Experts find optimism for milk prices; along with farm losses, bankruptcies

Jan Shepel
The outlook for agriculture in the coming year is a picture of light and shadow – some optimism and some pessimism.

MADISON – The outlook for agriculture in the coming year is a picture of light and shadow – some optimism and some pessimism.

Wisconsin still leads the nation in Chapter 12 farm bankruptcies, as it did a year earlier and during 2019 the state lost more than 10 percent of its dairy operations as farmers sold their cows amidst a fifth or sixth year of poor milk prices. The good news is that farm income was up -- the bad news is that without a huge influx of payments from federal farm programs, farm income would have been flat or down in 2019.

Farm financial experts note that 80 percent of farm family income comes from off-farm sources.

There’s optimism in the fact that the overall U.S. economy remains strong, making it possible for consumers to keep buying; farmland values have held up especially in the Midwest, meaning there won’t be a “farm crisis” as there was in the 1980s; and milk prices are likely to trend upward after a slump in early 2020.

Each year agricultural economists and farm leaders gather in Madison to take a look back at 2019 and look forward to the New Year during the annual Wisconsin Agricultural Outlook Forum held January 28 on the University of Wisconsin-Madison campus.

Mark Stephenson, director of dairy policy analysis and director of the Center for Dairy Profitability at the UW-Madison, predicted a better outlook for 2020 “with a few asterisks.” Economists disagree on whether or not the U.S. economy is going to slide into a recession, which would be bad news for everyone, including those in the dairy industry.

With 2020 being an election year, he predicted that those in the nation’s capitol will tug on as many strings as they can to make sure the economy stays humming, especially through November.

In the dairy complex, Stephenson noted that U.S. cheese stocks have been reduced to a less burdensome level, which helps the price of milk have a little more upward potential. When stocks of product rise too high, it creates downward pressure on prices. During 2019, he said, cheese stocks got to a “more comfortable place” even though supplies aren’t really what analysts would call “tight.”

Mark Stephenson, professor of agricultural and applied economics at UW–Madison speaks at the Renk Agribusiness Institute’s Agricultural Outlook Forum held at Union South on the campus of UW–Madison in Madison, Wis., Tuesday, Jan. 28, 2020.\r\rPhoto by Michael P. King/UW–Madison CALS

By contrast, butter stocks are growing and there have even been imports of butter, based on global and U.S. prices, which helps depress milk prices to U.S. dairy farmers.

While dairy producers had increased their cow numbers in 2015, 2016 and 2017, there was no rapid growth in dairy cow numbers in the past two years, he said. As a result, U.S. growth in milk production has slowed. “That has also allowed the cheese stocks to clear,” he added.

Consumption of fluid milk continues its descent as consumers choose other drinks, like bottled water and plant-based drinks. Two major fluid milk businesses (Dean Foods and Borden) recently filed for bankruptcy but Stephenson doesn’t believe this reflects the overall health of the industry – fluid milk processing is a business of thin margins, he said.

He predicted a downturn in farm milk prices over the next few months but said they would improve as the United States continues to whittle down its dairy stocks and milk production continues to slow, both domestically and in other global dairy areas. Trade agreements and the certainty they bring, along with a relatively strong U.S. economy will continue to improve the price picture.

Stephenson said he will be watching the “spring flush” in the dairy industry. If it is heavy – 620 million pounds per day – that’s going to depress milk prices. If it stays at a moderate level like 615 million pounds per day, that will bode well for milk prices.

$20 milk again

With all the factors considered, he believes that dairy farmers are likely to see $20 milk again by the end of this year. Stephenson predicted a price hike to dairy farmers of $1.20 per hundredweight (for the all-milk price average) in 2020. That’s on top of the $2.36 per hundredweight estimated price increase (when all the data is in) for 2019 over what it was in 2018.

Feed supplies may very well play a big part in the dairy picture. Poor quality feed for dairy cows, or not enough feed to sustain top production may pull down cows’ production and shorter supplies of farm milk will cause prices to rise. “Feed quality is not just an issue in the Midwest,” he said. “It’s true in the Northeast and in other regions.”

As he attends farm meetings, Stephenson said issues of feed quality (and quantity) are on producers’ radar. “Almost every meeting has a session on alternative feed.”

