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January 2009

Milk Market and Policy Update: The New MILC Program

Christopher Wolf
Dept. of Agricultural, Food, and Resource Economics

The cheese market collapsed in December. On December 1, spot block cheese prices at the Chicago Mercantile Exchange closed at $1.79/lb. On December 31, that price was $1.13/lb (and continuing down below support at $1.08/lb as of early January, 2009). Domestically, the poor economy and uncertainty is leading to less meals away from home and less cheese consumed. Internationally, the market for US dairy products is declining and exports are contracting. The result is a very dismal milk price outlook for 2009.

Extension of MILC Program

With the poor milk price outlook, perhaps the most important change in the Dairy Title of the 2008 Farm Bill was the extension of the Milk Income Loss Contract (MILC) program and inclusion of a feed cost adjuster. Previously—thinking back to the 2002 Farm Bill—we forecasted the MILC payments using the higher of the Class III or Class IV prices. We can use this again to forecast the Class I mover but now we must also think about the effect of feed prices. The new procedure for calculating the MILC payment is as follows:

  1. The base target price is $16.94/cwt Boston Class I price. The milk price used is the Class I mover which is announced by the 23rd of the preceding month plus a fixed differential of $3.25/cwt.
  2. This target price is adjusted by a feed index if the USDA dairy ration cost exceeds $7.35/cwt of feed. The USDA ration is composed of 51 pounds of corn, 8 pounds of soybeans and 41 pounds of alfalfa hay where all are prices received by farmers.
  3. The percentage that the ration cost is greater than $7.35/cwt is multiplied by 45% and used to adjust the target price.
  4. That target price is used compared to the actual Boston Class I price and producers are paid 45% of the difference for up to 2.985 million pounds of production.

A weekly updated forecast of the MILC payments is available at the National Milk Producers Federation website (www.nmpf.org) and I suggest you check it periodically. However, it is useful to go through a forecasting exercise using current prices.

A MILC Example

Corn and soybean prices were forecasted using the Chicago Board of Trade futures closing price. For months that do not have a contract offered, the price was interpolated. To arrive at an estimate of price received by farmers, which is the value used, an average basis was subtracted. Forecasting alfalfa hay prices is more difficult. Over the past 5 years, the US average alfalfa hay price received was $120/ton. But the price has been increasing over that period with the 2007 average at $130/ton and 2008 average at $162/ton. If you were purchasing you would still need to add hauling and this average does not account for variation in hay quality. We use $150/ton in this MILC forecast. The weighted cost of a hundred pounds of feed forecast is displayed in Table 1. The feed cost is projected to exceed the target of $7.35/cwt of feed for every month of 2009 at the current time. The percentage it exceeds this target is multiplied by 45% to adjust the target price below. For example, the June cost is 7.53% over $7.35/cwt so that the June target price will be increased by 3.39% (=7.53% x 45%).

Using the Class III and Class IV futures prices as of January 16 we can predict the Class I mover which is the higher of those prices at about the middle of the preceding month. The Class III and IV prices are announced at the beginning of the following months. Therefore, we will predict the Class I mover as the higher of the average of Class III and IV from the two months preceding the month in question (e.g., January and February for March). The January Boston Class I price was already announced at $18.99/cwt in December. The target price for MILC payments is still $16.94/cwt for the Boston Class I price. The outlook at this time is for very poor prices which would trigger payments for the remainder of 2009. With any luck the prices will have recovered somewhat by the time this article is read but the milk price is currently forecasted below support in early 2009. This can occur because the cheese manufacturers are not usually set up to sell to the government at short notice. They must package cheese for long-term storage and the Commodity Credit Corporation (CCC) must get their buyers ready to purchase cheese. Thus, price can be below support for short periods.
Table 2 completes the MILC payment forecasting exercise. First the Boston Class I target of $16.94/cwt is adjusted for the feed cost. Then the difference between this adjusted target and the projected Boston Class I price is multiplied by 45% to arrive at a projected MILC payment. At the current time, the months of March through June look like they may be the highest pay rates. Of course, this projection will change with not only the milk prices but the corn, soybean and hay prices as well.

Signup Rules

Signup is currently available through the Farm Service Agency (FSA). Producers with less than 2.985 million pounds may just as well pick October 2008 as a start month and will receive that start month—which is the beginning of the fiscal year—in future years with no need for additional signup or changes. They will not, however, receive a payment prior to February 2009 because payments were zero from October 2008-January 2009. If producers pick a start month for 2009 (say February) but do not pick one for future years, that start month will be the default unless they go back to FSA and change it.

For FY 2009 (October 2008-September 2009) producers can choose as their MILC payment start date the same month during which they submit their contract. For example, a producer who submits his contract any time in February can choose February as his start date. Similarly, a producer who submits his contract in May can choose May as his start date. In the following years, producers will need to sign up by the 14th of the preceding month. MILC eligibility is subject to a $500,000 limit on non-farm Adjusted Gross Income (AGI), but there is no eligibility limit on total or farm-based AGI.

 

 

 

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