The death of the mid-sized dairy
Despite improving milk prices, dairy producers across the country continue to struggle. While large farms remain efficient and profitable and small boutique style farms continue to thrive, it’s farms caught in the middle that will likely go out of business, says Curt Covington executive vice president of Farmer Mac.
“I think the dairy industry today probably isn't as bad as what we saw in 2009 but there is a move towards consolidation,” he says.” We are seeing many dairymen across this country that are burning through their herd equity. And I would say there's probably another good six months of pain unless something happens.”
Following a profitable 2017, milk production in the Western states picked up in early 2018. U.S. production increased 1.5% over 2017 during the first quarter 2018, driven by a larger herd and better milking efficiency per cow, Jackson Takach, Farmer Mac’s economist wrote in their summer edition of The Feed.
In the May WASDE report, USDA projected a Federal Class III milk price of $15.05 per cwt in 2018, a $0.60 per cwt increase from April.
“Based on inflation-adjusted income over feed costs,* dairy producers began 2018 with below-average cash flow, with levels like those experienced in 2016,” Takach says.
According to Covington, there are still good operators who have found ways to be profitable in this environment.
“We still see good operators in a very tough industry. They've done a really good job of marketing their milk but in the end, you know debt is debt,” he explains. “In these times, debt can kill a business. So as time goes along the liquidity continues to weaken, working capital continues to fall away, that debt still is there in a low-price environment.”
While farmers from coast to coast are suffering, Covington says there are noticeable regional trends.
“We kind of have a nationwide view of this and it's very interesting, particularly up in the northeast it's really, really tough times,” Covington says adding some of that is related to the size of the farms in that region which he sees as ripe for consolation. “Some of it arises from the fact that they're not the most efficient operators.”
On the west coast, it appears farmers are doing well, even though California, historically, has lower prices than the rest of the country. , Covington says that’s simply the result of diversification.
“The fascinating piece about that is while there are generally larger and more efficient operators down in the Texas panhandle and also on the west coast and through parts of Arizona, if you go out into California many of those dairymen are farming other commodities like almonds and pistachios and other crops that provide a sizable amount of income to offset those losses in the dairy sector,” he says. “So, while they still view themselves as dairymen, many of them are also farming some high value add crops.”
When it comes to surviving current market forces, Covington says large and small farms will be in the position to ride the waves, while mid-sized farms will likely be forced out of business.
“I think as in 2009, we're going to see continued consolidation. This dairy sector and this dairy industry have become very bifurcated,” he says.
According to Covington there are very efficient large farms who do a “marvelous” job of controlling expenses and marketing their milk. Then on the other end of the spectrum, there’s boutique style farms that are maybe bottling their own milk or focusing on genetics. “They continue to thrive because they've got a niche market,” he says.
Then, unfortunately, there’s everybody else in the middle who are likely to sell out.
“I can't say whether that's a 600-cow dairy to a 1,500-cow dairy, but I would say those people in the middle that aren't in a position to downsize, or have a specialized marketing opportunity or aren’t going to gain access to the capital [necessary] to grow and become the most efficient operator.”
Consolidation of midsized farms will happen nationwide, he says.
* IOFC is defined as Class III Federal milk price less average 16% feed ration cost normalized to 30-day months
“Reprinted by permission of Farm Journal media, June 2018”