The softening grain market that pressures row crop farmers has brought some welcome relief to dairy producers who are seeing stronger margins this year due to the reduction in feed costs.

But the outbreak of highly pathogenic avian influenza on dairy farms continues to weigh on the sector, even as economists see scant evidence that the virus has affected production very much. Some 59 cases have been confirmed in eight states in the last 30 days, according to USDA.

Still, the decline in feed costs provides hope. Last year, the average margin between the all-milk price and feed costs shrank as low as $3.52 a hundredweight. In July 2023, the average all-milk price dropped to $17.40 a hundredweight, while feed costs reached $13.88, USDA data shows.

This year, USDA is projecting feed costs will average $10.55 in July and not rise above $10.68 the rest of the year. Meanwhile, the average margin is projected to be $12.13 a hundredweight in July and rise as high as $13.72 by October.

The feed cost estimate includes the price of corn and soybean meal as well as alfalfa hay. 

“It's looking like not a bad year in terms of prices and margins,” said Peter Vitaliano, vice president for economic policy and market research for the National Milk Producers Federation. Vitaliano is forecasting that the average margin for this year will be $11.60 a hundredweight, in line with USDA estimates.

Danny Munch, an economist with the American Farm Bureau Federation, said milk prices have finally stabilized after a period of volatility coming out of the pandemic.

“Since December, the all-milk price has remained between $20 and $21 a hundredweight, which has been more stable than it's been in a while,” he said.

Meanwhile, prices for corn, soybean meal and alfalfa have all declined. The price of premium alfalfa hay dropped from $275 a ton in January to $260 a ton in April, while the price of soybean meal dropped from $379 a ton to $357, Munch said. The price of corn is down from $4.74 a bushel to $4.39.

USDA in June raised by 40 cents its forecast for the average all-milk price for 2024 to $21.60 per hundredweight. The forecast price for 2025 was raised 60 cents to $21.50.

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The improving economics is reflected in signup for USDA’s Dairy Margin Coverage program, which provides payments to producers when margins fall below a coverage level selected by the farmer. Producers can protect up to 5 million pounds of production, the output of about 200 cows, against margins below $9.50 per hundredweight.

Producers received some payments in January, when the margin was $8.48 per hundredweight, and again in February, when the margin was $9.44, just under the top coverage level, but they aren’t expected to get anything from DMC the rest of the year, based on USDA’s forecast.

Enrollment dipped to 15,579 operations this year, down from 17,088 farms in 2023, according to USDA data provided to Agri-Pulse. Last year, farms received $1.29 billion in DMC payments. This year, they’re only expected to collect $37.2 million.

This year’s DMC enrollment was delayed until the first part of the year because of changes Congress made to the program in a one-year farm bill extension enacted last November. The delay meant that when they signed up, producers had a better idea of what they were going to get paid from the program, and whether it would cover their premium.

The average premium at the $9.50 coverage level this year at 5 million pounds of production is $7,125, according to USDA. The average payout this year could be less than $2,400 per farm, if producers don’t receive any more money from the program.

Wisconsin producer Mitch Breunig, who farms near Sauk City, northwest of Madison, said he signed up anyway because he considers the program a good risk management tool.

“Last year that would have paid out really good, and this year it didn't pay out as well because feed prices fell, but I still look at it as a good investment,” said Breunig, who has about 450 cows.

In his view, paying for DMC this year is still worth the premium, because of the risk that widespread crop failures could drive up feed costs. In that case, producers who declined to sign up for DMC to save the annual premium “will probably wish they would have," he said.

Breunig also buys revenue insurance on his production to protect against market downturns. 

Wisconsin has so far escaped having any confirmed cases of avian flu, but Breunig said the outbreak is making some producers reluctant to take cows to events, such as fairs, or afraid to test their livestock for fear of being forced to quarantine them.

“If you test your cows because you want to go to a show, and you don't really have any symptoms, but all of a sudden you get a positive, how does that affect your business? So people are really scared to test for that situation. On the flip side, if you got something, you'd like to know you had it,” he said.

While feed costs are down this year, producers have other costs such as labor and interest expenses, Breunig noted.

Vitaliano said he doesn’t see producers ramping up production significantly, which is reflected in the strong price forecasts for milk.

“It’s looking like a year of decent prices, decent margins and no sign that we’re going to overproduce the market,” he said.

Producers are “kind of licking the wounds and waiting for much stronger signals” before they start expanding production, Vitaliano added. “Producers have had a tendency to overproduce the market but I think you're seeing a new note of caution. I’m not expecting a lot of rapid milk production growth.”

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