Missouri Dairy Business Update Commercial Agriculture
Volume 3, Number 8
August 2003

Selecting the Start Month for MILC Program Payments

Geoff Benson, PhD
Extension Economist
NCSU, August 28, 2003

My comments about the MILC program payments in my most recent market update stimulated a question; "How should a producer selling more than 2.4 pounds of milk annually select the start month for MILC payments during the coming fiscal year?" Here is my thinking but producers should contact their local FSA offices before September 15 to discuss their options.

  • First, a producer should project the amount of milk he or she expects to sell during the coming fiscal year, beginning October 1, based on expected cow numbers and milk sold per cow (net of discarded milk). It might be helpful to look back over past years sales to see if there is a strong seasonal pattern. If so, milk production should be projected on a monthly basis.
  • The next step is to convert these milk projections to the equivalent number of months during which payments would be received under the MILC program. For example, sales of 3.6 million pounds are equivalent to 8 months of payments (Divide 2.4 by 3.6 and multiply the product by 12 months).
  • The third step is to guess at what milk prices might do over the October, 2003 through September 2004 period. The Class III futures market is the best guide we have but producers should incorporate their own views as well. The table below shows today's (8/28/03) Class III futures prices for contracts through July 2004. These show a fairly typical pattern of higher fall prices followed by lower prices in the spring when milk supplies are normally more abundant and strengthening prices into next summer. However, as we well know, it only takes a small change in US cow numbers, milk per cow or dairy product sales to change prices quite dramatically. The further into the future we look the more likely it is that projections will be wrong.
  • The fourth step is to calculate the expected monthly MILC payments. MILC payments occur whenever the Class I mover is less than $13.69 per cwt. The actual payments are 45% of the difference whenever the Class I mover is below $13.69 per cwt. However, it is important to remember that the futures market contract relates to the monthly Class III price but the MILC payments are based on Class I prices. The Class I mover is 1) based on the higher of a Class III or Class IV price and 2) these particular Class III and Class IV prices are derived from a survey of dairy product prices during the first two weeks of the month only. This means the Class I mover can be significantly different from the monthly Class III price during periods of sharp price movements and when Class IV prices are above Class III. Note also that Class I prices are announced in advance, so the Class III price for one month should be related to the Class I price for the following month. I have illustrated this in the table, based on the assumption that the Class III futures price will be the Class I price mover.
  • The last step is to select the months expected to provide the highest MILC payments. In the table, the largest payment occurs in March, so this would be the place to start. Producers can only select the start month for MILC payments. After the start month is selected, milk sales volumes accumulate consecutively until the cap is reached, even in months with no payments. Producers should work both forwards and backwards from the month with the largest payments until the full 2.4 million pound cap is used up.
  • On final caution is in order. As with many aspects of dairy farming, selecting the start month for the MILC program is guesswork. Future milk prices and payments can only be guessed at and farm projections of milk production levels may turn out to be wrong. However, the procedure described here should help improve the quality of those guesses.

Estimated MILC Payments Based on the 8/28/03 Class III Futures Price

Futures Contract Month Class III Futures Price Class I & MILC Payment Month MILC Program Price Target Price Difference, if negative MILC Payment at 45% of diff.
September, 2003 $14.08 October, 2003 $13.69 n/a $0.000
October, 2003 $13.80 November $13.69 n/a $0.000
November $12.61 December $13.69 -$1.08 $0.486
December $12.00 January, 2004 $13.69 -$1.69 $0.761
January, 2004 $11.82 February $13.69 -$1.87 $0.842
February $11.25 March $13.69 -$2.44 $1.098
March $11.39 April $13.69 -$2.30 $1.035
April $11.38 May $13.69 -$2.31 $1.040
May $11.39 June $13.69 -$2.30 $1.035
June $11.77 July $13.69 -$1.92 $0.864
July $12.00 August $13.69 -$1.69 $0.761
August $12.30 September $13.69 -$1.39 $0.626

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