Robert D. Wellington, Senior V.P. of Economics, Communications & Legislative Affairs for the Agri-Mark, Inc. dairy farmer cooperative also serves as a member of the National Milk Producers Federation Federal Order and Price Support Committees. Additionally, he is a director and treasurer of both the Council of Northeast Farmer Cooperatives, and the Green Mountain Federation (of Vermont).
Wellington works closely with the Departments of Agriculture in all New England states and New York and is a member of the Massachusetts Dairy Advisory Committee. He has been active in legislative attempts at both the state and federal level to increase milk prices and frequently testifies before state legislative bodies and Congress.
FARMING: The year 2009 marked a low in milk pricing. In relation to the milk price dynamic, what’s the different between now and then?
Robert D. Wellington: There are major differences in the supply and demand conditions and marketplace today compared to 2009. In 2009, everything went bad at once. The U.S. and world economies both weakened substantially, resulting in reduced demand just as dairy farmers had increased milk production due to the stronger prices of 2007/2008. Farm milk and dairy product prices all collapsed at once.
Although farm prices are lower than costs for most farmers and margins are poor, they are not as bad as in 2009. United States demand remains relatively strong with butter sales booming, keeping wholesale butter prices between $2 and $3 per pound. U.S. milk supplies are up only slightly in aggregate, which would have meant stronger domestic farm milk prices if not for problems in world markets.
Current milk production changes vary dramatically by region with the West being down, the Upper Midwest up significantly and the Northeast up slightly. The West makes a great deal of the butter in the country so their reduced milk production is another factor keeping butter production in check and prices strong. The Upper Midwest is focused more on cheese production and most of their additional milk has gone into cheese vats. That has played a major role in lower cheese prices.
About 12 to 17% of U.S. milk production is exported as dairy products. This has helped domestic farm milk prices in years like 2014, but leaves us vulnerable when world markets are struggling like they are today. We usually export the majority of our nonfat dry milk (NFDM) so our NFDM prices mirror those on the world market. NFDM prices collapsed from over $2 per pound in early 2014 to below $0.80 per pound in much of 2015 and so far in 2016. Policy decisions in countries like Russia and China have had huge economic impacts on dairy product prices and will likely continue to be factors in 2016.
FARMING: Do you think this kind of fluctuation will continue in 2016, two years, five years down the road?
Wellington: Yes. A decade ago, a two percent or three percent imbalance in supply and demand would move farm milk prices by 20 to 30%. That situation still occurs, but with a five percent swing in exports (12 to 17%), changes in exports can create quickly create supply/demand imbalances. In 2014, upwards of 17% of U.S. milk equivalent was exported in many months and we had record high farm milk prices. That percentage dropped below 14% in 2015 (three percent more milk) and U.S. prices fell around 30%. I expect such fluctuations with higher highs and lower lows to conditions down the road.
FARMING: The Chinese currency has been weaker dollar wise and currently hurting our export exposure. Plus similar to the U.S., the dairy situation in the European system is viewed as worrisome. How does the Chinese dollar affect our dairy export and how will/has the global economy affect our milk prices?
Wellington: As previously discussed, the world economy now has a huge impact on U.S. milk prices. Political issues in Russia and China can quickly drive U.S. prices, but so can issues like the surge in European milk production when their quota system was eliminated in 2015.
A stronger U.S. dollar also means that the prices for U.S. dairy products are relatively higher than they would be otherwise. Conversely, it also means that the prices of dairy products imported INTO the U.S. are lower. Neither situation is good for American dairy farmers.
FARMING: Do you think we need a quota system in the United States? What advice would you give to someone who wants to go into dairy farming? Should they go the conventional route or organic route?
Wellington: Unfortunately, a quota system in the U.S. is a moot point as every attempt to lean in that direction has been met by dissension among dairy farmers and opposition by major dairy companies and most politicians.
New dairy farmers need a strong business plan and must strive to keep costs as low as possible. They need to plan for volatility in milk prices and consider hedging as a tool to do that. Farmers can no longer take finding a market for granted in areas like the Northeast. New farmers should make sure they have secured a willing milk buyer before they begin producing milk.
There will be opportunities in both conventional and organic dairying. However, keep in mind that higher organic milk prices also come with higher milk production costs.
FARMING: What do you think the future of dairy farming will be in 10 years?
Wellington: The world population keeps expanding as do income levels throughout the world. Milk is nature’s most perfect food and can be made into hundreds of nutritious and great tasting products. Butter and other milkfat products are experiencing surging demand and milk proteins have always been an excellent source of nutrition for all ages, from the youngest babies to the oldest seniors. There is a bright future for the industry as a whole, but it will be a challenge to bring that future to farm families.
Many dairy farmers will be forced to expand production to keep costs per hundredweight down while others will either process their own milk into value-added dairy products or diversify into multiple agricultural products. Cooperatives will also become increasingly important as they guarantee member farms a secure market for their milk and can leverage combined resources into profitable value-added dairy products as has been done with Cabot and other high quality brands.
Five Questions is a FarmingMagazine.com monthly series that discusses industry-related topics with the people who influence the industry.