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Dairy Farmers Hear Bullish Price Outlook


by Steve Grinczel

Published: Friday, February 14, 2020

All Steve Hein wants to be is a dairy farmer.

"We do it because we like the cows, and through milking cows you meet a lot of good people," said the 32-year-old manager of E.J. Dairies Inc., his family's 950-cow operation in Francesville. "I've been milking cows my whole life, and if I'm lucky I'll keep milking cows till the end of my life."

Whether Hein would have been able to work dairy until the day he retires, "or my back gives out," was in angst-producing doubt after the historically high prices hit in 2014 were followed by a devastating downturn that lasted more than four years.

Hundreds of dairy farms throughout the Midwest went out of business. Producers lived with the constant anxiety that comes from being inextricably linked to an industry that had no answers to the question: Who will be next?

However, 2019 turned out to be a bounce-back year for dairy, and from what Hein and fellow farmers heard during last Thursday's Indiana Dairy Producers' regional meeting in Plymouth, it appears a critical corner has been turned.

New or improved strategies for loss-prevention, herd nutrition and reclaiming market share through rebranding and creating more demand by developing more innovative products and uses for dairy had Hein feeling better about the possibility of bowing out on a flying tractor after he milks his last cow decades from now.

"It's been a tough four or five years, but as long as we're able to maintain the prices we've had for the last couple months, guys will be able to hang on and keep moving forward—that's the hope," he said. "It's just not as cut-and-dried as it used to be. There's a lot of public pressure from, you know, different animal-rights activists, different fads—this organic fad, the non-GMO fad—all the stuff that just comes and goes.

"You've just gotta make sure you're doing a good job because we are the sellers and the people out there are the buyers. We've got to keep shifting the product to what the consumer wants. We want to stay optimistic, but at the same time you need to stay reserved because there are a lot of things that can change these markets. You don't want to get too excited and you don't want to overthink it. We just have to do the best we can to keep our costs low and production high."

Zach Bowers, who grew up on a hog farm in Northwest Indiana and is a finance and project manager for Vault Ag, a Chicago-based commodity risk-management and brokerage firm, provided a market update filled with more good news than bad.

"We're at the point where we have a really tight supply-and-demand market, which could make things volatile as you've seen the last couple months," he said. "A little swing either way can drive us higher or lower, but I think all-in-all, the industry as a whole is pretty set on the fact it's going to be a bullish year in the back half, and you're going to have higher lows than you had going into the beginning of this year.

"So I think it is going to be a good year. At the same time, we don't want to take our eye off the ball and just assume it's going to be great because you know as well as I do, I don't always know what I'm talking about and nobody really does, right?"

Perhaps the most uplifting aspect of Bowers' presentation was its nearly complete lack of dependence on Phase One of the China trade deal recently signed by President Trump.

"We did make a China deal, but basically, nothing is line-itemed out," he said. "Nobody knows what China means when they say 'agriculture.' They can lump a lot of things into agriculture. All they said is they're going to buy $12.7 billion more than their 2017 baseline, and another $19.5 billion more the next year.

"The grain market actually reacted very poorly to the news of signing the trade deal because there were no details about it, so I guess the market still doesn't believe it's going to happen even though it's been signed. That's something we really want to keep our eye on: when they start detailing things."

The coronavirus outbreak in China that has resulted in hundreds of deaths, quarantines and fear around the world could have a short-term negative impact on the markets, "but long-term, it's probably not going to be a big deal," Bowers said.

He also said the new United States-Mexico-Canada Agreement should have a minimal effect on American dairy since Mexico continued to purchase products throughout trade negotiations and Canada isn't a significant importer of U.S. dairy.

"It's obviously a good thing because Mexico is our biggest buyer of dairy products," Bowers said. "But the good news is that even throughout that whole ordeal, they were actually buying a record-number of products from us, so we were still able to get a lot of good exports off through that. Canada is a whole different beast because of their quota system and all the laws and regulations to even get product up there. Does (USMCA) change the market? Probably not."

A crucial life preserver for U.S. dairy during the downturn was butter, which has enjoyed a renaissance as dietary trends skew toward healthier fat and protein. However, while butter's popularity has surged domestically, exports have lagged because of fat-content requirements demanded in Europe and other nations.

IDP executive director Doug Leman told the group that dairy has to work harder at identifying new markets and moving aggressively to fill demand that already exists.

"What do food manufacturers want?" Leman said. "They want a specific type of product. I think we can go a long ways by starting to make products that other people want. I've had the opportunity to travel on some trade missions over the past few years and in 2014, what I heard in Japan was, `We want to buy U.S. products, we're willing to pay more for U.S. products, but we don't trust you to make what we want.'

"We don't win by saying, 'This what I make, so please like it.' That's a spot where as an industry, we can really move forward."

In addition to butter, dairy's newfound agility is on display in grocery stores that have refrigerated cases full of yogurt while adding portable, enhanced milk products designed to go head-to-head with bottled water—dairy's biggest competition—sports and energy drinks, teas and soft drinks, to their shelves.

"Industrywide, I think we were slower to react to market needs and consumer demands than we should have been," said Brian Houin, IDP president and owner/manager of Homestead Dairy, an 1,800-cow farm in Plymouth. "But I think now we're starting to realize that we need to create new products that are exciting and taste good. A good example is Fairlife (ultra-filtered milk); the market has responded very positively to that.

"Over the next year or two we're going to see even more dairy products consumers will like. People today are so busy and on the move—look at cereal. Very few people are sitting at home eating a bowl of cereal like when I was growing up. We didn't change our products the way the consumer demanded. We're still trying to promote these big, wide, gallon jugs with no fancy labels or anything like that. We're starting to realize what we need to do by creating more on-the-go products that include dairy and I think that's going to be beneficial."

Wisconsin, where dairy is the state's agricultural bread and butter, was hit hardest by the industry's slump —with 1,600 dairy farms going under the last three years—but only because it boasts the nation's most dairy farms. On a percentage basis, Houin said, Indiana dairy suffered just as much.

"The last four or five years have been tough with the Russian embargo and the European stocks coming off quota," he said. "It took, on a global scale, balancing supply and demand, and I think we've finally gotten to that point where supply and demand are meeting up. As long as cow numbers don't jump very high this year, I think we'll be in pretty good shape.

"I don't anticipate that happening because a lot of dairies are doing a lot of cross-breeding, so the heifer inventories continue to shrink. Even if guys wanted to expand, they're going to have a difficult time finding the cattle to do that expansion, so I think the next couple of years are going to be bullish for the dairy industry."

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