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On Cows and Markets

By  E. W. Lang

USDA's Dairy Market News delivered a Holiday edition reviewing only three trading days this week. There was some milk on the spot market going for $5 under Class at the low end and 50 cents over Class at the top. Cheese prices are at five year record high levels, and butter has dropped to a three year low, prompting significant retail discounts.

Class III Milk closed today at $20.40 per cwt. for November, which is up four cents for the week. December is up like four bits at $19.27, and January is up three cents at $18.81 per cwt. from Friday. Feb to Dec of 2020 runs from $18.13 to $17.25 per cwt.

Barrel cheese closed today at $2.25 per lb., up seven cents for the week. Blocks ended the short week at $1.97 per lb., so that's up 13 cents from Friday.

Butter lost a couple cents this week to close at $1.9975 which is close to two dollars, so that's what we'll call it. And yes, close and close were spelled and used correctly, both times. I know that several of you read my stuff with your phone in one hand and a red stylus in the other, regardless of your interest in the dairy economy.

USDA announced the October All-Milk price at $20.90 per cwt., a 58 month high. Nov. will probably be something like $22.20 and Dec will likely come in just over $21.00 per cwt., based on today's future prices.

I've heard a couple optimistic forecasts for milk staying over the current $20+ pay price for the next several months. The common thought is that cheese is going to remain over $2.00 per lb. These are individual reports created by a few people who understand markets, stay well informed on industry activity, can process a lot of information and assess risk well.

Futures on Class III Milk average $18.28 for the next eight months, so that would end up as a $20 or so pay price nationally, I suppose. That number is the result of millions of consumers and thousands of processors and producers making milk decisions daily, rational or otherwise. So $20 would be a number to use for near term dairy income in a normal scenario.

I think 2020 is going to come in under that by ten percent. European cheddar is currently at a 20% discount to our U.S. product, and rightly so. I buy foreign cheese to try quite often, and often it ends up in the donation box at the dog shelter. Also, butter is trending down, and cream is rather abundant.

Corn and soy prices continue to decline, despite few surprises in the way of harvest news. It's late, it's wet, some of it won't get picked, and the markets don't care. Hay at auction this week was $1.65 per point of RFV on premium quality. Hay, along with labour cost, are the two major checks on dairy net incomes right now. Straw sold for $175 per ton this week, so those are some expensive calories and protein, too.

Most loans are at interest rates that are also trending down. So as milk production continues to retrench to a wrenching degree, fewer people are left producing milk at a lower average cost per cwt. Subsequently, national total milk production continues to increase because the market incentives and technology encourage and allow it to do so.

This, along with the competition of lower world cheese values and generally lower butter values, prompts me to think the forecasts I have been hearing reference future milk price on rather a Mature Equivalent basis.

In planning your income and expenses for 2020, it would be wise to include both a normal milk price scenario and a worst case scenario for your lender. Incidentally, your lender is really only interested in seeing your worst case scenario.

Regardless, take the milk forecasts you see in the popular press to use as a reference. Then also present a situation where milk income is 10% less, and expenses are 10% more. You will look more like a rational and wise borrower, and a better risk for the bank. If you only offer your lender a scenario where you get $20+ for your milk, you look like someone who just wants to hang on for another year, and may not be a rational borrower and good credit risk for the long term.

Within the process of planning and getting financing for 2020, milk and feed price risk can be mitigated with options and forward pricing. I've made and wasted a lot using both, and offer no strategy or encouragement for their use. They do allow a producer the opportunity to eliminate the highs and lows of both milk income and feed expense, when used consistently over time. That said, options aren't free and neither are commodity advisors, but Milk-Feed Indices average a historically high $10+ for next year, and warrant consideration.   In our lifetimes, revenue over feed cost has been higher only during 2014.

Let us be thankful this holiday, as always, for the freedoms, privileges and opportunities we enjoy because we live on a free continent. Many early pilgrims and other settlers attempted common ownership of land and were met with famine, and a lesson on the merit of private ownership that has fed us well over time.

Over the intervening years, relatively few in the U.S. have been hungry, and fewer have starved. So, too, has been the case for millions world wide who received U.S food and other assistance that was rendered because our market economy, technology and culture encouraged and allowed us to do so.

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