Livestock Gross Margin Insurance for Dairy

January & February 2012

Dr. Craig Thomas, MSU-Extension Educator

Genesee, Huron, Lapeer, Macomb, Oakland, St. Clair, Sanilac, Tuscola Counties

2012 Dairy Market Synopsis

• 2012 Class III futures prices: $16.89 (+$2.48 vs. 2011)• First half: $17.10 (+$3.52 vs. 2011)• Second half: $16.69 (+$1.46 vs. 2011)

• Commercial disappearance: +3.5% (+242% vs. trend)• Very strong export market (CY-10 12.8% of U.S. milk

production)• How will exports perform in 2012? USDA says -7.5% vs. 2011

• U.S. milk output: +2.7% last seven months (+175% vs. trend)• Cow numbers: 9.136 M (up 5K since July despite 34K CWT herd

rtmt)• Milk per cow: +3.0% since March 2011

• 2012 Outlook: there will be pressure to increase milk production with higher milk prices.• Higher feed costs (~+31% vs. last year)• Credit situation easing for most farms• Cow numbers likely to increase and milk per cow to remain

above trend

“Prediction is verydifficult, especially if it is about the future.”

-Neils Bohr

Never underestimate the ability of U.S. dairy farmers to produce milk when determined to do so…despite what obstacles CW say are in the way!

Market Milk

Market Feed

Ag Market Update Meetings

• Meet 8 times per year (no meeting in Apr, Jul, Sep, Nov).

• Meet in Sandusky and St. Johns• Meet from 10 AM till noon• Outlook and strategies for all major ag markets

(corn, soy, wheat, feeds, dairy, beef, energy, etc.)• First meeting free; fees for regular attendance• Jim Hilker, MSU-Extension Specialist• Craig Thomas, MSU-Extension Educator

83 lbs/cow per day (~27,400 lbs/year)

Is It Worth Your Time? This is real! 2009

1,530 cow dairy

Primary marketing tool: forward contracts Marketed 38.4% of total milk production Marketing high: $17.44; low: $14.88

Marketing average: $16.92

Farm’s 2009 average Class III price: $13.46/cwt

Is It Worth Your Time? This is real! 2009

2009 U.S. average Class III price: $11.36/cwt

Difference: +$2.10/cwt (+$5.56 on mkt milk) Effect: +$1.85/cow per day

Effect: +$2,405 for the herd per day

Effect: +$878,000 for the farm that year

Net Effect

Same as if every cow on the farm produced 12 lbs milk per day more at an

increase of only 12¢/cwt.

Is It Worth Your Time?

Cumulative ProbabilityClass III Price 1995-Present

R² = 0.9983

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Cum

ula

tive

Pro

bab

ility

Class III/BFP Milk Price ($/cwt)

Cumulative Probability DistributionBFP/Class III Price, 1995-2011

2012$15.90

85th Percentile

2011$16.89

89th Percentile

Min = $8.57Max = $21.38Ave. = $13.20StDev = $2.77

Settlement Prices as of 2/9/11

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$18.00

$20.00

$22.00

Pri

ce ($/

cwt)

Month/Year

BFP/Class III Price1995-2011

BFP/Class III Price Average +1 Stdev -1 Stdev

Min = $8.57Max = $21.38Ave. = $13.20StDev = $2.77

Dec-98

$17.34

92nd Sep-99

$16.26

87th

Jul-01$15.9

885th

May-04

$20.58

99th

Jul-07$21.3

8100th

Class III Price 1995-Present

What do all these peaks have in common?

Class III Price 1995-Present

$9.74$10.42

$11.36 $11.42$11.83 $11.89 $12.05

$12.43$13.10 $13.39 $13.48

$14.05 $14.20 $14.41

$15.39

$17.44$18.04

$8

$10

$12

$14

$16

$18

$20

2000 2002 2009 2003 1995 2006 1997 1999 2001 1996 2011 2005 1998 2010 2004 2008 2007

Year

Year

Annual Average BFP/Class III Price1995-2011

$10.00

$11.00

$12.00

$13.00

$14.00

$15.00

$16.00

$17.00

$18.00

$19.00

$20.00

$21.00

Pri

ce ($/

cwt)

Date

CME Class III Futures Settlement Price Averages

2009 2010

6/16/082009 Ave.

$20.6599th+

Percentile

Class III Futures Prices 2009/2010

6/16/082010 Ave.

$19.8197th

Percentile

Class III Prices2011 & 2012

R² = 0.9983

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Cum

ula

tive

Pro

bab

ility

Class III/BFP Milk Price ($/cwt)

Cumulative Probability DistributionBFP/Class III Price, 1995-2011

2012$15.90

85th Percentile

2011$16.89

89th Percentile

Min = $8.57Max = $21.38Ave. = $13.20StDev = $2.77

Settlement Prices as of 2/9/11

Greed

Hope

Fear

The End