Feed Cost Considerations

Nathan J Julinsky, Agriculture Business Management University of Minnesota

Feed cost is the most important and expensive input cost on a dairy farm.

For a combination of reasons, feed costs have risen sharply since the fall of 2020. At Central Grain in Sauk Centre June corn prices are around $6.70 with a positive $0.10 basis, with higher positive basis for late summer.  Soybeans are around $15.00 with negative $0.40 basis. These are very competitive bids.  Futures prices this fall are currently several dollars per bushel lower than nearby contracts. If you have any excess grain, consider contracting it for sale this summer.

However, if you own livestock and are buying crops for feed at these prices, things do not look as rosy. For a historical reference Table 1 shows the feed cost per cwt according to FINBIN data from the Minnesota dairy farms over the past 12 years. This is the yearlong average, so the monthly highs and lows are not captured, but we can see the increase from 2009 and 2010 into the high commodity prices of 2011-2014, and the decrease after that.

For the dairy farmers who have signed up for Dairy Margin Coverage with the USDA, this program is designed to cover the margin between milk prices and feed costs. This program has paid out in 2021 due to the higher feed costs. Table 2 shows the final feed costs significantly higher than the past few years in Table 1. At the highest coverage level of $9.50 for DMC, January paid out $9.50-$7.14 = $2.36 per cwt covered. The payments were $3.28, $3.04, and $2.56 for February, March, and April respectfully.  Not all dairy farmers can cover all their milk production and DMC is not a cure-all, but a safety net program. However, in times of quickly rising feed costs, the benefits of participating in DMC can become more evident.

Some dairy farmers must buy additional feed before the new crop of hay and silage becomes available. Historical trends have corn and soybean prices declining after July 1 and hay prices peek in November and December which should help farmers needing to purchase additional feed.  Will that happen in 2021?  The answer depends on what happens with the weather.  If by July, the crops look good and good fall yields are likely grain prices will likely decline. If a drought appears grain and hay prices will rise.

If you are buying feed now, what can you do to help relieve the extra expense? Ed Usset, Grain Marketing Specialist with the University of Minnesota, “If you expect me to pull a rabbit out of the hat, I am not a magician. When markets are inverted (nearby prices higher than deferred) and at 8-year highs, I would tell people to go “hand-to-mouth.” Buy what you need to get through the next week, and no more. This is not the right time to swing for the fences with an aggressive long position. It does not sound like a very active strategy. It is more of a ‘grit your teeth and hope for a break’ with good weather and crops in the weeks ahead.” This may not be the reassuring thing to do here but locking in some future prices to purchase may not be beneficial.

An alternative for dairy farmers who need to purchase corn or corn silage in fall would be to buy call options. Often the corn silage price per ton is based on 10 multiplied by the corn price.  On June 4th December 2021 corn futures were trading at $5.81 and a $5.80 call option cost 63 cents. If a farmer were concerned about higher fall feed costs, they could purchase a call to have a price insurance at today’s lower fall prices. But unlike a futures positions which face margin calls and more unpredictable loss potential, a call option acts more like an insurance policy with a knows costs: the premium. If the corn market declines, the loss would simply be the costs to buy the call (in the example above 63 cents premium). If corn prices continue to increase, the premium cost of the call is still incurred, and the call can be exercised at the strike price (in the example above, $5.80 per bushel).

Planting season is mostly wrapped-up, do you have enough acreage to harvest adequate tonnage of hay and corn silage for your herd, so you do not have to buy as much? Most famers do buy some minerals, supplements, and other feed inputs. Thus, reducing all feed inputs to grown crops is difficult. Managing feed costs is important aspect to your farm. Growing enough of your own crops is one way to help control feed costs. Looking at other options to buy feed, neighboring farmers, buying one cutting of hay, part of a corn crop, or watching the markets closely is another way to help control costs.

Editor’s Note: This article appears in the I-29  Moo U newsletter and is used here with permission.

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