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Weekly Digest: August cull cow prices were highest in four years

Progressive Dairy Editor Dave Natzke Published on 05 October 2021

Digest Highlights

August cull cow prices were highest in four years

As milk income margins shrink to historical lows, dairy cow culling has picked up. In addition to the high feed cost factors that are pushing more cows to slaughter, recent improvements in cull cow prices are also providing some incentives to convert them to beef.

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Through Sept. 18, weekly dairy cull cow slaughter at federally inspected plants had surpassed comparable weeks a year earlier for 15 consecutive weeks, reaching nearly 2.28 million head. During that 15-week period, dairy cow slaughter surpassed year-earlier totals by about 66,600 head.

U.S. average prices received for cull cows (beef and dairy, combined) moved to a four-year high in August, according to USDA’s latest Ag Prices report. The August 2021 average price was $76 per hundredweight (cwt), up more than $16 from January and the highest monthly average since August 2017.

Dairy margins improved to end September

Dairy margins improved over the second half of September, as stronger milk prices combined with steady to weaker feed costs strengthen projected forward profitability, according to Commodity & Ingredient Hedging LLC.

A slowdown in milk production was considered supportive for the market. The USDA reported August milk production at 18.84 billion pounds, up 1.1% from last year. At 9.48 million head, the U.S. dairy herd is now starting to ebb. While up 106,000 head from August 2020, it was the third consecutive month that the total herd has declined. The decrease tied the largest month-to-month decline dating back to September 2018.

Butter in cold storage at the end of August was reported at 367 million pounds, down 30 million from July and 1.2% lower than last year as the drawdown in butter stocks got off to an earlier start than usual. However, inventories remain plentiful from a historical perspective.

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Cheese stocks, at 1.43 billion pounds, were only down 21 million pounds from July, smaller than the average 27.4 million drawdown between July and August and still more than 4% higher than a year ago. It’s the largest August cheese inventory level on record. Despite this, both block and barrel cheese markets advanced sharply last week, as availability of fresh cheese remains limited due to labor shortages at processing plants.

June 2021 mailbox, all-milk price spread declines

With Federal Milk Marketing Order (FMMO) producer price differentials (PPDs) turning mostly positive in June, the differences in two monthly milk prices announced by the USDA declined.

The monthly spread between the average “all milk” and “mailbox” prices was about 85 cents per cwt, the slimmest range since the first half of 2020. With baseline PPDs trending positive in July and August, the difference between the two announced prices should continue to narrow.

Through the first six months of 2021, the USDA’s mailbox prices averaged about $1.16 per cwt less than average all-milk prices for the same months. During that period, all-milk prices averaged $18 per cwt, while mailbox prices averaged $16.84 per cwt.

The all-milk price is the estimated gross milk price received by dairy producers and includes quality, quantity and other premiums but does not include marketing costs and other deductions.

The mailbox price is the estimated net price received by producers for milk, including all payments received for milk sold and deducting costs associated with marketing.

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The price announcements reflect similar – but not exactly the same – geographic areas. The USDA National Ag Statistics Service (NASS) reports monthly average all-milk prices for the 24 major dairy states. The mailbox prices are reported by the USDA’s Agricultural Marketing Service (AMS) and covers selected FMMO marketing areas. The AMS announcement of mailbox prices generally lag all-milk prices by a couple of months.

For additional background, read: Pandemic impact shows up in milk ‘mailbox’ prices.

The difference in the two announced prices can create challenges to dairy risk management, since indemnity payments under the Dairy Margin Coverage (DMC), Dairy Revenue Protection (Dairy-RP) and Livestock Gross Margin for Dairy (LGM-Dairy) programs are all based on the all-milk price, before any marketing cost deductions.

‘Class I mover’ options analyzed

Much focus has been placed on the change in the FMMO Class I pricing formula implemented in the 2018 Farm Bill. Since then, multiple policy options have been unveiled to address that controversy.

Daniel Munch, American Farm Bureau Federation associate economist, recently provided analysis of four proposed options, including: keeping the current "average-of plus 74 cents" formula; returning to the "higher-of" formula; using the "average-of" formula but adding market-based flexibility to the adjuster; or adopting a “Class III-plus” option.

Read: A Guide to Class I Milk Formula Options.

According to Munch, no option guarantees the highest benefits over the long run. Class III-plus and the higher-of options would have prevented a significant portion of Class I revenue-related pool losses associated with high Class III prices during 2020, but they perform weaker pre-COVID-19 and in more recent months.

Use the average-of formula with a flexible adjuster would not have provided farmers any real-time relief during 2020 but would provide some of those returns in the form of a higher adjuster until at least April 2023. There are also basis risk implications associated with switching back to the higher-of or having a variable market-based adjuster that can inhibit farmers’ abilities to effectively manage risk long term.

In any case, the chosen option must better reflect current conditions across milk markets and account for the regional utilization and production differences across the U.S., Munch wrote.

