Milk Producers to See Some Relief, According to Banker
Published: Friday, February 15, 2019
The economic outlook for dairy farmers should improve in 2019, one veteran banker says, especially if cow numbers continue to decline and trade disputes are resolved. Producers who are struggling to stay afloat after four consecutive years of low milk prices should see some relief this year.
According to dairy consultant and banker Gary Sipiorski, only 20 percent of U.S. dairy farms currently are operating profitably. That situation has forced some herd owners to exit the industry, while the rest are barely hanging on.
The outlook for 2019 holds some good news. Sipiorski, who spoke during last week's Indiana Dairy Forum in French Lick, said that Class 3 milk prices are expected to average between $16.75 and $17.75 per hundredweight this year, and prices could go $2 higher if the tariff war with China is resolved.
Another less talked about trade conflict involves Russia, which is the world's second largest importer of dairy products, behind China. In August 2014, Russia ceased buying U.S. dairy products after the U.S. imposed its own sanctions following Moscow's annexation of Crimea. According to Sipiorski, a breakthrough in that trade dispute would also raise U.S. milk prices by $2 per hundredweight.
While there is some reason for optimism, Sipiorski told producers to expect the Federal Reserve Board to raise interest rates at least two more times this year.
"We're going to get through this," he said. "In difficult times, there is opportunity."
According to Sipiorski, milk producers can survive in the "new normal," but they will need to have a firm understanding of their balance sheet, capture more revenue, and work to save "nickels and dimes" on production costs.
Despite the popular notion that large herds have a lower cost of production than smaller farms, Sipiorski said small herds can compete with larger operations but only if those producers "know their numbers," focus on maximizing butterfat and protein, and work proactively to prevent herd health problems.
"Get your financials in line," he said, "and think about what you need to do to make money."
Another dairy market observer, Mike North, said, historically, milk prices run in three-year cycles, but he said the current market seems to have found a new, longer "comfort zone" between $13 and $17 per hundredweight. While those numbers are not high enough to please most dairymen, North said the U.S. is poised to be a very strong player in the export market, provided there isn't any interference from tariffs or other politics.
The commodity risk management specialist with CRMG, based in Platteville, Wis., said the average Class 3 milk price, based on the futures market, will be $14.54 per hundredweight for the first half of the year and $16.30 for the second half. While the potential exists for a dramatic upside swing that is similar to 2014, he said it most likely won't happen this year. There is still too much cheese in inventory.
"This barrel market is weighing on price," he said.
For milk prices to reach a higher plateau, dairy farmers will have to make some difficult choices.
"No substantial rally has ever happened without first getting rid of cows," he said, echoing Sipiorski's comments.
According to North, the majority of cows sold by farms exiting the business aren't being retired but are instead moving to other farms, where they continue to produce. As a result, the market currently has both low prices and a near-record number of cows.
Regarding government policy, North said there is some "good stuff" for dairy farmers in the recently passed farm bill.
First, the farm bill improves the way Class I milk is priced. That's good news for Indiana, he said, because 30 percent of the state's production falls into Class 1 utilization.
Second, the old Margin Protection Program for Dairy (MPP-Dairy) has been "revitalized into something that looks really good." The program, now known as the Dairy Margin Coverage (DMC) program, raises the maximum level of protection from $8 to $9.50 per hundredweight and increases the volume of milk that can be insured. Payments are made if the DMC margin falls below the farmer's elected coverage level. Coverage can range from 5 percent to 95 percent of a farm's milk production history.
The program will be retroactive to Jan. 1. However, the Farm Service Agency isn't ready to roll it out yet, due to the prolonged government shutdown.
Return to Top of Page