January 29, 2013 – Dairy economist Brian Gould from the University of Wisconsin shares with DairyLine Radio listeners the latest projections the Milk Income Loss Contract.

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(August 29, 2012) USDA’s Risk Management Agency (RMA) is offering a Livestock Gross Margin-Dairy Insurance policy sale Friday. Brian Gould is professor at the Department of Agriculture and Applied Economics at the University of Wisconsin-Madison and spoke with DairyLine about last Friday’s announcement.

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(April 17, 2012) The proposed Dairy Security Act may see a transition to new competitive pay prices. University of Wisconsin’s Brian Gould discusses the potential structural change in mik pricing and the fluid milk futures contract on Tuesday’s DairyLine.

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(February 7, 2012) Brian Gould from the Unversity of Wisconsin-Madison discusses why the Livestock Gross Margin insurance program should get out of pilot status.

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(November 25, 2011) Another sales period for Gross Livestock Insurance was gobbled up during Thanksgiving week.  Brian Gould, from the University of Wisconsin-Madison,  joined us on Friday to discuss the latest LGM sale, scheduled November 18^th. 

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The August Consumer Confidence Index declined from 59.2 percent to 44.5 percent, according to Brian Gould, Associate Professor and the Department of Agricultural and Applied Economics at the University of Wisconsin-Madison.

“Consumer confidence and the willingness for consumers to go out and purchase food away from home are very important to the dairy industry,” he said.

Switching gears, Gould anticipates CME spot cheese prices will remain in the $1.70’s. The most recent data available show the ratio of American cheese stocks to American cheese production in July as the highest since August of 1987.

“So we had a lot of stocks out there relative to production and I’m not optimistic that there is going to be a rebound in those cheese prices in the near future,” he said.

Futures prices remain fairly stable.

“They are about $1.70, plus or minus five cents,” he said. “Right now the indicators are not looking for substantial changes on the upside or either on the downside.”

The August Federal Order Class III milk price is $21.67, likely the peak for the year.

“If you look at Class III future settled prices just prior to the announcement of the August value – for example the September settled price on that day was $18.87, the highest on the board and continually declines by June of next year about $17.00, so still relatively high, but I don’t see $20.00 on the board at this time,” he concluded.

S& P this week downgraded the credit ratings of Fannie Mae, Freddie Mac and other agencies linked to long-term U.S. government debt. Farm lenders and debt issued by 32 banks and credit unions are also involved in the latest downgrade. Analysts are saying they are not surprised by this decision.

“Obviously there is a direct linkage between government supported programs and the rating of the federal government,” Brian Gould, Associate Professor of the Department of Agricultural and Applied Economics at the University of Wisconsin-Madison told DairyLine Radio.

“The question remains, theoretically when the quality of bonds goes down the cost of attracting money for those bonds has to go up because there viewed as more risky. If that holds true than both short term and long term loan costs could go up for the ag sector.”

“There is some indication that the markets aren’t reacting as we would have thought in terms of significant increases in those interest rates, but it’s a wait and see because we’ve never been in this state before,” Gould said.

The first two days of CME trading – spot butter was down 3 ¼-cents to $2.07 on four trades and seven offers. Block cheese was also down 3 ¼-cents to $2.13 on four trades and 2 offers. The barrels were unchanged at $2.1350 with no activity.

The dairy industry is seeing some volatility because of the fluctuation in the grain prices. That affects both the revenue side and the cost side. When looking at the relative volatility of feed versus the Class III milk price since 2006, feed markets have been just about as volatile as the Class III market in terms of month-to-month variability of those prices.

“You have to look at both sides of the coin now, we don’t have stable grain prices, and we need to be concerned about volatility in the grain market as well as in the dairy market,” he said.

Gould’s analysis on the volatility of feed prices versus Class III includes a series of 16 percent dairy rations and how it varied relative to the Class III since the BFP formula in 1995.

“Between 2000 and 2005 we did indeed have relatively stable feed prices and we didn’t need to be concerned about margins, all we had to do is look at the milk price side,” he said.

