April 28, 2017

Margins Will Keep Milk Flowing This Year

 |  By: Fran Howard

Milk continues to flow in the United States despite slim profit margins for dairy producers. Last year, margins were thin, yet dairy producers continued to expand. Between 2016 and 2017, the nation’s dairy producers added 59,000 cows. This year, with margins expected to improve from last year’s levels, milk production will likely continue to outpace year-ago levels.

At the end of March, Class III futures were projecting an average price of $16.50/cwt., up $1.66 from 2016’s actual average Class III price. Likewise, Class IV futures were projecting an average price of $15.21/cwt. for 2017, up $1.34 from last year.

“Like last year, dairy producers who also farm will likely have very little farm revenue to cover costs,” says Sarina Sharp, agricultural economist with the Daily Dairy Report. “Land values continue to slip, reducing producers’ potential collateral for loans, and agricultural lenders are in no position to be generous—interest rates are on the rise, and profits look slim for farmers and livestock producers.”

Costs will continue to rise for dairy producers in 2017, particularly wages. “Tighter labor markets will increase the cost to milk cows as well as the cost to build new facilities,” says Sharp. “Together, these factors could limit the prospect of robust growth in U.S. milk production, but milk price will always be the final arbiter.”

It’s doubtful that U.S. dairy producers will make a substantial push to expand in the foreseeable future, thus the bulk of the current spate of U.S. dairy expansion has probably already occurred.

“The largest barrier to further growth will be the lack of manufacturing capacity available to process more milk,” says Sharp. “The problem is especially acute now that spring flush is accelerating in some key milk-production states.”

According to a recent issue of Dairy Market News, there was plenty of milk available for processing and many manufacturers were at or near capacity in late March. Some areas were even reporting a shortage of tankers.

“Over the past four years in areas that have seen the greatest expansion, surplus milk is now weighing on producers’ premiums, reducing their bottom lines,” notes Sharp. In 2013, for example, she notes that dairy producers in Michigan received an average of 43 cents per hundredweight more for their milk than producers in other states, based on the difference between Michigan’s All-milk price and the national All-milk price. However, by 2016 Michigan producers were receiving $1.15/cwt. less for their milk. During that same time period, the state’s milk production grew 18.4%, much faster than the increase in processing capacity in the region, Sharp adds.

“Other factors are also likely to weigh on dairy producers’ appetite to invest in larger facilities or more cows in the near future,” Sharp says. “Holstein bull calves are practically worthless; values in the first quarter were less than half of where they stood at this time a year ago, and they have plunged more than 75 percent from the first three months of 2015.”

Day-old calves are bringing only about 
$100 a piece, she says, and cull cow revenues are no better than they were a year ago and sharply lower than they were in 2014 and 2015.

“The value of cull cows, Holstein bulls, and day-old calves represent foregone income, which in the past could have been used to finance expansion,” Sharp notes. “That income would have been especially helpful in 2017 now that dairy producers are even further removed from the cash they built in 2014 and 2015 when milk prices were much higher.”