The loss of dairy farms in Wisconsin will “have a long tail,” and he’s concerned about the effect that the closure of these farms will have on rural communities around the state. Wisconsin continues to lose dairy farms at the rate of 2.2 per day. The state lost more than 10 percent of its dairy farms in 2019.

Stephenson began his career in the 1980s and was “dropped into a maelstrom” as the farm crisis churned. He called that decade a “substantially difficult time” adding that “for dairy, this is another one of those times. We’ll still have a dairy industry but it will look different.”

Crop production

As farmers know, crop production in the 2019 growing season was “horrible” to use the word of ag economist Paul Mitchell, director of the Renk Agribusiness Institute. So-called “prevent plant” acres in the United States were at a record level – 20 million acres. Some of the worst states hit by early season weather that prevented planting were South Dakota, North Dakota, Minnesota, Indiana and Ohio, he said.

Paul Mitchell, a professor of agricultural and applied economics at UW–Madison, speaks at the Renk Agribusiness Institute’s Agricultural Outlook Forum held at Union South on the campus of UW–Madison in Madison, Wis., Tuesday, Jan. 28, 2020.\r\rPhoto by Michael P. King/UW–Madison CALS

Wisconsin had 593,000 acres of “prevent plant” according to Farm Service Agency records. Prior to 2019, the worst “prevent plant” situation in the state was 6.6 percent of corn acres. Last year it was 12 percent for corn and 7 percent for soybeans.

Crops that did get planted remained about two weeks behind normal maturity as the bad weather continued throughout the year.

The last report of the cropping year, which came out from the National Agricultural Statistics Service (NASS) on December 8 showed that in Wisconsin, only 74 percent of the corn was harvested by that date and only 88 percent of the state’s soybeans were in. The north-central region of the state was the worst hit with prevented harvest. In that region of the state only 46 percent of the corn was reported as harvested.

Mitchell said that 75 percent of the corn and soybean acres in the state are insured and to date, crop insurance has paid $204 million in indemnities to state farmers. That number is expected to rise.

In addition to the poor crop performance, late harvest and prevented plantings, Mitchell said there was also a lot of damage to fields as farmers tried to harvest crops in wet conditions.

Farmers who have livestock also know that 2019 was a terrible year to try to make hay. When hay stocks were reported in May they were the lowest since 1950 and the hay stocks report from December showed the second lowest hay stocks since 1950, he said, so the situation didn’t improve much during the growing season.

In addition, there are concerns about the low quality of 2019’s silage. Much of it was harvested with very light test weights.  “Dairy nutritionists that I have talked to said they are concerned that cows are not going to milk very well on this ensiled feed and everyone’s very concerned about toxins in the corn silage,” he said.

Farm Income

Mitchell said that USDA economists have pegged U.S. farm income up 12.9 percent to $119 billion but without the array of payments to farmers from the federal government, farm income would be flat or down. Most of the uptick to farm income was attributed to the Market Facilitation Program (MFP) which exceeded $14 billion to farmers over payments made in 2018 and 2019.

Wisconsin farmers received $260 million in MFP payments, according to the FSA. Payments to Wisconsin farmers from the Dairy Margin Coverage (DMC) program in 2019 amounted to $69 million.

“Farm programs were a big deal in Wisconsin in 2019,” Mitchell said. With the MFP and DMC added to ARC and PLC payments, Mitchell said Wisconsin farmers have gotten $500 million from all the programs for 2019, so far.

Some good news for farmers is that land values are holding up in the Midwest so “it’s not like the 1980s,” he said, but ag lenders are starting to worry about their loans to farmers. In a recent survey of those lenders, 74 percent said they were concerned about ag loan deterioration.

Mitchell said that Wisconsin continues to lead the nation in farmers filing Chapter 12 bankruptcy with 48 (as of September) – far more than any other state.

In 2019 Wisconsin lost dairy farming operations at the rate of over two per day. Statistics showed that the state lost more than 10 percent of its dairy farms last year. Many dairy farmers have decided to retire early or raise beef.

As smaller dairy farms go out, the average size of a dairy herd in the state is rising. In January 2019, the average state herd was 132 cows. Now, a year later, it is 173 cows, Mitchell said.

“If we keep sailing the ship where we’re going it means more consolidation in the dairy industry,” he added.