A perfect storm of rising exports, a strong dollar, the ongoing drought in California, and rising demand for cheese and butter brought the federally set price paid to farmers for milk this summer to a high of more than 25 percent above what it was just a year ago, and well over twice what it was in 2009. Further, high feed prices had discouraged overproduction in recent years, but the recent decline in feed prices has helped dairy farmers see margins better than anticipated.
However, they’ve seen this before and know what’s to come. All-time high prices in 2007 followed by a good 2008 led to a slide of more than 50 percent in 2009, resulting in many farms going out of business and several others borrowing heavily to stay afloat. A struggling overall economy played a part, but a glut of milk on the market was a significant factor as well. Many farmers had seized the opportunities offered by high prices in previous years to build herd size and produce more milk.
“It happens over and over again,” said John Knopf, whose family has milked cows in Canandaigua, New York, for 80 years. “We’re all human. When the price is good we’re motivated to make as much milk as we can. Then there’s overproduction and the industry has to adjust to that. Lower prices slow down the industry’s growth, and higher prices make it grow in spurts, and every so often someone spurts too far.”
Dean Norton, a dairy farmer and president of the New York Farm Bureau, noted that the lessons of 2009 were well learned and fewer farms have been so quick to increase herd size this time.
“The whole industry has slowly recovered from that downturn. It has given farmers a chance to do some capital improvements and hopefully set some money aside for what I believe will be a downturn next year,” Norton said. “The experience of 2009 taught us that we need to be better managers if we’re going to stay in business. We need to make sure we’re protecting ourselves. There may be safety net programs, but the best safety net is a strong balance sheet.”
For Norton, that meant rethinking his feeding program and looking deeper into his costs. “We can’t change input costs much, but there’s a lot we can do to find that margin between what we’re being paid and what it costs us to make the milk.” For some that has meant finding ways to improve efficiency and reduce labor costs by installing robotic milkers and other automated systems.
In a downturn, Knopf explained, “the first thing we do is make sure we’re not milking cows that are not profitable. We manage all of our cows well, and a low-producing cow can be marginally profitable in a high-price environment, so we try to get every bit of milk out of her. But when prices are low, the incentive isn’t there to produce more milk.”
Hal Adams, a dairy farmer in Ontario County, New York, said, “The market helps to weed out people who are poor managers or who don’t plan well. The way to succeed in dairy farming is to be an above-average manager and get your costs down, either through higher production or lower inputs. History shows that New York dairy continues to consolidate around the best management. Farmers love to think that we’re all in it together, and we are cooperatively minded, but the reality is that we’re competing against each other.”
Knopf agreed. “The volatility in the market creates more opportunity, and it puts a premium on management,” he said. “You have to anticipate that there’s going to be significant swings in the price of milk, which breeds a little caution on the part of everybody, and that makes for better decision-making.”
Adams said, “It’s not what you do when times are tough that makes you succeed; it’s what you do when times are good, and how you position yourself for the next downturn.” For him, that has meant taking care of deferred maintenance and building a new barn, but not increasing herd size.
The price cycle has become somewhat regular: roughly 12 months of poor pay prices, 18 months of moderate growth, and then a peak before beginning the trend again.
“Farmers are becoming better educated on the cyclical nature of the industry,” Norton said. He added that farmers are using tools such as contracting their inputs as well as their milk to help weather the downturns. They don’t have to become experts on currency exchanges, Norton explained, but do have to be able to deal with the volatility that comes as a result of the market becoming more global. “The signal we get is price, and we have to be able to react and deal with that,” he added.
Norton noted that the state Farm Bureau, along with Farm Credit East and other organizations, are offering webinars and other opportunities for dairy farmers to learn how to remain sustainable in this shifting market. The federal government’s long-standing Milk Income Loss Contract (MILC) program, which compensated dairy farmers when milk prices fell below a certain level, expired in 2013 and was replaced by the Margin Protection Program (MPP) and the Livestock Gross Margin (LGM) insurance for dairy program. These programs allow farmers to opt in and purchase insurance to protect against downturns. Norton advised dairy farmers to investigate these two programs and participate in at least one.
“I think that the reduction in price supports is responsible for a lot of the wealth created in the dairy industry recently,” Knopf said. “Now that the price signal is more tied to the marketplace, the market has done a good job of telling us when we need more and less milk.”
Knopf noted that he’s skeptical of the new programs due to concerns of blurring the price signal to producers by softening the low points in the market, possibly resulting in artificially high production and longer, continuing downturns.
Norton said learning to weather those fluctuations is important for dairies of all sizes. While some larger dairies may have more margin to help buffer against the harder times thanks to economies of scale, they may also be more highly leveraged, which brings greater risk.
Smaller dairies may have somewhat fewer options when it comes to cutting costs or boosting output, but Knopf said many small dairies have thrived in recent years, finding nontraditional niche markets and meeting new demands. “Small farms can be pretty resilient, though maybe not necessarily wildly profitable,” he added.
Prices paid for milk from organic dairies don’t fluctuate in the same way as conventional milk prices, noted Brian Bawden, an organic dairyman in Hammond, New York. That stability, he explained, makes planning somewhat easier. But even though the price paid for organic milk is higher, so are the costs of inputs, and when the conventional pay price is as high as it has been recently the margin between the two is actually smaller for organic dairy farmers than for conventional dairy farmers. That means there’s less economic incentive for conventional dairy farmers to transition to organic, so organic production remains relatively stagnant, even as demand increases.
At the same time, the price for organic feed has increased dramatically, Bawden noted, and he has had to transition to all grass and hay feeding to remain profitable. That means lower production, so his income declines as well.
By early fall last year, the summer’s record-breaking prices were already a memory, and the decline many have been predicting may have already begun. “We’ve sown the seeds of our own destruction,” Knopf said. “We’re due for a difficult period. Production and cow numbers have increased, but many other countries are in a recession, so demand is down and we’ll have more milk on the market than what it wants to bear at the price we’re at now. So we’ll tighten our belts a little bit, remove some unprofitable cows from the herd, and try to be efficient.”
Norton concurred, “It’s been a good year, but with good years comes the alternative. We need to brace ourselves. Increased production and increased herd sizes means we’ll see much more moderate prices next year.”
“Our industry will always be characterized by cyclical pricing,” said Adams. “It’s a fact of life – we’re very supply sensitive. We make a perishable product, and if we make more than the public wants, the price will drop. We need to accept, embrace and manage for this.”
Cover photo by 123ducu/iStockphoto.com