In early 2015, American Agriculturist’s Profit Planner panel responded to a young farmer’s question whether it would be a good time to start planning expanding his dairy from 160 to 300 cows – reaching that production level in 2017.
The panelists generally agreed.
Now, another dairy farmer questioned the wisdom of that advice. With some of the panel’s responses still to come in, they’re generally sticking with their original advice.
SENSE HER DISBELIEF? Profit Planner panelists tend to agree that the cure for low prices is low prices, and that milk price recovery will get underway in 2017.
But what about the current bottoming of the milk price cycle and still more production quotas coming? Consider this from panelist Mike Evanish, farm business consultant and business services manager of Pennsylvania Farm Bureau’s Members’ Service Corp.:
“The past year has seen the entire dairy landscape change. Milk prices have dropped a third or more. Profitability on even the most efficient farms is questionable.
“At least one cooperative has instituted a quota system in Pennsylvania, that’s going nationwide. Dairy farmers have lost markets resulting in the need to sell their cows, and more.”
What’s behind this dramatic change
A lot has happened, says Evanish. Here are just a few items that have impacted milk prices:
* The European Union discontinued quotas. “Article after article said that it wouldn’t result in greater production. Well guess what? Production went up.”
* For a long time, cattle and embryos have been going to India to help their dairy industry get on its feet. The long-term project succeeded, and India has become pretty much self-sufficient. “Check off one major export market that won’t be coming back. Also, look for them to begin exporting dairy in the not so distant future.”
* The dollar is trading at a very high level. That makes U.S. milk more expensive on the world market, and slows exports. “The last figures I saw show that exports are off about 2%,” adds the PFB analyst. “They’ve dropped from over 15% of production to about 13%. While 2% may not sound like a lot, it has had a major effect on prices.”
* Cheap oil might seem like an odd reason for milk prices to drop. “But if you think about it, cheap oil makes it less expensive to move a bulky product like milk around the nation or the world,” he explains. “Cheap oil adds to the downward pressure on milk prices.”
* Finally, a relatively new major player – customer preferences – is becoming more important. “While the average person has no idea what an artificial growth hormone is, or what a GMO is, they do know that ‘they’re bad.’ Remember, facts have nothing to do with any of this,” emphasizes Evanish. “They’re being ‘taught’ in school and in the press that products like almond milk – which isn’t milk and contains some very nasty-sounding chemicals – is good.
“More examples are available. But you get the point.
“Given the headwinds faced today, and I didn’t even mention expense issues, stating that it’s a bad time to expand would be easy. But I’ve always been a contrarian.”
Brighter future?
Many factors will make dairy farming’s future bright, contends Evanish. “Population growth and worldwide income growth are projected to be substantial in the coming years. That’s important because as incomes rise, so does the intake of high-value foods like milk.
“And, the average dairy farmer is about 60 years old, meaning he’ll be out of business shortly. That means younger farmers will have a greater opportunity to prosper in the not so distant future.
“’How?’ you ask. If you can secure a long-term market (contract) for your increased production, and your budgets are positive at current prices (no pie-in-the-sky assumptions), long-run odds of success are in your favor should you do the expansion.’”
Watch for the full panel’s answers in the soon-to-arrive May issue and here next week. Look for “Dairy expansion still a thumbs up?”
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