Assessing Milk Price and Risk Management for 2023

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Source: Ohio State University Extension, Jason Hartschuh, Extension Educator, Agriculture and Natural Resources, Crawford County

With harvest well under way to feed the cows for 2023, it is important to make sure we are assessing what the 2023 milk price may be and how to manage the risk of a milk price downturn. Talking to input suppliers for commodity/feed crops, it appears that prices may be higher in 2023 to produce feed. This makes it very important to manage the milk price risk for 2023. The September USDA World Agricultural Supply and Demand Estimates (WASDE) report has both the 2022 and 2023 all milk price forecast being up from the previous month. The current 2022 all milk price forecast is $25.45/cwt, while the 2023 all milk price is less at $22.70/cwt. The increased price was due to slower growth in cow numbers than was originally projected. This may mean a tighter margin year ahead for 2023 as crop input costs increase, while all milk price decreases. When doing your 2023 budgets this fall, it may be best to consider what milk price floor you can protect along with the USDA price forecast.

The two most common risk management tools used in Ohio are the Dairy Margin Coverage (DMC) program and the Dairy Revenue Protection (DRP) program. The DMC program covers the margin between the DMC calculated feed price and the All Milk price. The table below shows what the prices were that went into the 2022 DMC calculation so far and the resulting margin. The greatest margin was in May at $12.51/cwt and has declined to $9.92/cwt in July. If USDA’s milk price forecast is accurate, this may lead to margins falling above the upper DMC margin of $9.50/cwt. Comparing your feed cost over the first 7 months of 2022 to the final feed cost for DMC each month can help you asses the protection that the DMC program can provide for your operation.

Month Corn ($/bu) Premium Alfalfa Hay  ($/ton) Soybean Meal ($/ton) All Milk ($/cwt) Final Feed Costs for DMC($/cwt) Milk Margin Above Feed Costs for DMC($/cwt)
January 5.57 262.00 421.21 24.20 12.66 11.54
February 6.10 266.00 480.96 24.70 13.72 10.98
March 6.56 269.00 493.98 25.90 14.35 11.55
April 7.08 271.00 476.70 27.10 14.81 12.29
May 7.26 274.00 441.28 27.30 14.79 12.51
June 7.37 277.00 445.93 26.90 14.98 11.92
July 7.25 333.00 467.87 25.70 15.78 9.92

The second subsidized program to consider is the DRP, which can be used to set a floor under your milk price at your cost of production or lock in a profit if one is available on the Chicago Mercantile Exchange (CME). The DRP is managed through USDA-RMA by working with your local crop insurance agency. DRP has many more individual decisions, including being by the quarter instead of for an entire year and the option to cover as much or as little milk as you would want. DRP coverage contracts can be purchased after the close of trading each day. While it is recommended that you study milk futures and don’t cover your entire year’s production at the same time. If you had covered all of your 2023 production on Monday, September 26th using Class III coverage, your average covered Class III price would have been $19.20/cwt with a premium of $0.5790/cwt, making your coverage after marketing $18.62/cwt. Class IV prices have continued to be above Class III. If Class IV coverage was chosen, the 2023 average would have been $20.16/cwt with a premium cost of $0.701/cwt for a coverage after marketing of $19.45/cwt. While it is very possible that the high for each quarter of 2023 has not happened yet. If contracts had been purchased at the current high point, 2023 Class III coverage after premiums would give you protection at $19.44/cwt, and for Class IV, the coverage would have been $19.89/cwt. As a point of reference, Quarter 1 maximum prices so far were reached in April and June of 2022.

Besides trading futures and options as a method of risk management, you may also want to discuss with your processor if forward contracts are available. While forward contracting is straight forward, it is much more complicated with milk than grain since Class I fluid milk cannot be forward contracted. On the other hand, if you sell into a Class III market, your processor or cooperative has the option to offer forward contrasts.  While 2023 does not currently appear to have as much profit potential as 2022, through careful management of your expenses a profit can still be achieved. Utilizing these risk management tools can help determine what milk price to use as you plan your 2023 budgets.