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April 2009

Michigan Milk Market Update

Christopher Wolf
Dept. of Agricultural, Food, and Resource Economics

Reviewing the financial analysis from the MSU Dairy Farm Business Analysis summary for the past eight years—noting that 2008 values are preliminary at this time—reveals that feed costs were the big story in 2008. Even though the milk price seemed healthy at $19.49/cwt, a dramatic increase in feed cost meant that the income over feed cost was only $6.75/cwt (Table 1). That was the value left to cover all other costs and generate a profit.

The news that Cooperatives Working Together is accepting bids for the seventh herd buyout from April 1 to May 1 comes as little surprise given the program’s desire to help take the troughs out of milk price variation. There is little doubt that there is no money to be made at current milk and feed prices. As Figure 1 reveals the milk-to-feed price ratio has been consistently below 2.0 since the Spring of 2008. The average ratio from 1985 to the present time is the solid line at 2.86. The last time the ratio was above that average was November 2007. The February and March 2009 values of 1.5 are the lowest values recorded since USDA began tracking these values in 1985.

Jim Hilker here at MSU updates the probabilistic price forecasts using futures and options data weekly. He tracks corn, soybeans, wheat, cattle, hogs and milk (available at his web site: https://www.msu.edu/~hilker/). As of April 2, which follows the latest CWT announcement of a buyout but with the size not known, the September Class III milk futures closed at $14.77/cwt. Using the options market prices, we can etimate that there is a 50% chance the Class III price will be less than (or equal to) $14.77 and a 50% chance that the price will be greater than (or equal to) $14.77 (Figure 2). At that time the market was indicating that there is a 10% chance that the price will be higher than $18.46/cwt and a 10% chance that the price will be less than or equal to $11.84/cwt. With respect to corn July and December were around $4/bushel and soybeans were between $8.80 and $9.60/bushel. The estimated milk-to-feed price ration would be about 2.2 based on these grain prices, an alfalfa hay price of $135/ton (average over past 4 years) and typical Michigan bases on milk and grain. That is hardly an ideal profit situation for dairy farmers.





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