he short-term dairy outlook for 2018 appears grim as prices are expected to drop during the first quarter before rebounding in the second half of the year.
The great unknown is whether factors affecting the market, such as exports and production, will improve or if current record-high consumer confidence will give way to an economic downturn, which would hurt dairy even more.
Former Cornell instructor Mark Stephenson, now director of dairy policy analysis at the University of Wisconsin, discussed such issues during a Farm Credit East-sponsored webinar on Wednesday.
“The (low) 2018 milk price is going to feel a whole lot like 2016 was,” he said. “It’s one of the longest price cycles we’ve ever had. It’s not brutal in its depth, but brutal in its length.”
Stephenson described the situation as a “long scrape” as opposed to a deep cut.
However, some farmers might not be able to endure another year of selling milk barely above the cost of production.
About 14 percent of all milk produced in the U.S. is sold overseas, compared to 3.5 percent in 2000.
“So trade has become very important to the U.S. dairy industry,” Stephenson said.
But exports have dipped since 2015, putting more milk on the world market, which affects American farms at the grass-roots level.
At the same time, the price farms get for milk is still high enough that most dairies continue to produce more milk, which contributes to oversupply and keeps prices low.
In addition, there’s little incentive to reduce herds by selling cull cows because the price farms get for these animals is also low.
With efficiencies and improved breeding, the average U.S. cow now produces 23,000 pounds of milk per year, versus about 7,000 pounds in 1960.
Production has gained the most in Northern states such as New York, Wisconsin and Michigan, which now surpass California, the nation’s largest dairy state, in per-cow production. Cows perform better in cold climates than hot, humid conditions.
But the success of Northern states sometimes makes it difficult for farms in these areas to find a market for their milk.
Farm Credit East business consultant Greg McConnell and senior loan officer Cory Kayhart also took part in the webinar.
“We’re going back to the 2016 pricing cycle,” Kayhart said. “It’s certainly going to be tight times. How much more can our balance sheets withstand?”
He predicted that farms will limit capital spending to only the highest return-on-investment projects, to boost production.
Dairies should focus on cutting variable costs such as heifer numbers and feed expenses to make it through tough times, he said.
“A lot of producers have done good in this area, but need to continue to remain viable,” Kayhart said. “We’re dealing with some stress and it will have a big impact.”
Source: The Troy Record