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Michigan Milk Market Volatility?

Christopher Wolf
Dept. of Agricultural, Food and Resource Economics

Much publicity has been given to price volatility—both milk and feed price—in recent months and with good reason. Both the Class III and the Michigan mailbox milk price have been quite volatile in the past 10 years. One measure of volatility is the coefficient of variation (CV) calculated as standard deviation divided by mean. That is, it is the amount of variation in that series divided by the average value. For Class III and all milk, the CV was 0.23 and 0.19, respectively. Higher values indicate more volatility. These values are much higher than past decades but are lower than similar measures of volatility in corn and soybean markets over the same time period. Both milk and feed price volatility contribute to margin—and therefore profit—volatility.

Price volatility is not desirable for many reasons. One big reason is that it makes it difficult to plan for business expenses such as reinvestment in facilities. Dairy farming is a capital intensive business and uncertain margins can lead to poor decisions that financially stress the operation. But more important than how much volatility exists is whether the milk price or margin is adequate to cover other expenses and generate a return to unpaid capital, labor and management. Farm managers likely can deal with volatility that occurs when prices are adequate—although they may not enjoy it.

As of this writing (June 10, 2011), the July corn price on the Chicago Board of Trade was trading at just shy of $8/bushel, while soybean meal was trading at about $375/ton. Meanwhile, Class III price for July is $19.70/cwt. Using a representative basis for each, and the income-over-feed-margin, calculated as the National Milk Producers Federation (NMPF) does in their margin policy proposal, the income over feed margin is about $6.25/cwt. This value is below the 10-year average of $7.60/cwt. It is not profit—instead it is the amount that is available to pay for everything else. The futures market at the present time does not forecast Class III milk prices remaining at $20/cwt with prices dropping off to $17.50/cwt by the end of the year.

The exceptionally high feed grain prices are in part driven by planting problems which occurred on top of a small stocks from last year’s crop.  In order to maintain a respectable margin at these feed prices, Class III milk prices must remain at historically high levels. Wholesale cash cheese prices near $2.00/lb will generate Class III prices around $20/cwt. Whether cheese can hold this price depends heavily on demand—both domestic and international. Domestically, the economy continues to underachieve with high unemployment while retail dairy prices are high which curbs demand growth.  Internationally, product prices remain strong but austerity measures and concerns about inflation abound that could hurt longer-term prospects.

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