Milk tankers.
August 16, 2018

Who You Ship Your Milk To Matters More Than You Think

 |  By: Dairy Talk

A couple of weeks ago, my wife and I were back home in Elkhart Lake, Wis. for my 45th High School Class reunion. At the place we were staying, we ran into a young dairy farmer and his new bride of just a few months.


The young farmer, who dairies with his dad in northwest Wisconsin, was able to take a few days off after getting third crop alfalfa packed and covered in the bunker. After we introduced ourselves, the inevitable question came: “What stories are you working on? Are any on milk prices?”


My immediate thought was, “Oh boy, here we go.” But the young man proceeded to say that he and his dad shipped to a Minnesota co-op, and that while prices weren’t anything great, they were still above breakeven and were even making a little bit of money. He quickly acknowledged that many of his neighbors weren’t as lucky, depending on who they were shipping their milk to.


But his comments pointed out the difference a processor or co-op can make to your bottom line. After I got back, I made a couple of calls to lenders to get their impressions. They confirmed what I thought I knew: Pay prices and basis will vary by both processor and producer.


“I actually have a client, a Holstein herd, that is getting a $3 basis,” one lender told me. But the lender also quickly added that this farmer is an outlier. More typically, most farmers are getting less than $1 above Class III here in Minnesota and Wisconsin. Some of the better paying co-ops are still pushing out $1.20 to $1.60. But some are only paying 45¢ above Class III.


Whether processors and co-ops here in the Midwest can pay more—or less--largely depends on their product mix. If they are producing a large proportion of their output in barrel cheese, they are far less able to pay higher premiums than those co-ops and plants producing blocks or specialty cheese.


Note: Farmers can help themselves by producing as many pounds of butterfat and protein that they can. And the emphasis should be on butterfat, say lenders, since it is worth $2.54/lb while protein is worth $1.47. “If you’re not shipping 6 pounds of combined fat and protein daily from your Holsteins, you might not be in business long. For Jerseys, you need to ship 5 ¼ lb,” says Steve Bodart, a senior agribusiness consultant with Compeer Financial. (See “Six Benchmarks to Stay Ahead of Your Neighbor.”)


But given the difference in basis among processors, who you ship your milk to matters a heck of a lot. In the current environment, every dairy farmer I know is simply happy that they have a place to ship their milk. But when this market turns around, and it will, having a discussion with your lender and other financial advisors about which processors are better able to pay consistently higher prices is well worth your while.


As a producer, you will need to stand out as a preferred, reliable and trouble-free supplier of high quality milk. But if you do, you will be attractive to those processors who also are producing high-quality, consumer-preferred dairy products. As we’ve seen above, it could mean $1/cwt or more to your bottom line.