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The State of Dairy 2018: Uncertainty in the Midwest

Progressive Dairyman Editor Dave Natzke Published on 13 March 2018
Midwest state of the dariy

The March 12, 2018, issue of Progressive Dairyman features our annual regional snapshots of “the state of dairy” around the U.S. Expanded previews for individual regions are highlighted in this online series.

Deb Reinhart, Wisconsin dairy farmer and executive director of the Professional Dairy Producers Foundation, said dairy farmers are concerned, and it seems, more than ever, the factors impacting their livelihoods are out of their control.

“It’s kind of scary out there,” she said. “We have spent years building these businesses, and now, the future seems uncertain.”

Milk prices – currently at about breakeven – are worrisome for the coming year. In addition, the rural labor market is tight.

“Many of us must bring in the next generation, which requires more income, better environmental stewardship and more investment to pay for those improvements that do not necessarily generate more income,” she said.

Reinhart said milk production in excess of processing capacity puts more power in the hands of processors. Producers are being asked to pay for hauling costs, while quality and volume premiums are cut. The implementation of base plans do not allow the growth necessary to bring in the next generation of dairy farmers.

“We eagerly await the plants in Michigan and Indiana coming on line and hope it takes some of the pressure off Wisconsin,” Reinhart said.

For the most part, feed inventories seem good and prices are lower, helping avoid the dire economic situation of 2009, Reinhart said. However, two feed-related concerns are emerging: custom growers of corn silage and hay may switch to more profitable crops; and the lack of adequate snow cover this winter is leading to early worries of alfalfa winterkill.

Minimizing losses

Compeer Financial’s Greg Steele said he has seen the concern, although the mood is better than many would expect.

The milk price is the leading worry. Last year brought break-even prices and modest profitability, but that was not shared by all, and 2018 will result in financial losses for many, he said. A small minority may be forced to exit the dairy business. Those who worked with lenders and have working capital – and those who locked in milk prices – will limit losses.

“It takes discipline for a dairyman to commit to a price that they know will result in a loss,” Steele said. “However, they have the assurance that they know what that loss will be, rather than it being open-ended.”

Little processing expansion is limiting available markets and keeping the lid on any production growth. Milk premiums have eroded and are the new reality.

“Producers are diligently evaluating their cost structures and operational efficiencies while also making sure they maintain production and are selling high-component milk to offset the lower prices,” Steele said.

Worry over labor is on a case-by-case basis, with availability and higher wages forcing dairies to stay on top of human resource management. Steele is seeing much greater interest in robotic milking systems, even among CAFO-sized operations. In some cases, they’re adding a robotic barn to an existing conventional parlor-freestall setup.

“Milk prices, including loss of premiums and added hauling fees in some cases, negative cash flows and a very limited-to-nonexistent labor supply are all tied (as leading concerns),” said Greg Blonde, Waupaca County Extension ag agent. “Concern over future trade and immigration policy also come up quite often and only add to the cautious if not negative outlook.”

Processing capacity is full, limiting growth opportunity.

“Recently, a dairy farmer from the eastern U.S. contacted me saying he was all set to purchase a dairy farm in Waupaca County, but could not find a buyer for the milk,” he said. “Lenders are asking those who are considering expansion to discuss their plans well in advance with the milk plant.”

As a result, Blonde said he expects 2018 milk production will be steady and might even decline. Factors include the loss of recombinant bovine somatotropin, less expansion, more culling and the financial squeeze, leading to dairy farm dispersals.

Fortunately, land values are holding steady, and adequate feed supplies and lower prices provide some relief, but shortages of vitamins A and E are driving up costs.

Although hopeful for better milk prices, the economic situation is adding stress.

“Some lenders are not extending operating loans,” Blonde said. “We are keeping an eye out for the health and well-being of family, friends and neighbors. It’s tough, if not tougher than 2009.”

If they haven’t already, Rod Wautlet, with Agri-Business Consultants LLC, urged dairy farmers facing uncertainty to finish 2018 cash flow projections with a business plan and see their lender.

“Lenders want to know producers are aware of the current situation. They also know there are dairy farms that will not make it through this cycle,” he said.

“Communication is essential. Be proactive with your lender, and make key vendors aware of your situation,” Wautlet said.

In addition to milk prices, the loss of basis is a growing concern, with few if any options to move milk to another processor in hopes of gaining premiums.

“Producers are handling their processors with kid gloves,” Wautlet said. “They know looking elsewhere is not likely.”

Economics adds to family stress

Like Reinhart and Blonde, the situation goes much deeper than finances for Lucas Sjostrom, executive director of the Minnesota Milk Producers Association. He characterizes the mood as cautious if not pessimistic in Minnesota, with economic conditions adding mental health stress to farm families. One thing that seems to help is when farmers get together at workshops and meetings, even if bad news is shared.

“It may be a scenario of fear if you avoid the bad news, whereas you can manage through it if you know what you’re dealing with,” he said.

The dairy business climate is perceived as poor, and regulations and costs related to them create uncertainty. Combined with processing capacity issues, future expansion opportunities are clouded.

“Everyone is at a different spot in life, but those who want to bring new partners – sons or daughters, or outside partners – into a farm are having a hard time finding a home for their potential new milk,” Sjostrom said.

There are incremental increases in processing capacity coming on line. Plants are finding ways to be more efficient, and several expansions and modernizations have begun within the state and right outside its borders, he said. Like other areas, Minnesota is seeking “the big one” to make a sizable impact in making a home for Minnesota milk production, and legislative work last year may provide an avenue for that.

“Our current cooperatives and processors remind us it’s finding a market for the end product as the biggest unknown risk for them,” Sjostrom said. “If they can identify that and a plant can make a return for the patrons or proprietary plant with an acceptable amount of risk, obviously they would do that."

While feed supplies are good, Minnesota, too, has seen inadequate snow cover this winter, and extremely low temperatures are adding to alfalfa winterkill concerns.

Read also:

California in transition

Uncertainty in the Midwest

Northwest turning to short-term 

Two forms of concentration in the Southeast

Apprehension in the Northeast 

Texas and New Mexico optimistic end mark

ILLUSTRATION: Illustration by Kristen Phillips.

Dave Natzke
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