Selecting the Start Month for MILC Program Payments
Geoff Benson, PhD
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.