Thoughts on 2018 Ag Outlook Forum
The annual UW Ag Outlook Forum takes a look at the past year in Wisconsin agriculture and attempts to forecast what might the future hold. Members of the UW faculty give their thoughts.
The ag scene—“2017 was generally a good year for crop production, but with continued low prices for major state commodities, farm income in Wisconsin remains relatively low. The good news is that the multi-year decline in farm income nationally and in Wisconsin seems to have stabilized, summarized Paul Mitchell, Professor Department of Agricultural and Applied Economics, at the UW-Madison, leadoff speaker at the 2018 Ag Outlook Forum.
“The data suggest that most Wisconsin farmers are still stressed financially by continued low prices and high costs, but so far have been able to manage the problem, though these tight margins will continue into 2018,“ he says.
“By mid-2017, milk prices felt as though they were on the way to recovery. We were about three years into price declines from the highs of 2014 but prices never really showed enthusiasm and as we finished 2017, it is clear that market sentiment is negative once again and farm milk prices will be declining as we begin 2018," said Mark Stephenson, director of Dairy Policy Analysis, UW-Madison CALS, summarizingthe dairy pricing situation at the recent UW 2018 Dairy Situation & Outlook Forum.
Stephenson pointed out that farm milk prices are affected at the local, regional and international levels and for Wisconsin producers, none of those have been positive, but the international effects have probably had the most impact.
“The U.S. really began its role in world export markets in the mid-2000’s as exported product increased from 3-4% of milk production to 14-16% today. The result is that the U.S. dairy industry is now dependent on exports in a way much different than a decade ago,” he said.
During that same time California has been losing milk production while Wisconsin, Michigan and New York have been raising their milk flow with Michigan doubling its milk production over the last 15 years; and no state has increased milk production more than Wisconsin,” Stephenson said.
Milk processing plants throughout the upper Midwest have all the milk—and more than they wanted and it is expensive to transport raw milk long distances. This has put downward pressure on over-order premiums throughout the region. Michigan has experienced milk prices below federal order minimums as farmers absorb the costs of transportation and the sale of milk at distressed prices.
Meanwhile, Canada responded to sales of milk protein isolate into their country from plants in Wisconsin and New York by making changes in their pricing program. Thus effectively halting these sales that left an additional one million pounds of milk per day without a home resulting in farms being cut in both Wisconsin and New York.
“Over the last decade we have talked about the existence of price cycles in U.S. markets,” Stephenson says. “Price cycles have been seen to be about three years in length but our current price cycle is likely to be the longest one that we have observed. We are now going into the fourth year of low prices and my forecast would not show a high milk price yet in 2018."
The milk price received has been more than enough to cover variable costs of production (but not total costs) on most farms and thus not bad enough to cause changes in production decisions. However, we are seeing the evidence of the impact with open accounts at suppliers growing and capital purchases delayed, he said.
Difficult to be optimistic
Based on national USDA estimates, the average milk cost of production over the last year has shown no trend and ranged roughly between $21.70 and $23.00 and averaged $22.22. Note: that this cost estimate includes unpaid labor, opportunity costs, capital recovery costs, and general farm overhead costs.
Hence, for 2018, the projected Wisconsin milk cost likely ranges between $21-$24 for most farmers, with higher costs for those with smaller herds and even lower costs for those with larger herds.
“It is difficult to be optimistic about milk prices in the short-run,” Stephenson says. “I am forecasting that farm milk prices will continue to decline through the first quarter of 2018 and probably hit bottom in April or May. At that point, prices should begin to increase on through the rest of the year," he said. "My forecast is that milk prices will look a lot like 2016 prices and will give back the gains of 2017.”
“Corn and soybean prices showed very little change from this time last year. Large world production and carryover is weighing on the markets and will continue to do so in 2018. Continued price weakness should be expected without a production shortfall in one of the world’s major producers,” said Brenda Boetel, professor and chair of Agricultural Economics and Agricultural Marketing Specialist at UW-River Falls.
U.S. corn demand remains strong, although down 1% from last year. Even though the number of cattle on feed has increased, feed and residual use has remained the same as last year.
The potential to see slightly increased feed and residual usage is high. Barring that production shortfall, 2018 harvest prices should be similar to $0.10 lower than 2017 harvest prices.
The price of soybeans is currently higher than the projected ending stocks would suggest. Similar to corn, soybeans have had high production for the last five years, and U.S. production has increased every harvest since 2013.
Planted acreage for 2018 will likely be slightly higher and 2018 may see more acres of soybeans than corn planted for the first time since 1983,” Boetel says.
Good year for livestock
”2017 was a good year for poultry, pork and beef producers,” Boetel continued. “Demand has been strong, both domestically and through exports. Per capita pork, poultry and beef production increased in 2017 and will continue to increase in 2018. Per capita production levels in pork and poultry will likely hit record levels for the fourth year in a row due to the expansion driven primarily from weak grain prices.”
Increased cattle on feed and slaughter in 2018 will bring large production that continues to increase through 2020. Nearly 27.4 billion pounds of beef production in 2018 will increase our reliance on exports. Increased slaughter will give processors greater bargaining power and fat cattle prices will decrease.
Expect a yearly decrease of around 4%. Yearlings and calves will see decreases averaging 3%, year-over-year,” she predicts.
Weather and the unknown
As always the experts end with the clause, “It depends on the weather and other unforeseen conditions.” However the dairy situation is now at the forefront of Wisconsin farm challenges as the loss of 500 dairies last year might indicate.
Rumors abound that many dairies are in financial difficulty but facts are few and far between. Frank Friar, economic specialist at the DATCP Farm Center says calls have increased in recent months with about half centering on family farm succession planning, half on financial challenges.
My conclusion: It’s logical to assume that dairy herd numbers will continue to go down in the state, continuing a trend that began decades ago. Baby boomers are getting ready to retire and family succession is costly unless children get involved at a young age and gain equity early on. Meanwhile mega farms will continue to grow in number and size. The changes continue.
John F. Oncken owns Oncken Communications, a Madison-based agricultural information company. He can be reached at 608-222-0624 or e-mail him at firstname.lastname@example.org.