Increasing butterfat and protein can partially offset milk check deductions as basis continues to shrink.
Increased components and improved quality are adding to basis on milk checks, but dramatically higher hauling charges are pulling overall basis lower in the Midwest, according to Matt Lange, business consultant with Compeer Financial, Baldwin, Wisconsin.
Compeer’s Dairy Consulting Team Benchmark monitors basis and reviews milk checks for clients in the Upper Midwest. That group of herds, analyzed monthly, average about 1,400 cows, with a total of about 100,000 head.
Like Mark Linzmeier (see related article), Lange said components and other milk composition factors affecting basis have improved. Among Compeer client farms, butterfat percentages were averaging 3.87 percent through the second quarter of 2018, up from 3.77 percent for all of 2017. Lange attributed the higher butterfat levels to herds coming off recombinant bovine somatotropin (rbST), as well as an increase in whey and cottonseed in dairy herd rations.
The increase in protein is less noticeable: At 3.13 percent through the second quarter of 2018, it’s up 0.01 percent from 2017.
Another factor with a limited impact on basis is average somatic cell counts (SCCs). Compeer herds averaged 167,000 cells per milliliter in 2017 and have dropped to 143,000 cells per milliliter in 2018.
“Quality is drastically improved, and those who are getting paid on quality are picking up some premiums,” Lange said. “However, the SCC premiums are so low, and some additional quality premiums have eroded away, so even though the dairies are producing much better-quality milk, they’re not getting paid in the same proportion as the quality improvement.”
Progressive Dairyman heard from one southwest Wisconsin farmer whose total annual hauling charges went from $4,800 in 2016 to $48,000. Lange said he’s seen similar cases, warning it’s hauling costs that are likely going to create the biggest sticker shock in 2018.
Due to competition for milk, processors have historically subsidized hauling costs in the Midwest and some other parts of the country.
“When Midwest farmers look at profit-loss statements and the impact of hauling compared to previous years, their jaws are going to drop,” he said. “Hauling is pretty scary to some degree. The one positive is: We’re getting a truer picture of hauling costs, which were masked by processor hauling subsidies. But it’s adding expenses to the cost of production. That’s forcing some producers to evaluate their hauling options.”
When it comes to basis, Lange said, “It’s hard to do an apples-to-apples comparison.” He compared two herds of similar size, about 700 cows.
One 700-cow herd in southeast Minnesota ships 6.6 pounds of combined fat and protein per cow per day to a cooperative cheese plant. Based on FMMO-announced butterfat, protein and other solids values through the first nine months of 2018, Compeer’s Dairy Consulting Team has calculated the dairy has been underpaid on fat by $170,000 and underpaid on other solids by $39,000 but overpaid on protein by $106,000 more than the FMMO value. Add it all up, and that producer has received $101,000 less than the FMMO-announced price for those three categories.
That same dairy had average hauling costs of 8 cents per hundredweight (cwt) for the period of October 2017 through April 2018. However, in May and June 2018, hauling costs jumped to 21 cents and 23 cents, respectively. In July-October 2018, hauling costs moved even higher, to 46 cents per cwt.
Annual hauling costs in 2017 totaled $16,450. Based on historical averages, the operation had budgeted about $5,000 for third-quarter hauling expenses.
With the 2018 rate increases, their hauling costs for the quarter totaled $26,000, or $10,000 more in one quarter than the entire hauling costs for all of 2017. On an annualized basis, their hauling costs will now be about $102,000.
“If the current rate continues, they’re paying 38 cents more per hundredweight for hauling than they were before,” Lange said. “Some of that hauling rate increase may be showing up elsewhere on the milk check, although it’s not always transparent.”
A similar-sized herd, shipping to an independent processer in Wisconsin, is shipping 6.1 pounds combined fat and protein per day, with an average SCC of 110,000 cells per milliliter. That dairy has been paid $24,000 more than the FMMO value on protein through the first nine months of 2018 but $25,000 less than the FMMO value on other solids. So the net is only about $679 less than value based on the FMMO announced price.
Their hauling costs, about 36 cents per cwt, have been virtually unchanged this year. As a result, Lange budgeted a “basis” of $1.79 per cwt; their actual basis has been $1.88 per cwt.
As hauling charges continue to rise, basis will continue to erode across FMMO 30, Lange said.
“High basis is not sustainable for processors,” he said. “We will continue to see erosion of basis. It may level off a bit, so we won’t see the drastic reductions we have seen in the past.”
Reflecting on how things have changed, Lange said Compeer’s average herd had a basis of $2.83 per cwt (calculated on energy-corrected milk) in 2014. In 2017, the average was $1.94 per cwt, and through the first six months of 2018, it was $1.53 per cwt.
“Basis is seasonal, increasing late in the year, but even if we finish the year averaging a dollar-seventy per hundredweight, it will be 24 cents less than 2017 and down a dollar-thirteen per hundredweight from 2014.”
The bulk of Compeer’s client base is in FMMO 30, but it stretches east into Ohio. In Michigan, “basis is a different ballgame. With the flood of milk and the distance it has to be moved, basis continues to be negative,” Lange said.
When a conversation regarding basis starts on the farm, Lange urges his producer-clients to focus on the things they can control. In an effort to capture whatever basis remains, his advice to producers is to ship as many pounds of combined butterfat and protein pounds per cow per day as possible.
“There’s a correlation between energy-corrected milk production and net income,” he said.
Through the first six months of the year, Compeer analysis shows the top 25 percent of herds (on a net profitability basis) were shipping more than 6 pounds of combined fat and protein per cow per day; the bottom 25 percent were shipping 5.72 pounds of combined fat and protein per day.
Lange encourages producers to evaluate the impact of raising the production of butterfat or protein on their monthly bottom line.
As an example, a dairy shipping 1.92 million pounds of milk with a butterfat test of 3.76 percent in June 2018 would produce a little over 72,000 pounds of butterfat. Boosting the butterfat test to 3.86 percent would generate an increase of $12,550 for the month.
“That’s 62 cents per cow per day in increased income,” Lange said. “Working with your nutritionist, could we have generated that income with ration changes at less cost than 62 cents per day? Even with lower basis, it’s still worth it to get components, to ship as much fat and protein as possible.”
In addition to feeding changes, Lange said he’s seeing more Holstein herds adding Jerseys and crossbreds – not because those cows are more profitable but because it allows them to ship more fat and protein in every tanker load of milk.
“The component level is going to be more important as we go forward,” he said.
To evaluate basis in the Southeast, retired dairy cooperative CEO Calvin Covington compared January-August 2017 and 2018 FMMO blend prices with mailbox prices received by dairy farmers, incorporating adjustments for fat tests and location.
• In the Florida FMMO, the January-August 2017 average mailbox price was $2.73 per cwt less than the FMMO blend price. For January-August 2018, the average mailbox price was $2.18 less than the FMMO blend price, an improvement of 55 cents per cwt.
• In the Southeast FMMO, the January-August 2017 and 2018 average mailbox prices were $1.73 and $1.47 per cwt less than the blend price, respectively, for an improvement of 26 cents per cwt.
• Finally, in the Appalachian FMMO, January-August 2017 and 2018 average mailbox prices were $1.05 and $1.35 per cwt less than the blend price, for a decline of 30 cents per cwt.
Covington said the improved basis in Florida and Southeast FMMOs is the result of less surplus milk produced, which lowers balancing costs, and less need for supplemental milk. Through September, milk production was down 3.7 percent across the 10-state region, in part due to implementation of a seasonal production plan by Dairy Farmers of America; and fluid sales were down 2 percent in Florida and 3.2 percent in Southeast, respectively.