“But since 2006, the volatility measures that I’ve looked at are about equal with respect to the 16 percent dairy ration that I put together verses the Class III milk, so again that implies that you need to look at both the revenue side and feed side since feed is such a high portion of total cost of production.”

Buyers are bidding up the cheese market to a new three-year high this week, and that has some analysts scratching their heads. “It’s unbelievable in terms of what market fundamentals would indicate, with demand softening and cheese stocks remaining high,” said Brian Gould, Associate Professor of Agricultural and Applied Economics at the University of Wisconsin-Madison.

The movements are occurring at a time when discussion of the 2012 farm bill is starting to pick up, specifically the draft dairy policy reform proposal put out by Representative Collin Peterson (D-MN).

The proposal would eliminate the dairy price support program, the MILC program, initiate a margin revenue insurance protection program, institute some supply management and also reform federal orders.

Since Peterson’s announcement, two of the major players in the debate, the International Dairy Foods Association and the National Milk Producers Federation are having a discussion back and forth on whether it’s a good policy or not.

IDFA is concerned about the price impacts of the proposal and National Milk is lauding it to its voluntary control measures. “Where this plays out is anybody’s guess, but movement in today’s cheese price will continue to push this discussion to the forefront,” Gould said.

The major issue of contention is a supply management system designed to send strong signals to producers to increase or decrease their production depending upon market conditions.

With lawmakers focusing on the debt ceiling, it’s even more apparent that the dairy industry becomes united with their cause. Because there isn’t a unanimous, cohesive support for getting a common dairy policy, there could be some delays in any dairy legislation.

“So if the dairy industry would like some consideration to dairy policy reform prior to the farm bill, there’s going to have to be some coming together of these two organizations,” Gould concluded.

Class III dairy futures saw big declines Tuesday. July and August were limit down 75 cents. September fell 70 cents and October was down 62 cents, and November was down 39 cents.

July closed at $19.42, August $18.64, September $18.09, and October $17.60

Futures had been riding high with the cash cheese market. Block cheese was finally unchanged Tuesday at $2.11 per pound, after 16 consecutive days of gains. Barrel was also unchanged at $2.05, with no activity. The last time the block price was this high was three years ago.

“I’m very surprised about that trend because of what is going on in stocks. Stocks are relatively high in the cheese market and it’s really confounding some of us why that cheese price has continued to increase,” said Brian Gould, Associate Professor of Dept. of Agriculture and Applied Economics at the University of Wisconsin-Madison.

The bleeding continued in the cash dairy markets Monday with block cheese prices losing another penny and three quarters and barrels down 2 cents. Butter and Grade A nonfat dry milk were also down 2 cents. The University of Wisconsin’s Dr. Brian Gould said in Tuesday’s broadcast that he long anticipated in the downfall of cheese but was hesitant to predict how low it will go. Looking at the futures price on Class III, butter, and dry whey, and the imputed cheese value coming out, Gould said “either the cheese value has to come up or those futures have to come down because there seems to be a disconnect of about 10 or 15 cents over the near term over what the current cash market is.” Gould also said he was surprised at butter dropping, given that stocks are fairly low.

Once again we see volatility demonstrated in the dairy markets and the reason risk management tools being sought after. Gould has been a strong advocate of the Livestock Gross Margin insurance program for dairy. The program has been very successful, perhaps too successful, because, unless Congress authorizes additional funding, no more contracts will be offered until October.

Gould called it a “wealth of riches,” in that there has been a lot of interest in it but USDA’s Risk Management Agency has run out of funds for this fiscal year.

As of the March contract offering for this insurance year, which starts in July, 46.1 million hundredweights in the U.S. insured, representing about 2.4 percent of the U.S. milk supply. That’s a lot of activity, he said, three quarters of a billion dollars of gross margin being protected.

He said he’s concerned that we keep momentum going. “This is a success story in terms of the utilization of a risk management tool by both large and small dairy farmers across the U.S. For more information, Google “Understanding Dairy Markets.”