Rising milk prices are the bright spot for dairy farmers looking ahead. But skyrocketing input costs for feed, fertilizer and labor, plus general inflation and uncertain global market conditions, threaten to offset such gains.

"That's why I say tempered optimism," said Willard Peck of Welcome Stock Farm in Saratoga County, N.Y. "Milk prices look better, but feed prices the past couple months have reached all-time highs, and fertilizer for corn planting is like triple the price."

"Everything seems so volatile and on edge all the time," he said. "One bad turn of events and everything could spiral down quickly, like what happened with COVID when everyone was dumping milk. It's a tough business for sure."

An Agri-Mark Northeast milk price forecast says Class I milk, which averaged $20 in 2021, is expected to reach $25.41 this year, its highest point since 2014.

Chris Wolf, a Cornell University dairy economics expert, talked about trends in the dairy industry during a recent 2022 Dairy Outlook webinar put on by Farm Credit East.

"I think the individual farm situation will matter a great deal, but margins should still be above average and above the values of the past six years, except 2020 when government payments made up a large share of net income," Wolf said. "I'm optimistic, particularly if I've got capacity to grow my own feed. If I was planting corn, I'd look real hard at fertilizer. You've got a whole lot of value right now sitting in your manure pit. I would utilize that value. I would be injecting it and getting nitrogen in the root zone. To the extent that I can do that and get a handle on my feed costs, I'm pretty optimistic right now."

In addition, Wolf pointed out the need to manage labor efficiently, especially considering increased minimum wage and overtime costs. New York state has already mandated farmworker overtime payments after 60 hours per week, and a three-member state panel has held contentious hearings on the matter and might recommend lowering the threshold to 40 hours.

The final decision rests with the state labor commissioner.

"Longer term, the incentive is to do labor-saving technology everywhere you can," Wolf said. "Prudent investments in that are going to be key."

Worldview

Weather is always an uncertain variable affecting cost of production, but geopolitical disputes are another cause for concern as these affect exports, which provide a significant share of dairy revenue.

"Russia, a dairy deficit country, is a concern for 2022 directly and indirectly for U.S. dairy and agriculture in general, because there's likely to be a bunch of trade sanctions, which as an economist I think is a bad thing," Wolf said. "But it's not just Russia."

The Biden administration might also impose trade sanctions against China if it exerts power and influence over Taiwan's self-governance. "So those are things to watch that could raise potential uncertainty," Wolf said.

Canadian issues

Northeast dairy producers in particular, Wolf said, could benefit from recent U.S.-Mexico-Canada Agreement (USMCA) developments. The free trade pact, which took effect in 2020, includes dairy, which wasn't part of its predecessor — the North American Free Trade Agreement, or NAFTA.

Under Canada's protectionist quota program, farm milk prices are about twice those of U.S. prices. A very small amount of U.S. milk is imported at lower prices, but most is subject to tariffs that essentially quadruple the price.

"They can't let our dairy come in,” Wolf said. “It would flood the market, and they couldn't maintain high prices, so they put tariffs on our products coming in.”  

Any milk that was allowed in at lower prices was sent to existing dairy processors that had no need for it, virtually eliminating any incentive for bringing it in. In December, the U.S. filed a dispute, saying this isn't what USMCA called for, and claiming it wasn't being allowed real market access. Canada has until Feb. 3 to respond, or the U.S. can impose retaliatory tariffs.

Wolf is hopeful of a resolution that would allow a recently negotiated amount — 3.6 percent — of U.S. milk to be imported, which wouldn't be subject to extremely high tariffs. "New York and Vermont are in a position to benefit from that," he said. "It's not going to be huge, but it opens the door. The important thing is that it sets a precedent and opens the door."

DMC enrollment

With so much industry uncertainty, Wolf encouraged producers to enroll in the Dairy Margin Coverage risk management program.

"The intention is to protect from adverse outcomes even if they are not expected," he said. "For example, you don't buy car insurance expecting to have an accident. There have been other years, which looked good in January, where supply and demand shocks resulted in poor margins. We have the potential for shocks on every front right now, particularly until we get out of this pandemic. The uncertainty of feed costs and milk price values taken together mean there's still going to be a pretty good chance of a payback."

"Given the information available today, the markets are forecasting a 42 percent chance that DMC will be a net benefit," Wolf said. "Historically, the DMC program has paid about two-thirds of the months in basically every year except 2014, so it's something you're going to want to consider, especially for small- and medium-sized producers."

Enrollment is open until Feb. 18.

In a letter to its members, Agri-Mark, the New England and New York state cooperative behind the Cabot Creamery and McCadam Cheese brands, as well as Agri-Mark Whey, encouraged its 650 producer-members to sign up for DMC.

"Supply chains and labor markets are very fragile, and we expect they will continue to impact dairy markets in unexpected ways well into 2022 and beyond," said Catherine de Ronde, vice president of economics and legislative affairs for Agri-Mark. "As long as the COVID-19 pandemic continues, so will volatility within the marketplace."

She encouraged enrollment in the program's Tier I (up to 5 million pounds) at the $9.50 margin with 95% coverage.

More information is available at the website dmc.dairymarkets.org.

Regardless of anything affecting dairy, Wolf said that Northeast producers have one very large, important and distinct advantage in their favor: location.

"The thing we have that the Upper Midwest and South Dakota don't have is proximity to two-thirds of the consuming population in the United States," he said. "That's really hard to beat, especially with transportation and energy costs that we're looking at right now. More firms are looking at innovative ways to use dairy, such as energy drinks that include dairy. Hopefully, we can take advantage of this. If we do, I think the outlook is really strong because I don't think demand for dairy products is going down anytime soon."

Post writes from eastern New York.