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High feed costs: How we got here and how to overcome them

Curtis Bosma for Progressive Dairy Published on 07 October 2021

The lack of volatility in the grain markets from 2015 to 2018 really lulled a lot of people to sleep. Most dairy producers had all but forgotten about the prices paid for feed between 2012-14 and became very accustomed to seeing corn futures bounce between $3 and $4 per bushel with minimal movement.

The annualized volatility of corn prices fell to a 20-year low in 2018-19 as ending stocks remained above 2 billion bushels for the third consecutive crop year. In 2020-21, the trifecta of weather issues, massive Chinese imports and inflation brought a major return to volatility in the grain markets.

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Why has China been importing so much corn?

The 2018-19 outbreak of African swine flu (ASF) decimated China’s hog population. Experts estimate that since 2018, as many as 300 million pigs have died or were culled in China due to ASF. This represents about 25% of the global hog population. As the hog industry in China navigated these issues, their need for soybeans and corn as feed inputs was significantly reduced, weighing down the prices received by farmers in major exporting countries (Brazil, Argentina and the U.S.).

Entering 2020, the Chinese hog industry made it a high priority to rebuild their population rapidly. With this came a major increase in imports of both soybeans and corn. In the 2019-20 crop year, China imported 7.6 million metric tons of corn. In the 2020-21 crop year, the USDA is estimating that China will have imported 26 million metric tons of corn, 242% above the prior year. In the August 2021 World Agricultural Supply and Demand Estimates (WASDE) report, the USDA projected 2021-22 Chinese imports will remain at the same level as 2020-21 at about 26 million metric tons). This has significant implications for corn price expectations in the coming years.

What is going on with the weather?

When U.S. farmers planted their crops last spring, many did so in a cloud of dust. Eventually, rains came through and provided adequate moisture for the southern and eastern ends of the Corn Belt, but the lack of rainfall continued to stress crops in the states along the I-29 Corridor (Nebraska, Iowa, North Dakota, South Dakota and Minnesota). Rains in July and August significantly improved the yield outlook for the southern portion of that region, but there are some key acres to the north that could be in trouble as the harvest approaches.

The USDA’s August WASDE report gave us the first 2021-22 yield estimate for corn of 174.6 bushels per acre and soybeans of 50 bushels per acre.

The larger story developing in the grain complex is the La Niña concern arising in South America. In a typical La Niña weather pattern, areas like Brazil and Argentina become abnormally dry. With corn planting in South America right around the corner, the market will be closely tracking weather patterns.

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How could you have avoided these high feed costs?

The best position to be in right now would be to have your feed needs covered using contracts with suppliers, and futures and options positions for feedstuffs that extended beyond the horizon for which the suppliers can offer. Unfortunately, many producers were shell-shocked by the events of 2020 and did not get enough feed coverage. When the initial uncertainty surrounding COVID hit, the markets during spring 2020 and all commodity markets went into free fall; many people in the dairy industry were overcome by fear and uncertainty. Underneath that emotion was a rare opportunity to lock in inputs that dairy producers utilize at distressed price levels. This led to lots of interesting conversations with producers around diesel, natural gas and feed. As Warren Buffett says, “Be fearful when others are greedy, and be greedy when others are fearful.”

However, at the time when commodity prices were depressed, margins did not align well for dairy producers because of how far Class III and Class IV futures had fallen. I could go on and on about the correlation between milk prices and feed costs in various market cycles. In general, a favorable scenario where the vast majority of dairy producers can capture a strong margin by selling their milk while simultaneously buying their feed forward rarely exists. However, there are times when feed costs are gaining support at historically low prices and other instances where milk prices are facing resistance at historically high price levels.

Dairy producers often get hung up trying to align everything to perfection in the markets and develop a disorder we like to call “paralysis by analysis.” The side effects of this disorder are missed opportunities and a lot of frustration. The best practice is always to take a position before the fundamentals of the market shift, which causes prices to move. Many people reach out to risk management advisers like me after things have become challenging and are searching for a solution to alleviate their margin stress. Unfortunately, the solutions available after a move has occurred in a market are always more limited than what was available before.

How can I manage these prices moving forward?

When feed costs creep higher, as they have been doing over the past year, every dairy producer needs two allies to help overcome this.

First is a good nutritionist for your herd. Most dairy producers have a great nutritionist who has already made several key ration adjustments to mitigate their clients’ exposure to high-priced feed inputs.

The second ally needed is a knowledgeable risk management adviser. Your adviser’s role is to keep track of all the market forces at play to provide actionable advice on how you go about your feed purchasing. When markets are moving fast and the prices become volatile, they are the ones to help set expectations and maintain an action plan. An effective risk management adviser should be able to provide you with advice on local feed contracts as well as strategy on managing longer-term price risk using futures and options. With this team, you can take control of your financial future and achieve your long-term goals.  end mark

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PHOTO: Mike Dixon.

Disclaimer: Nothing contained herein shall be construed as a recommendation to buy or sell commodity futures or options on futures. This communication is intended for the sole use of the intended recipient. Futures and options trading involves substantial risk and is not suitable for all investors.

Curtis Bosma
  • Curtis Bosma

  • Vice President, Producer Services
  • HighGround Dairy
  • Email Curtis Bosma

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