Michigan Dairy Review
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October 2006

Michigan Milk Market Update

Christopher Wolf
Dept. of Agricultural Economics

The US milk-to-feed price ratio is currently very low—2.48 in August (Figure 1). Milk Income Loss Contract payments are helping farms with eligible production. The payment was $0.966/cwt for September and will be $0.432/cwt for October. In August, the payment of $0.925/cwt was enough to increase the mil-to-feed price ratio to 2.94. Milk prices are not exceptionally low relative to the prolonged low prices in 2000, 2002 and 2003. However, input costs, especially those tied to energy prices, have increased substantially so that the milk-to-feed price likely understates the financial distress on-farm at the current time.

Low milk prices and higher input costs are squeezing dairy farmer profits and cash flow. Unfortunately, one simple solution to cash flow problems is not available to most farmers. In 2002 and 2003 very low interest rates enabled some farmers to roll short-term debt into longer-term debt to improve cash flow. However, interest rates are higher (but not excessively so) and the refinancing already has occurred.

wolf fig 1

High milk prices and low feed prices in 2004 and 2005 spurred the large increase in milk cow numbers (Figure 2). US milk cow numbers surged from 8.984 million in February 2005 to 9.137 million in June 2006. US numbers did fall 13,000 from June to July 2006 perhaps marking a turning point that will lead to declines in quantity of milk supplied. Michigan milk cow numbers have grown from 297,000 in April 2004 to 321,000 in July 2006. The most recent (July 2006) replacement heifer price statistics reports Michigan at $1,800/head which is higher than most other top dairy states perhaps reflecting a steady demand to fill expanded dairy facilities.

wolf fig 2

The past two periods of very low milk prices (which I will define as a Class III price below $11/cwt) were both 16 months long from November 1999 through March 2001 and March 2002 through July 2003. This time Class III prices have been at or below $11/cwt since March 2006. Futures markets and other forecasts are predicting prices above $12/cwt for the fall months. This amounts to a bit of a recovery consistent with a typical seasonal pattern. Cheese stocks showed a strong rate of increase in June and July despite the heat wave in the West. Milk cow numbers need to turn down before the market will have confidence in higher milk prices.





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