Milk-feed ratio faces a squeeze

The index is an indicator of the feed buying power of a pound of milk.

by Dave Natzke

Most signs point to higher production costs ahead. Many forecasters now estimate 2003 feed – the largest single production cost – could rise 20%-30% compared to 2002.

Without a similar increase in milk prices – which doesn’t appear likely – the milk income per unit of feed (milk-feed ratio) will shrink. Cash flow has already been impacted. It’ll take a sharp pencil and attention to management details to make sure your dairy’s profitability isn’t substantially hindered.

Poor conditions in many of the major growing areas forced USDA to lower its feed grain production estimates. Latest corn projections estimate U.S. corn crop yields and ending stocks at the lowest level since 1995/96. USDA estimated the 2002/03 marketing year farm corn price to range between $2.35-$2.75 per bushel.

On the soybean side, USDA crop estimaters said yields could be the lowest in seven years. The midpoint of the USDA’s projected price range was raised to $5.60 a bushel, up $1.25 from last year’s price of $4.35. If correct, this will be the highest price since 1997/98.

The alfalfa hay situation is mixed, and prices in much of the country are expected to be considerably higher than in recent years. Late-season recovery has helped, but drought-conditions are expected to lower total alfalfa and alfalfa mix hay acreage harvested, tonnage and quality.

Milk price forecast

That’s the expense side. Now, for milk income. Average 2002 farm milk prices are expected to run almost $3 per hundredweight below those seen in 2001, and forecasts for 2003 aren’t substantially higher.

Latest USDA estimates foresee a Class III price of $10.40-$10.60 for 2002 – down from $13.10 in 2001 – and $10.30-$11.30 for 2003. The 2002 Class IV price is expected to range between $10.70- $11.00, down from $13.76 a year ago. The 2003 Class IV projected range is $10.80-$11.90.

As of Oct. 7, Class III futures on the Chicago Mercantile Exchange surfaced above $11.00 in March 2003 and finally got above $12.00 in July 2003. CME Class IV futures topped $11.00 in April 2003, and $12.00 isn’t on the board for the next 12 months.

USDA’s average all-milk price for fiscal year 2003 is projected at $12.10, down from about $12.75 is fiscal year 2002; $14.51 in fiscal year 2001; and $12.61 in fiscal year 2000.

All of this is resulting in a significant drop in the milk-feed price ratio, notes Penn State University dairy market specialist Ken Bailey. That index, which measures the milk price relative to the cost of feed, hit 2.23 in September, the lowest level since June 1997, and is forecasted to fall to 2.0 later this year (see Table 1).

The take home point is this: with only slight improvements, dairy producer margins will continue to remain tight in 2003. Reduce costs where you can without hurting milk production and revenue.

Table 1. Milk-feed ratios, 2000-current

1/ Milk prices are the latest monthly average price for milk received by producers.

2/The milk-feed price ratio is the pounds of 16% protein mixed dairy feed equal in value to 1 pound of whole milk. The higher the ratio, the more feed a dairy producer could buy with proceeds from the sale of a pound of milk. Reported monthly by USDA, feed prices used in the ratio are based on current U.S. prices received for corn, soybeans and alfalfa hay. Table 1 summarizes the milk-feed ratios for the past three years. The numbers are national averages, and will vary slightly by region.

Source: Midwest Dairy Business
Author: Dave Natzke