Commodity milk pays the bills – or is supposed to pay the bills – on most dairy farms today. Selling milk from the bulk tank to the dairy processors is how most milk and milk products travel from the farm to the consumer. Raw milk, on-farm pasteurization and direct fluid milk sales, or production of farmstead cheese, yogurt and ice cream, sold directly from the farm, is a rarer breed.
Dairy producers are primarily price-takers. Staying on top of policies affecting milk pricing can be confusing, time-consuming and frustrating. It’s not only domestic production, supply, and demand which impact the milk price, but the economies of other countries, too, that matter when selling commodity milk.
Andrew M. Novakovic, Ph.D, of Cornell University’s Charles H. Dyson School of Applied Economics and Management, addressed some of these issues in a recent presentation, “U.S. Dairy Markets in 2016,” hosted by the South Central New York Dairy and Field Crops Team, Cornell Cooperative Extension. (SCNYDFC).
The inflation-adjusted price of milk, which was a good estimation of dairy farm health up until 2007, is not accurate today. Today’s producer can’t tell if the price of milk translates to good or bad times for dairy farms, because the ethanol effect has changed the cost of production factor.
It’s now all about income over feed cost (IOFC). While the price of milk paid to the producer may be low, it’s the difference between that and the price of feed that determines whether dairy farms are healthy or not, Novakovic said. Due to volatility in the price of corn, as well as that of milk, IOFC provides a better indication of dairy farm profitability than does looking at the average monthly All-Milk price.
Researchers at Cornell University, Michigan State University and the University of Wisconsin compared data on the return on assets (ROA) of dairy farms in each state – all similar in size and management – to the Margin Protection Program data on dairy farm profitability. The Margin Protection Program (MPP) data was similar to the ROA data from each state, but it did differ, and ideally should be modified so it relates more closely to what is actually happening on the farms, Novakovic said.
“Data is an imperfect representation of what is really going on,” he said. “Can I look at MPP (Margin Protection Program) and assume it translates? Clearly there are some limitations to that.”
They also found the MPP to be a poor indicator of solvency, which relates to the risk of bankruptcy. Overall, the MPP hasn’t really lived up to expectations, he said. Farmer participation in MPP on the national level was six percent less than in 2015. Farms who originally signed up in 2015 were automatically enrolled in 2016, without an opt-out option. But the number dropped because some of those farmers decided not to pay their 2016 premiums, and weren’t counted in the data. Other farms went out of business.
Of those farms that did enroll and pay for 2016, enrollment at the basic level of $4 increased by 65 percent, while all other higher categories lost enrollment. Producers who enroll at this basic level automatically have 90 percent of their milk covered. This catastrophic coverage level provides payments when the national dairy production margin – the difference between milk pricing and average feed costs – drops below $4 per hundredweight (cwt).
At the higher levels, $6 and $6.50 were the most popular selections. Producers who opted for a higher level of coverage enrolled most of their milk. However, if they had enrolled a smaller percentage at the higher level, which is an option, they could have seen cost savings, Novakovic said.
According to MPP data, the program would have paid producers more than the previous MILC program if it had been in effect 2009-2014. More information is available here: www.fsa.usda.gov/programs-and-services/Dairy-MPP/index
Supply and demand
Annual milk production in the United States is growing overall. The month of least production in 2014 equates to the month of most production in 2010. So today’s seasonal lows are producing the same amount of milk as the high season peak a few years ago.
Feed costs are at a low, and feed is of good quality. A mild winter has led to increased production from contented cows. Farm expansion is a big deal across the industry. Milk processors need to increase capacity to meet that production level. That growth is the equivalent of three billion pounds – the amount produced by Vermont, New Hampshire and Maine combined – each year.
The challenge for processors is “to keep up with this growth in milk production,” he said.
Without increased processing capacity, milk dumping will occur, as long as production outpaces annual increases in demand. The United States’ annual population growth means some production increase each year, to keep up with demand. There has also been total dairy product growth, per capita.
So where is the domestic demand headed? Although we’ve survived the recession, and are better off than we were then, consumer confidence in the future is dropping. That translates to less dining out, and not splurging on $20/lb. cheese at the supermarket, Novakovic explained.
“Dairy relies heavily on food service,” and if people aren’t eating out, milk pricing will suffer.
The retail price of milk does correlate to the farm price, but it is not a full correlation, and it does not happen simultaneously. There are also factors that offset the retail price, he said, and as a result the retail fluid milk price is fairly stable.
One of the main questions today is whether the dairy industry is marketing its products in an effective manner, Novakovic said. New generations don’t respond the same way to marketing information, don’t want to receive that information in the same manner, and may hold differing values from older generations.
While dairy has marketing itself as healthy and nutritious, consumers today are seeking goodness – not only in quality of product, but in who produced it. Social responsibility, ethical behavior and natural, local and organic practices are in demand.
“I think the biggest take-home message for marketing to consumers is to realize that different generations buy things differently and the way we market to them should differ,” Betsy Hicks, Dairy Specialist with the SCNYDFC team, said about Novakovic’s presentation. “Marketing to the younger generations needs to reflect how they’re buying and what they say is important to them – not necessarily price.”
Dairy farmers can connect with all generations by using diverse methods of educating and promoting their own dairies. Telling the brand story will become more about the farmers that make the brand possible.
“The dairy farmer continues to be one of the most trusted sources of information for consumers,” Hicks said. “The individual farms need to tell their story the way they feel most comfortable doing so. Opening up their doors for farm tours or farm days for the community, connecting via social media, and being a face of agriculture within their community… are all great ways to do so.”