insurance or not and at what level.

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Here’s some background. The feed cost used in the Farm Bill milk margin calculates the cost of producing a hundredweight of milk but includes the cost of feeding not only the cow producing the milk in a present lactation but the cost of all “daily rations for replacement animals on a model dairy farm enterprise that are not producing milk sold on a given day but are necessary for the milk production enterprise,” according to NMPF.

But after the Congressional Budget Office scored the cost of proposed dairy margin insurance, legislators revised the feed cost adjuster used to determine the margins that will drive supplemental and basic margin protection down roughly 10 percent.

This was to make the program fiscally viable. Using the previous formula, current milk margins would be at nearly $1. However, using the new proposed formula, margins are about $2.75. Which formula more accurately represents the real pinch dairy producers feel? I suggest it is the one that was previously proposed. Thus, you may need to adjust your expectations of how well the program would mirror your real finances.

For right or wrong, dairy producers historically respond to tighter margins by first cheapening rations, feeding the same number of cows a less energy-dense or lower-quality diet. I suggest that the actions of Congress in modifying the ration from the formula previously proposed to the new one have essentially baked in the effect of this traditional dairy producer response to low margins.

That means at $6 margins you’re probably already feeling financial pain. That would have been about February of this year. That’s when I started to hear about tough times ahead.

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But be the judge for yourself. Are you presently keeping $2.75 after paying all your feed costs? You should know if that is accurate if you’ll participate in these proposed programs.

This year’s margins would have activated the Dairy Market Stabilization Program in April and required producers participating in government-sponsored margin protection to cut back production. However, it’s interesting to note that by June the temporary supply management program would have been inactivated, even though low margins persisted.

Economists will argue that this does not take into account how a reduction in supply from producers who would participate in the program, and its mandatory supply management, would affect milk markets and eventually impact milk prices. It’s true.

Still, that is the unknown and most important variable. It’s best to start watching now how well what Washington says is happening on your farm tracks with reality. PD

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