Stephenson offers dairy producers strategies to improve profitability in high-risk markets

Wisconsin State Farmer
Dr. Mark Stephenson

GREEN BAY - People within and outside of agriculture are quick to blame current global trade disputes for the problems facing dairy producers.

Dr. Mark Stephenson, director of Dairy Policy Analysis at the University of Wisconsin-Madison and director of the Center for Dairy Profitability, says the problems are more complex, and have been developing over several years.

“We’re headed into our fifth year of relatively low milk prices, and that has caused a tremendous amount of strain in the industry,” Stephenson said, as he began his presentation to dairy producers and others in the dairy industry during Alltech’s Wisconsin Dairy School, Dec. 12.

In an effort to help producers develop some offensive and defensive strategies for profitability in theses challenging times, Stephenson reviewed some of the factors causing the strain.

Regional production variables

The region stretching from the Midwest to the Northeast has about 31 billion pounds of net milk surplus Stephenson reported. 

“The Eastern seaboard is generally a deficit area, as is the Northeast if the Midwest is not included in the production totals, as production has been stagnant in recent years,” he said. “The Upper Midwest has seen a steady increase in milk production over a long period of time.”

While the West still has a net surplus, it has been losing some production recently. In the Southeast dairies are sparse, and the region has been having problems retaining milk production. 

“The whole region has a 45-billion pound milk deficit,” Stephenson related. “The animals down there simply can’t maintain high levels of productivity in the hot, humid climate.”

He noted that milk in surplus areas has to get to those deficit regions. “That’s one of the reasons we see great differences in milk prices and products moving around the country.”

Fewer farms, more milk

Stephenson also cited the loss of farms as an industry concern. “The attrition rate is slowing down now, and consolidation has continued to occur throughout the country,” he noted.

Wisconsin is one of the few states that provide dairy farm numbers on a monthly basis. “While it’s normal for Wisconsin to lose 3-4 percent of its farms annually, this year there has been about a 7 percent loss,” he reported.

“While we’re losing more farms, milk production is not slowing down, and we are still producing more milk in the state than we did before. Farms of 1,000 cows and larger are the only ones consistently showing an increase in milk volume,” said Stephenson. 

“Milk production per cow is astonishing,” he declared. “No other commodity has this rate of consistent increase. These high-producing cows are like athletes.”

Stephenson acknowledged that when regional patterns of production change, the whole food system has to change with it. “That means not only where the cows and milk are located but also where the dairy plants are and where we’re processing food, and that makes for a complicated world.”

He noted that Wisconsin, Michigan and New York have increased milk production by 15 million pounds per day. “That increase calls for three big new dairy plants, and we haven’t built three big new plants in the last three years,” Stephenson said. 

A new processing plant is being planned for Michigan, which is projected to cost over $500 million. “Meanwhile milk is spilling into Wisconsin, Ohio and Pennsylvania trying to find that processing home, and this is putting additional pressure on milk prices in the region,” he said.

Trade, exports

“Around 2003 we joined exporting countries of the world, because world milk prices rose to a level that matched U.S. prices, and almost overnight we were competitive with exports,” Stephenson explained.

By 2005 the European Union reduced its subsidies on milk exports, and Europe and Australia milk prices converged with the U.S. “Canada’s milk pricing system has isolated it in some ways resulting in a higher and more stable price,” he said.

“U.S. milk imports had been running about 3-4 percent, but are now declining somewhat because we’re producing some of the products, like specialty cheeses, that we used to import,” he said. “Exports have increased substantially over time, and now we expect to export dairy products.”

While exports are generally good for U.S. producers, the downside is a greater susceptibility to price volatility, and milk products can back up during those downturns, which we’re seeing right now.

“I don’t think we’ll have a full price recovery until we start to see exports in a sustained range of about 18 percent of our milk production,” Stephenson said. “We’re moving back up in the right direction but we aren’t quite there yet.”

He conceded that the U.S. tariffs on aluminum and steel have hurt dairy exports to Mexico, Canada and China. 

“The U.S., Mexico, Canadian Agreement will be good for us but still doesn’t solve the problem with cheese sales to Mexico,” Stephenson said. “The agreement will provide some small additional access to Canadian markets but that will be phased in over several years, and it will take some time before the China situation gets resolved.”

Stephenson believes we’ll see some improvement in prices through 2019 because some of the world supplies of dairy products are being drawn down, but those higher prices probably won’t be really felt on the farm until 2020.

Farm Bill benefits

He see some positive benefits for dairymen in the recently passed Federal Farm Bill.

The Farm Bill significantly changed the Dairy Margin Protection Program, which is now being called the Dairy Margin Coverage Program. “This will be a useful program, particularly for smaller farms because it has higher margins all the way up to the $9.50 level, and premiums are also much lower, with a 15-cent per cwt. premium at the tier-one level.” said Stephenson.

The bill also features Dairy Revenue Protection insurance that allows producers to protect the margin that is being forecast by the futures markets. 

“This can provide some real opportunities we see occasionally in the marketplace and want to protect our risk. It’s a good tool because it can minimize basis risk, and can be an inexpensive put option for larger farms,” said Stephenson.

“We have a trend toward high productivity in this country,” he said. “And that is colliding with weather patterns, changing regional patterns of production, and is also changing the tilt of milk prices in the U.S., where we’re getting a lot of milk in places where we don’t have the processing capacity to handle it all, and that’s putting downward pressure on milk prices.

“As a dairy producer you really need to have a marketing plan in place that let’s you think about under what circumstances you would do something to protect a portion of your milk supply and milk price,” Stephenson advised. 

“If milk markets are at historically high levels and the margin is kind of sideways, maybe you place a put option under that price. You have a lot of decision tools so you can take the emotion out of the decision-making process. And you really need to watch for marketing opportunities,” he stressed.