Farmers typically lock in their contracts, which means they’re not necessarily feeling every monthly fluctuation in milk price. Still, that can be a mixed blessing. Because prices stayed high for only a few months, producers might not have seen much of a benefit.
“They probably need at minimum six to eight months to catch their breath,” FC Stone Director of West Coast Dairy James Carr said. “There wasn’t enough time for people to get healthy.”
BIGGER, BUT NOT MUCH BETTER?
Last year was an erratic one for the dairy industry. Early in 2019, class III milk prices were in the $14 range per hundred pounds. In the Magic Valley, producers typically break even at about $17 per hundredweight, so when milk prices are as low as $14, that generally means farmers are losing money.
Then, after years of persistently low prices, milk finally climbed above the break-even price this fall, rising as high as the $20 mark.
Some of that increase was due to the holiday season.
“We see noticeable increases in dairy demand around the holidays,” Idaho Dairymen’s Association CEO Rick Naerebout said. “We also get a bump from the Super Bowl — some companies bring in extra cheese.”
Unfortunately for dairy farmers, prices haven’t stayed high like they were in December. And the dip isn’t all due to seasonal variation.
There’s a bigger reason prices have dropped and will likely continue dropping.
“Coronavirus has got a lot of people on edge around the world,” University of Idaho Extension Ag Economist Ben Eborn said. “Everyone’s wondering what the heck this is going to do to the world economy.”
Markets, including commodity markets, don’t like uncertainty. So even though the coronavirus hasn’t become a pandemic, and isn’t expected to become a pandemic, it’s still disrupting markets.
Carr said he doubts the damage done by the coronavirus outbreak is done yet. But he still expects to see a rebound by this summer, and in general, anticipates 2020 to bring better prices than 2019.
Higher prices could be critical for dairymen. Eborn and fellow University of Idaho Ag Economist Garth Taylor study Idaho dairy industry revenues every year. Last year was a record-breaker, with Idaho dairy grossing $2.8 billion.
That’s a 19% increase over 2018. But while the news sounds good, the underlying numbers are cause for concern, Eborn said. Yes, the Gem State’s dairy industry made more money last year, but that doesn’t mean farmers’ profits rose much, although 2019’s relatively higher prices probably helped.
The gross is up because production is up, Eborn explained. The number of dairy cows in Idaho grew from 617,000 cows to 640,000. That’s a 4% increase from last January to now, and it’s a lot more than the 1% increase seen nationwide.
“You can’t keep prices going up when you’re expanding production like that,” Eborn said.
Dairies continue to get bigger and bigger because, from a financial standpoint, it’s more efficient to be big. The number of dairies continues to decrease across the state, too, but fewer dairies doesn’t lead to less milk. Typically consolidation gobbles up a dozen or so Idaho dairies every year.
Naerebout said that increase in production is outpacing the increase in processing capacity. If the Magic Valley doesn’t attract some additional processing soon, the situation could get ugly.
“We’ve got a significant oversupply of milk,” Naerebout said. “Our milk production at the farm level has grown more rapidly than the processing has. That issue is coming to a head.”
It’s important to note that Idaho’s milk price is effectively about a dollar less than the national class III price, in large part because the state’s processing shortage means a lot of milk has to be shipped out of state for processing, which is more costly.
“The processors are passing that cost on to their suppliers,” Carr said.
Carr said the Magic Valley needs one, if not two, more processors. The oversupply of milk here means a processor would have a steady supply of milk right away.
This year could be interesting from an international trade perspective, too. The Trump Administration has announced phase one of a new trade agreement with China, but Naerebout said there’s still a lot of uncertainty about the dairy industry’s relationship with the world’s second-largest economy.
Both Carr and Eborn said they expect 2020 to be relatively good for the dairy industry, at least compared to the previous five years. Carr noted prices shouldn’t drop too far below break-even as long as the coronavirus doesn’t continue to disrupt markets.
“It’s going to be an ok pricing market domestically,” Carr said. “We’re still going to have $17 milk.”