Global Dairy Trade index unchanged

Global Dairy Trade (GDT) dairy product prices were mostly higher in the latest auction held Oct. 5, but the overall index was unchanged. Prices for major product categories follow:

  • Skim milk powder was up 0.5% to $3,315 per metric ton (MT, or about 2,205 pounds).
  • Whole milk powder was down 0.4% to $3,749 per MT.
  • Butter was up 0.4% to $4,878 per MT.
  • Cheddar cheese was up 0.7% to $4,297 per MT.
  • Anhydrous milkfat was up 0.4% to $5,984 per MT.

The next GDT auction is Oct. 19.

Vitaliano: Prices settle into traditional alignment

Following more than a year of tumult, milk prices have settled into a more traditional alignment, National Milk Producers Federation’s Peter Vitaliano notes in the latest Dairy Management Inc./National Milk Producers Federation Dairy Market Report. Still, markets have continued to move sideways, indicating that more confidence is needed for prices to move higher. For more information on commercial use, dairy trade, milk production, product inventories, prices and margins, click here.

Prairie Farms’ Mullins stepping down as CEO

Prairie Farms Dairy announced that Ed Mullins will step down as chief executive officer/executive vice president, effective Jan. 1, 2022. Matt McClelland, currently serving as senior vice president of sales, will replace Mullins as CEO. Mullins will assume a new role as senior executive officer and will continue to be actively involved in the company's day-to-day operations.

Inflation concerns grow in latest Ag Economy Barometer

Results from the monthly Purdue University/CME Group Ag Economy Barometer survey indicate inflation is weighing on producer attitudes concerning short- and long-term financial conditions.

Producer concerns about rising input costs rose sharply compared to a month ago, with over one-third of survey respondents saying they expect input prices to rise by more than 12% in the coming year, which is six times the average farm input inflation rate of the last decade.

Among other highlights in the most recent survey:

  • Compared to a month earlier, fewer farmers said they planned to increase their machinery purchases. In a follow-up question, 55% of respondents reported that their farm machinery purchase plans have been impacted by low farm machinery inventories.

  • Although plans for machinery purchases fell, producers' plans for new grain bin and farm building construction rose.

  • Farmers remain bullish about farmland values. Additionally, about one-half of corn and soybean growers continue to say they expect farmland cash rental rates to rise in 2022.

  • Farmer expectations regarding future agricultural trade prospects continued to weaken.

The Ag Economy Barometer provides a monthly snapshot of farmer sentiment regarding the state of the agricultural economy. The survey collects responses from 400 producers whose annual market value of production is equal to or exceeds $500,000. Minimum targets by enterprise are as follows: 53% corn/soybeans, 14% wheat, 3% cotton, 19% beef cattle, 5% dairy and 6% hogs. Latest survey results, released Oct. 5, reflect ag producer outlooks as of Sept. 27-29.

USDA accepts bids for process cheese

The USDA continues to purchase dairy products for domestic feeding programs. Recent contract awards cover 633,600 pounds of process cheese products for delivery in November-December 2021 by Bongards’ Creameries, Norwood, Minnesota.

Things you might have missed

  • A continuing resolution, passed by the House and Senate on Sept. 30 and signed by President Joe Biden, averted a government shutdown through Dec. 3. Although the funding crisis was postponed, the government will hit a debt ceiling on about Oct. 18.

  • The USDA’s National Agricultural Statistics Service quarterly Grain Stocks report showed that old-crop corn stocks on hand as of Sept. 1, 2021, totaled 1.24 billion bushels, down 36% from a year earlier. Old-crop soybeans stored in all positions were down 51% from Sept. 1, 2020.

  • The USDA is preparing to issue details of a program to encourage investment in the meat supply chain. The program will provide $100 million for loans and loan guarantees to finance food supply chain working capital, facilities, equipment and other investments. The USDA is hosting a lender training webinar on Oct. 14.

  • The USDA announced an initiative to provide up to $3 billion to address costs associated with drought, animal health, market disruptions for agricultural commodities and school food supply chain issues. The package includes: $500 million to support drought recovery and encourage the adoption of water-smart management practices, up to $500 million to prevent the spread of African swine fever, $500 million to provide relief from agricultural market disruptions and up to $1.5 billion to provide assistance to help schools respond to supply chain disruptions.

  • U.S. Ag Secretary Tom Vilsack outlined a new climate partnership initiative designed to create new revenue streams for agricultural producers. Under the program, the USDA will partner with agriculture, forestry and rural communities to support pilot projects that provide incentives to implement “climate smart” conservation practices and to quantify and monitor the carbon and greenhouse gas benefits associated with those practices. The USDA published a request for information (RFI) seeking public comment and input on design of new initiative. Comments may be provided by Nov. 1, 2021, via the Federal Register, docket ID: USDA-2021-0010.  end mark
Dave Natzke
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