Dairy Outlook – Feed Inputs and Financial Stability

Margins continue to tighten as the 2012 year proceeds, but the milk price outlook provides some relief, writes Kristen Schulte, University of Iowa.
calendar icon 20 October 2012
clock icon 3 minute read

Although milk prices have increased over the summer, they have not kept pace with feed commodity price increases. Dairy product exports and prices have remained strong so far in 2012 which have helped to support higher milk prices despite the continued increase in milk production.

Historically, feed input costs have been 40 to 60 percent of total variable costs; current outlook prices push the upper limit and in some cases may surpass 60 percent. Feed input costs have ratcheted up over the past few years with the corn price per bushel increasing over 200 percent since 2005 while the alfalfa hay price per ton has doubled in the same timeframe. Figure 1 shows prices for milk (U.S. All Milk Price), corn, and alfalfa hay as a price index from 1980 forward. When comparing corn and alfalfa hay prices, with the exception of the mid 1990’s, prices were fairly stable until mid-2000’s. Since the end of 2009 alfalfa hay has increased from a 1.71 to over 3.0 price index where it has remained since August 2011. Similarly, corn price index increased from the end of 2005 to 2008, subsided until late summer 2010 then started to climb and has been between a 2.25 and 3.00 price index since February 2011. These feed price indexes are compared to the U.S. All Milk Price index which has ranged from 0.86 to 1.73 since 2000. The spread of price indexes between feed inputs and milk continues to spread; however, increasing feed efficiency is one way to alleviate financial strain from increased feed prices. These prices represent U.S. average prices, price indexes and spreads will be different for regions across the U.S.

Price Index for Milk and Feed Inputs, 1980 – 2012.

The USDA-NASS August crop report indicates corn yield is estimated to be reduced to 123.4 bushels per acre, down 23.8 bushels from last year. Soybean yield is also expected to be down with the average bushels per acre at 36.1 bushels per acre, down 5.4 bushels from last year. Alfalfa hay production is down 16 percent across the U.S. compared to 2011. Tightened supplies of all feed input commodities will continue to push prices upward, further tightening margins for dairy producers.

Looking ahead, adequate inventory and financial planning may be crucial for producers to survive the coming year. Fields affected by drought may have less forage tonnage yield and specifically corn silage may have varying nutrient quality due to low grain yield compared to a typical growing year. Corn silage and forage inventories will need to be assessed to determine the need to purchase additional forage or feedstuffs or to alter rations to have sufficient feed inventories for the year. Purchase of additional feed may affect cash flow and liquidity of the operation. Cull cow slaughter has been on the rise. This may continue as producers assess production and efficiency of cows in the herd with feed prices on the rise. Re-evaluating cash flow and liquidity positions given the current commodity price levels and making needed adjustments will be key for producers to remain in a financially healthy position over the next year.

Although the milk price outlook is positive for coming months, feed commodity prices have historically increased at a greater rate. Producers purchasing in feed products will need to ensure adequate cash flow in the coming year to cover these costs. Working capital and equity may be accessed in the coming year to cover increased feed costs, and with tightened margins projected cash flow plans should be reviewed to ensure adequate timing of funds throughout the coming year.

October 2012

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