Mike Hosterman, an agricultural business consultant for AgChoice Farm Credit, said this year’s Dairy Industry Outlook indicates that 2016 was a difficult year, but it was still a marginally profitable year.
The outlook is for a better price this year and next, he said during last week’s videoconference and luncheon. But there won’t be a lot of room for errors in business decisions.
The U.S. continues to be a top milk-producing country, surpassed only by the European Union. Last year, the U.S. exported 14 percent of its milk supply.
But other countries, including New Zealand, China, Russia and Argentina, also have an impact on the supply and demand of milk and dairy products.
“There are significant headwinds in the United States,” Hosterman said. Cow numbers, milk production, milk per cow and average herd size continue to grow.
The overall size of the cow herd has not grown significantly, but milk production per cow has jumped considerably.
“Over 15 years, we are up 22 percent in annual milk shipped per cow,” Hosterman said. “That is genetic improvement. That is efficiencies that have been gained at the farm. That is driving total production in the world.”
The number of U.S. dairy farms has dropped as individual herd sizes have grown. It’s not a surprising national trend, he said. Producers are trying to grow to keep up with the cost of living by generating more income and minimizing costs.
Milk production has grown in all regions of the U.S., but 69 percent of the new milk production has come from the Midwest, Hosterman said.
Production in the East is growing at a much slower pace, with Pennsylvania’s dairy production increasing less than 1 percent a year compared with the national average of 1.5 percent and New York’s at just over 2 percent.
Pennsylvania, which has about 80 cows per dairy farm, ranks 50th in the country for average farm size, he said.
Conventional business planning encourages expansion during times of low prices, Hosterman said, but dairy farmers need to plan carefully before embarking on an expansion project.
“With all of this extra milk and growth of the business, this should be a good thing,” he said. “But we have to have a demand for that milk. … We could all grow, but if there is not demand we will have to dump it or take a lower price.”
Balancing supply with demand, and marketing are critical issues for the region. “The old adage of you produce it and they will take it” is not true anymore, Hosterman said.
Handlers are charging more to haul milk. Quality and volume premiums are being reduced. Farmers are at risk of losing their markets.
Last month, 11 western Pennsylvania dairy farmers received 30-day notices from Galliker’s Dairy, which blamed growing costs to move surplus milk as the reason for the notices.
Before undertaking an expansion, farmers need to work with their milk handlers. “Make sure you are on good terms with them and your field reps,” Hosterman said.
The average milk price in the Northeast in 2016 was $16.85 per hundredweight, he said. The average farm had a net income of 23 cents per hundredweight or $58 per cow, according to the Farm Credit East’s Northeast Dairy Farm Summary.
Based on an analysis of the farms in his dataset, Hosterman said Pennsylvania’s $17.33 milk price was higher because of the state’s over-order premium. But Pennsylvania farms also have a higher cost of production than New York’s.
“A third of the farms (in Pennsylvania) were able to grow their net worth through earnings,” he said. “Less than half the farms were able to cash flow, make all their payments, pay the bills, pay all the debt and meet their living needs.”
Ag Choice Farm Credit’s Dairy Industry Outlook report is predicting a gross milk price of $18.50 per hundredweight for 2017 and slightly higher at $19 for 2018.
Both projections are higher than 2016 prices but still lower than the five-year average. This year, an average farm is expected to net 54 cents per hundredweight or $133 per cow.
“There’s not a lot of room for error,” Hosterman said.
The average dairy farm will break even this year with “nothing left over,” he said. “It will all go out to make payments and meet demand.
“This is just average,” he said. “Top producers will do better than that. Bottom producers will need to borrow more money. They will have a hard time cash flowing.”
Many farms will also need to borrow money to recapitalize the business, and debt per cow is expected to increase.
Looking ahead, several trends have appeared. Milk prices have been increasing over time along with cow numbers and milk production per cow.
However, capital spending continues to outpace earnings. Farmers made $674 per cow in capital investments despite the difficult marketplace.
“This recapitalization rate continues to exceed operational earnings, and we are seeing increasing debt per cow,” Hosterman said.
Interest rates have remained low but are expected to climb over the long term. “Before you worry about price, you should worry about the debt,” he said.
Pennsylvania producers are going to need to evaluate how to reduce their cost of production, he said.
The Northeast has traditionally served a fluid market in Federal Order 1, and that has boosted the milk price. However, fluid demand is decreasing and is now consuming only 30 percent of the region’s milk supply.
More milk heading to dairy products instead of fluid lowers the order’s milk price. “I don’t see that drastically improving in the near future. Demand is still there, but not for fluid consumption,” he said. “Our basis will continue to be tightened.”
Farmers must improve their liquidity, or the ability to meet current financial obligations, Hosterman said. Strong liquidity helps the farmer withstand short-term price drops.
The industry is also going to have to address its debt per cow. “It’s getting to a level in the Northeast that it is getting us worried,” he said.
There are some farms in Hosterman’s group with a debt of $5,000 per cow and higher. Traditional financial wisdom has encouraged keeping debt below $3,000 a cow.
Source: Lancaster Farming