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Dairy Producers Planning 2021 Profit Margins

Jim Moriarty
Educational Opportunities: 
Grain, Dairy, Swine, Young, Beginning Farmers, Specialty Industries
Home > Education & Events > July 2020 > Dairy Producers Planning 2021 Profit Margins

It can be difficult to think about next year’s margins when we have half of this year left and are still assessing results for the first half of the year.  As the wild swings of the past four months have shown us, we can’t predict future milk prices and profit margins.  Crop yields for 2020 are still to be determined and we have ongoing uncertainty on milk price.  With all that said, with feed costs trending lower and future milk prices at or above trend averages, there are profit margin opportunities in 2021 that we should be considering and acting on now. .
As we project ahead to this fall and next year, feed prices / costs look to be lower.  Planting conditions were clearly more favorable this year compared to last and the corn, soybean, and alfalfa crops are progressing ahead of schedule. The crop conditions to this point are reflected in lower futures prices, with corn and soybean prices down ten to 25% compared to last year at this time.  Hay prices are still near last year’s value but alfalfa conditions are improved this year which is enabling more and better quality haylage to be harvested on our farms. 
With feed costs trending lower, how can we translate those lower prices into lower cost of production in 2021?   While the potential for upside price movements for corn and soybeans and related products looks minimal now, weather could still impact yields and move prices higher.  There may also be  cost of production gain through  increased milk production from higher quality feed.  We can take steps now to put some certainty in feed costs by hedging or forward pricing part of our anticipated feed needs today.  This can be done through your broker relationship or with your feed suppliers and can cover purchased grain needs, protein supplements, and other ration ingredients.
Along with taking the opportunity to set lower feed costs, we should strongly be evaluating putting a floor under milk revenues for next year, with hedging options or insuring with Dairy Revenue Protection.  Understandably, we may be hesitant to take action on milk price management for next year as we are trying to figure out how we went from $16 Class III in February to $12 in May and then up to $21 for June.   We expect wide swings to continue in the dairy industry with both milk production and dairy product demand being impacted by Covid 19.  Rather than trying to predict the price, the key is to identify the milk price levels that will cover your cost of production projected for next year and take steps to place a floor price that protects downside risk while still enabling opportunity for profitable margins.
An incremental approach using multiple tools may be the optimal strategy for milk price in 2021.  Class III futures prices are currently in the low to mid-$16 range for 2021.  That is well below the $21 price in June 2020 but significantly better than prices for most of the period from 2015 through 2018 and obviously much stronger than the $12 experienced in May this year.  With feed prices trending lower, Class III prices in the $16 range could likely be a breakeven to positive profit margin for most dairy farms.  Dairy Margin Coverage at a $9.50 margin level for up to 5 million pounds of annual production should be a first step in 2021 milk price risk management.  Dairy Revenue Protection and/or options using the CME would then be another layer to use to set price floors.  If first quarter 2021 futures don’t meet your targets yet, look to the higher futures prices in the second and third quarter to get started.  You can also layer in coverage in increments of your expected milk production to get some coverage in place while looking for higher price movements.  
We certainly understand that it is a challenge to focus on 2021 with the disruptions we are still experiencing this year.  However it is important to plan ahead as we have a significant opportunity to set the foundation for profitable margins for the coming year.  Future milk prices are favorable relative to the past four to five years and feed costs are at relatively lower levels.   Action now can set the stage for profits next year while also protecting against the unexpected. 
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