Dairy Channel: Milk producers have options to reclaim profit margins

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A new year, 2001, has begun. Open one of the complimentary wall calendars that stack up on the desk in December and 12 crisp shiny pages are ready to be filled. How will they be filled? By you or for you?

The same can be said about your dairy. Will your milk price be set by you or for you? Will your fertilizer bill be calculated by you or for you?

I chose those two examples for specific reasons. Right now, you will not find anyone with any credibility who will tell you that milk prices will be high and fertilizer prices will be low in 2001. Quite the opposite. Those who know much better than I don’t see a big improvement in milk prices without some major changes in rates of production.

Fortunately, consumer demand for dairy products continued to be strong in 2000. In 2001, you can either let milk prices be set for you or you can impact them.

The same philosophy goes for fertilizer prices. Every time fuel prices go up, fertilizer prices also skyrocket. Estimates go all the way up to 4 times last year’s prices for nitrogen. Enough to make an agronomist wither.

You can freak out, or you can do something about it (or, if it makes you feel better, freak out and then do something about it!).

As a dairy farmer growing some forages and possibly some grains, you have a distinct advantage over a crop farmer. You may have cursed that advantage when it was frozen for four solid weeks and didn’t flow where it was supposed to flow. The advantage has been filling up your manure pit all winter. Manure, brown gold this spring.

Between the manure available to apply before crops go in, and the manure that has been applied over the years, it is highly likely that many dairies need to purchase little, if any, commercial fertilizer. Soil tests will tell the tale.

Refer to last year’s soil tests and take additional ones this spring, where needed, to make final decisions. Get a test of the manure you have available to spread.

Which fields need the manure that is waiting to be spread? Which have enough and merely need a starter fertilizer at planting or a sidedress later? Don’t need it all? Look for a crop farmer nearby who might be interested in buying it at a competitive price.

If you haven’t been regularly soil testing and manure testing, contact your local extension office for information on commercial labs that can analyze and evaluate your samples.

2000 is a year that many who produce milk do not care to repeat in 2001. No surprise, as milk prices hit historic lows.

Midwest dairy farmers can be thankful for low feed prices and overall decent crops in 2000 and a profitable 1999 preceding last year’s squeeze. Most went into 2000 with a cushion of some sort, such as a stash of cash, updated machinery and equipment, a few more cows or a paid-down line of credit that may not be available this year.

The implications? Less tolerance for mistakes, miscalculations or plain old snoozing on the job.

In terms of milk prices, there are three alternatives that all dairies must look at in 2001. In our area, not counting the cheese houses in Holmes and Wayne counties, I can think of at least nine processors and milk cooperatives who are buying milk. While most pool milk in the federal order and use the appropriate pricing, each buyer offers a different final price for a given test and quality of milk based on components, quality bonuses, seasonality of production, hauling costs, etc.

A Jersey dairyman in Mahoning County has been monitoring prices between a number of buyers over the last eight months. For November 1999, the difference between the highest and lowest pay price for the same milk that he was pricing was $1.51 per cwt. Any one processor was not always the highest or lowest in any given month.

To make a fair, long-term comparison, let another processor price your milk over the previous year so you can make an objective long-term comparison between what you received compared to what you could have received through a different processor. As he put it, “I’m leaving too much money on the table.”

I’m picturing more conservative average long-term differences, perhaps 20 to 50 cents. Let’s look at what that would mean to herds of different sizes:

At milk production of 21,000 pounds, a boost of 20 cents/cwt. on a 50-cow herd means additional income of $2,100 per year; on a 200-cow herd, that’s $8,400. A jump of 50 cents/cwt. translates into $5,250 for a 50-cow herd; $21,000 on a 200-cow herd.

Processors may now offer forward contracts on milk going into a non-fluid product. Length of contract, prices offered and other stipulations will vary with each contract.

Each opportunity must be evaluated against what you think will happen in the milk markets and how much risk you want to assume by taking a contract or not taking a contract.

These milk contracts have been traded on the commodity markets for over three years now. Most northeastern Ohio and some adjoining Pennsylvania counties will be eligible to participate in the 2001 round of the USDA’s Dairy Options Pilot Program. If you haven’t had an opportunity to explore these, here is a chance to look at options (locking in a minimum price) utilizing cost share on the premiums and broker’s fees.

We’ll keep you posted as details on when and how are available.

The market will set the limits on both ends. Where do you fall within those limits? The choice is yours.

(The author is the northeast Ohio district dairy specialist with OSU Extension. Send comments or questions in care of Farm and Dairy, P.O. Box 38, Salem, OH 44460.)

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