milk trucks
October 16, 2018

Processors Demand Quality Milk, But Most Won't Pay For It Anymore

 |  By: Anna-Lisa Laca

At the start of the year, John Pagel, of Pagel’s Ponderosa Dairy in Kewaunee Wisconsin, found out the company he ships milk to would be cutting their quality premium structure by roughly 65%. Pagel is not alone. Farmers across the country have lost these premiums over the past six months and are forced to figure out how to adjust budgets to accommodate a decrease in revenue.

“Milk premiums of all sorts are being trimmed right now,” says Mike North of Commodity Risk Management. “That will continue in response to the overwhelming supply of milk being witnessed across the upper Midwest and outlying areas. This will not be a story surrounding just one buyer, but rather most of them.”

According to Matt Lange, a dairy consultant with Compeer Financial, the loss of premiums and reduced basis are both widespread issues that will continue, particularly as spring flush arrives. He advises farmers go through their budgets with a fine toothed comb. Pagel is working with his management team to do just that.

“When you already have low milk prices, and then you lose your premiums, you lose another 10% of your income just from the premium structure changing, besides the drop in milk prices,” Pagel says.  “We’re doing whatever we can to look for efficiencies that we’re not currently seeing.”

Analyzing expenses alone won’t be enough. Lange says you’ll need to adjust the revenue side of your budget to reflect what your processor is actually paying.

“Go back and evaluate what your milk price has been and then budget for lower basis reduced or non-existent premium structures,” he says. “For some clients in the Midwest I’m basically taking Class III and saying ‘OK that’s your mailbox price for 2018.’”  This is based on their historical basis and what their processors have said.

Processors demand quality milk. Pagel hasn’t lost all of his premium structure but even if he had, he wouldn’t back away from producing the highest quality milk he can.

“It’s always in a dairyman’s best interest to have the healthiest herd you can,” he says. “We’re going to continue to produce high quality milk regardless of the premiums.”

That’s what processors are counting on.  There is so much milk on the market in the Midwest that processors don’t need to pay more for milk that meets their quality criteria. Instead, they can demand it. Producers who don’t meet the milk quality standards will be looking for a new home for their milk.

A balanced market could bring premiums back. But Pagel doesn’t see that happening anytime soon.

“There might be some type of a correction in the future after the milk volume stabilizes but I’m not sure if that’s realistic,” he says. “The only thing that will bring back any correction for premium structure is competition for milk.”

While Pagel’s Ponderosa is considered, by all accounts, a large dairy, Pagel is quick to add that this isn’t a size issue.  

“Right now it doesn’t matter if you’re milking 50 cows or 5,000 cows,” he says. “It’s hard to make a dime.”