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External Factors Still Weigh on Dairy Sector

But there is a ray of optimism.

To say the dairy industry has been under significant stress the past four years is an understatement. Record-low prices have been a millstone around the neck of producers, forcing many to the sidelines. 

In 2018 alone, nearly 3,000 dairies (or 6.8% of the total U.S. dairy farms) ceased operation. While the numbers for 2019 are still being compiled, it’s likely that rate hasn’t changed.

As producers move into 2020, there is a ray of optimism. Milk prices are beginning to turn the corner, and some experts predict an average milk price of $18 or higher isn’t far off. Yet, there are a lot of ifs involved when projecting markets. Knowing what could be ahead can help as you develop your 2020 marketing plan.

Tight Feed Supply

A very slow 2019 planting, coupled with record numbers of abandoned planting acres, will mean that the quantity and quality of feed sources may be compromised. Combine that with the high amount of alfalfa winterkill, as well as wet weather during first cut, and it’s a recipe for higher feed prices going into winter.

“We have quite a disastrous situation shaping up in the feed market as we move into 2020,” says Michael Hutjens, professor of dairy science at the University of Illinois. “While there is still a lot of uncertainty as to the size of the 2019 corn crop and the hay stocks, producers would be well advised to get their feed needs locked in as soon as possible. Waiting could mean scrambling to find feed at lower quality and a much higher price.”

The feed situation could have ramifications on total milk supply, as some producers may either not be able to secure feed supplies  or they’ll decide it’s time to exit because feed supplies are too costly. 

“I recently fielded a call from a producer who is exiting the dairy industry because not only have the past four years been difficult, but also he simply doesn’t believe he will have enough feed this winter,” says Marin Bozic, assistant professor in dairy food marketing economics at the University of Minnesota. “I think this will be a real issue that some dairy farmers face.”

Keep Your Nutritionist Close

Getting the most out of every milking is the goal of every producer. With the possibility of changing feed rations because of changing supplies or varied growing conditions, monitoring what’s in your feed will take on added importance. 

“With the potential of lower-quality forages or changing forage sources because producers are scrambling for feed, it will be important to ensure you are meeting the animal’s nutrition needs without sacrificing production,” says Robert Cropp, dairy marketing specialist at the University of Wisconsin.

Lower feed quality could put pressure on overall herd production, boosting prices – but at the cost of paying a higher feed bill.

Caught in the Crosshairs of  the Trade Saga

The elephant in the room is the continuing saga of international trade  and the tit-for-tat tariffs being raised and lowered. Agriculture is in the crosshairs.

“We seem to be moving toward more transactional trade policies rather than coalition trade policies,” Bozic says. “Agriculture seems to be the first area where we see retaliation, because it is a hot-button issue in states that have political importance in U.S. presidential politics.”

Overall, he believes a positive outcome is possible to these negotiations that, ultimately, will have a positive impact on the dairy industry by opening more marketing opportunities. “International trade negotiations can be a long, drawn-out process with many twists and turns until a successful compromise is reached,” Bozic says.

Global Economy

New cheese plants coming online and existing plants boosting production are welcome signs for demand. But the overall global economic situation could have a profound impact on dairy demand and prices.

“A global economic downturn would impact not only the U.S. dairy industry but also the global dairy market,” Bozic says. 

Price Protection

Opportunities exist to provide a bit of a safety net to dairy producers. The Dairy Revenue Protection Program offers a way to remove some of the risk at an attractive rate. 

“I advise producers to look at all margin coverage programs available. Depending on the size of the operation, the programs offer an affordable way to remove some risk,” Hutjens says. 

There is also the futures market. “I know some producers grumble a bit about the futures markets, but it continues to offer some opportunities to lock in prices that offer a profit. That’s something we have not seen in some time,” he says.

“The Tier 1 of the Dairy Margin Coverage Program should be a no-brainer for producers marketing less than 5 million pounds of milk per year, especially in the current market,” Bozic says. “Other price-protection programs can help provide a safety net.”

Whether it’s a global trade war, a recession, or some other factor that impacts dairy prices, he says the one sure way to protect against a severe downturn is to use programs that protect prices.

“There are structural changes afoot in the global dairy economy. Add on top of that the political shuffling, and it continues to be a very uncertain time. Today’s market is subject to external political pressures from other governments that can impinge on our ability to export our dairy products for their political goals,” Bozic says.

More Consolidation, Steady Numbers

ike it or not, 2020 will probably be another year of producers exiting the dairy business. 

“Frankly, some producers who have used equity in their operations to weather the past four years may look at an uptick in prices as a way to exit on their own terms,” Cropp says. 

For some, the past four years “were a mortal wound that can’t heal,” Bozic says. “A boost in cattle prices may make them decide that it’s time.”

Experts expect that overall dairy herd numbers will remain stagnant to possibly a little lower in the coming year. 

“Dairy producers have lost a lot of equity, so they may use a boost in milk prices to catch up on some other bills,” Cropp says.

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