Even though the dairy economy is not as strong as it was last year when milk prices hit a record high, it could be a whole lot worse, says Sam Miller, managing director, group head agricultural banking for BMO Harris Bank.
"It's not the best of years for dairy producers but it's not the worst," Miller says. "If you look back at 2008 which was a great year for milk prices, it was followed by 2009 which was a horrible year. The Class III price in 2008 was $17.44 and in 2009 in averaged $11.36. That's a similar price decline from 2008 to 2009 and 2014 to 2015 but this year thankfully is nothing like 2009."
The Class III milk price in 2014 averaged $22.36 per hundredweight.
"It was an incredible year," Miller says. "This year, Class III prices are between $16 and $17 per hundredweight. That's pretty close to breakeven for most dairy producers."
The cost of production is coming down on dairy farms due to declining feed costs. Through the period of high grain prices between 2007 and 2013, Wisconsin was the place to be when it came to milking cows, Miller says. Now corn is cheaper to buy than it is to grow.
"The challenge in the water-short areas like California, which is suffering through the fourth year of a severe drought, is that forages are expensive to produce," he explains. "So the advantage still goes to Wisconsin producers who grow most of their feed."
Miller says Wisconsin dairy farmers are also benefitting from lower land values and cash rents.
"If you compare Wisconsin land values with other parts of the country like Iowa, Illinois and Indiana, Wisconsin land values haven't gone up as much, which is a good thing," Miller explains. "Higher land prices help your balance sheet, but it affects your costs. If you are renting land or buying feed, that higher cost is going to be imbedded in the price that you pay for it."
Last year was a great year for all dairy farmers.
"2014 allowed farmers to pay down their mortgages and lines of credit, defer income, pay down their payables and prepay feed, seed, fertilizer and chemicals," Miller says. "That helped them with some of the changes with cash flow this year. If you weren't paying for feed the first few of months this year or seed and chemicals, that helped cushion you some from lower milk prices."
Fuel prices were lower this spring too which helped when dairy farmers were emptying manure storage and doing fieldwork.
"This year we've had cheaper corn prices, cheaper feed prices and cheaper fuel prices," Miller says. "We didn't see much relief in seed, fertilizer and chemical prices. Rents in heavier cash grain areas of the state went down. In dairy areas there was not much change in cash rents, but rent prices never got as high as they did in cash grain areas."
Milk prices can swing substantially.
"It doesn't really matter what the price is, the number that matters is the margin," he explains. "What important is the bottom line. And people don't like to 'leave money on the table.' But a better attitude is how much profit do you want or how much do you want to limit your loss?
"We like volatility when prices go up, but we don't like it when prices go down. Volatility is hard to manage," Miller explains. "It is a challenge in any commodity business. The thing with volatility is you don't know if the price going to break out at the top or fall through the bottom."
The futures market does not have a very wide variation between high and low prices during the next 18 months.
"There isn't $1 difference between the top and bottom," Miller says. "If you look back at the Class III milk prices for the past five years on average the high and low variation has been about $5."
*In 2010, the low price was $12.78 and the high price was $16.94 (per hundredweight). That's a $4.16 difference.
*In 2011, the low price was $13.48 and the high price was 21.67. That's an $8.19 difference.
*In 2012, $15.23 was the low price and the high price was $21.02 That's a $5.79 difference.
*In 2013, the low price was $16.93 and the high price was $18.95. That's a $2.02 difference
*In 2014, $17.82 was the low price and the high price was $24.60. That's a $6.72 difference.
"The low price so far this year was $15.46 in February and the high is $17.61 in July. September is trading at $17.78," Miller says. "That's only a difference of $2.32 which is a lot less volatile than most of the past five years."
So why did we have high milk prices in 2014?
"Because there was strong demand for dairy exports," he says. "Why do we have lower prices in 2015 -- because we have lower exports."
One of the challenges for all commodities, Miller notes, is the strength of the dollar.
"It costs more for other countries to buy stuff from the U.S. than it did a year ago because our dollar is stronger. You combine greater supply with lower demand and that's why we're seeing lower prices."
Record-high beef prices is another dynamic helping dairy producers.
"We have also had strong beef prices in 2013-2015 as opposed to 2009 when beef prices were very low," Miller notes. "Culling cattle in 2009 did not help your bottom line. Cull cow prices and bull calf prices have been very strong. That's helping the top and bottom line."
Miller notes that now is a relatively stable time in dairy farming
"Farmers' balance sheets are in pretty good shape," he says, "and they're working hard to make adjustments to improve their bottom line."