Dairy dilemma

Low milk prices have farmers, ag community unsure of future

Posted on Jan 30, 2019 :: Insight Insider
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Posted by , Insight on Business Staff Writer

Wisconsin may be known as the dairy state, but right now its dairy farmers and processors are struggling to deal with low milk prices and trade issues that either close foreign markets or make their products more expensive than others. And with Northeast Wisconsin home to literally thousands of cows, that struggle is hitting close to home.

“We are entering the fifth year of low milk prices,” says Mark Stephenson, a dairy policy analyst for the University of Wisconsin’s College of Agricultural and Life Science’s Center for Dairy Profitability. “Milk prices tend to cycle, but usually after two to three years being low, they head back. Not this time around.”

Milk prices are nearly 40 percent lower than they were four years ago, while shipments to China have fallen nearly 65 percent.

Those numbers have led to challenges on dairy farms — both financial and health-related issues as farmers struggle with stress and depression. A mid-January event in Kiel coordinated by University of Wisconsin-Extension offices focused not only on how farmers can manage their financial woes, but also their emotional ones. Information also was shared about the state’s Department of Agriculture, Trade and Consumer Protection’s Farm Center hotline — a resource farmers can turn to in navigating the ups and downs of agriculture.

Tim Trotter, executive director of the Edge Dairy Cooperative, which represents farmers in nine Midwestern states, says the ongoing low milk prices are difficult for farmers to deal with.

Almost all the dairy farmers we speak with are concerned about how much longer prices will remain low and what they can do to make it through this difficult time,” he says. “Depending on their financial and equity position before the downturn, some dairy farmers have decided to stop milking cows. Some are retiring. Others are continuing to farm but are no longer raising dairy cattle.”

While many variables are causing the low milk prices, Stephenson says it boils down to one issue: supply outweighing demand.

“We have really grown to be a dairy product exporter, but there’s softer demand in the market,” he says. “There are a number of countries we are competing with and they have increased milk production.”

Since the United States produces more milk than its residents consume, exports and access to export markets is essential, says Dave Coggins, executive vice president and chief banking officer for Investors Community Bank.

“That means that things like the value of the dollar, trade wars, economic vitality of key global markets and dairy expansion in places like the EU and Oceana are all difference makers,” he says.

The ongoing trade war between the United States and China isn’t helping matters, Trotter says.

“We have seen our exports, particularly to China, falter because of retaliatory tariffs. China is one of the markets with the most opportunity,” he says. “Cheese exports to Mexico, our largest export market for dairy products, seem to be holding on despite retaliatory tariffs there. Still, we would like to see strong growth in exports to these countries, and the tariffs work against that.”

For farmers here, that has led to low milk prices and dairies needing to make enough selling their milk to pay the bills, including feeding and caring for the animals, without depleting their savings.

“The strain being felt by area farmers is real,” Coggins says. “The length of time that milk prices have been below trend-line levels has been much longer than for any period in recent history. That has put pressure on farm checkbooks and impacted bottom-line profits and farm balance sheets.”

If worrying about milk prices and export levels were not enough, there’s also a scarcity of milk processing facilities, especially near areas of large milk production such as in Northeast Wisconsin and parts of Michigan, says Greg Blonde, ag agent for UW-Extension in Waupaca County.

“When you don’t have the processing capabilities, it adds to the whole situation,” he says. “There are some new processing facilities being built in Michigan, which should help. Right now, the processing capabilities are maxed out.”

 

Larger effect

When milk prices fall, farmers obviously have less money to spend, which affects ag retailers and suppliers.

“Right now, farmers will try not to spend money on anything they don’t have to,” Stephenson says. “They aren’t spending money in their communities, which impacts other businesses.”

If a machine breaks, for example, farmers will choose to repair it rather than replace it, he adds.

It’s not all gloom and doom for farmers, however. Stephenson says many farmers bought new equipment earlier in the decade when milk prices were higher. Feed prices also are low since many corn and soybean producers have excess on hand due to the trade stand-off with China.

While the state keeps losing dairy farms, Coggins points out that cow numbers and milk production for Wisconsin have not declined during this recent downturn.

“While we have had a loss of around 700 farms in Wisconsin in 2018, for an example, year-over-year milk production was stable, so how that plays out in terms of the state and regional economy is hard for me to estimate,” he says.

The use of technology and improved production management — such as monitoring cows’ productivity levels, which can be an early sign that an animal isn’t feeling well — have increased the amount of milk produced per cow, Blonde says.

“Farms that utilize technology and use big data will continue to grow,” he says. “We may have fewer dairy farms, but milk production continues to increase.”

From the business side of things, Coggins says strong farm management skills are a must during trying economic times.

“The best managers tend to spend the bulk of their time focusing on the things they can control … expenses, efficiency, marketing, etc.,” he says. “And we’re seeing some fairly bold, new approaches to solving some of their challenges. Doing everything the same way you’ve always done them doesn’t seem to be acceptable these days.”

Some farmers may receive government assistance to cope with low milk prices thanks to some protections in the new Farm Bill, but the government shutdown has put some of that assistance on hold, Stephenson says.

Until dairies stop producing more milk and cheese than the market can sell, Coggins says the industry will continue to face challenges. But, he says there’s hope.

“In spite of today’s challenges, the long-term outlook for dairy remains strong. The projections for world population growth to 9 billion people in the next 30 years, combined with the limited amount of arable land available to feed that expanded population, means good things are likely in store for American agriculture in the future,” he says. “It’s just likely to continue to look different than it used to.”

Blonde says the futures market predicts an increase in milk prices by the end of 2019.

“Farmers who use their risk management strategies well and can hang on will do well,” he says. “You need to wait the bad market out.

“There’s another bright spot: Consumption of cheese and other dairy products continues to increase. As more people around the world move into that middle class, they see dairy as a quality source of protein,” Blonde continues. “That bodes well for us.”