by Katie Navarra
Dairy producers received record prices for their products in 2014. Average pricing for the year within the Northeast Order Uniform Price (UP) at the Boston, MA Zone averaged out at $24.28 per cwt, the highest price paid over a 10 year period ranging lasting from 2004-2013.
As the year came to a close, dairy farmers were beginning to realize the record prices weren’t going to last long. The last four months of the year and into the first half of 2015, milk prices have paled in comparison. The Northeast UP Boston has averaged $16.79 per hundredweight (cwt) over the first four months of 2014. “That is $7.66 per cwt, roughly 31 percent below the same period last year,” said Peter Fredericks, Northeast Milk Marketing Area.
Pricing estimates for the remainder of 2015, based on the Chicago Mercantile Exchange futures prices for Class III and Class IV milk, anticipates the Northeast Order UP will average $17.45 for the entire 2015 year.
Understanding minimum milk pricing
“The Federal Milk Market Orders establishes a minimum price level for milk to farmers who sell to handlers (plants) regulated under the provisions of the federal milk order,” Fredericks said. The prices are calculated and announced each month based on the selling price of wholesale dairy products such as cheese, butter, nonfat dry milk powder and dry whey.
“Any volatility in Federal Order prices is a reflection of the wholesale market selling prices as reported in the surveys, which are a reflection of supply and demand,” he added. As supply and demand conditions in the marketplace change, so do Federal Order prices, and in turn, prices received by dairy farmers. Federal Order prices are known as minimum prices and it is common for milk buyers to pay a premium or a bonus in addition to the Federal Order prices. The premium also fluctuate in response to local supply and demand.
Increased domestic milk supply/production and stronger than expected international milk supplies are two factors that have contributed to the downturn in pricing. “There is a little more milk than what can be handled right now so some of it is getting dumped,” David R. Balbian, Area Dairy Management Specialist, Central New York Dairy and Field Crops Team.
The U.S. now exports a large portion of its milk production and minimum pricing will reflect the volatility that may be related to global market influences. “Demand shocks such as the Russian ban on dairy products or the change in China’s demand for imports have an increased impact on U.S. domestic prices,” Fredericks said.
A recent recovery of export volumes along with a strong domestic demand for cheese and a less than expected domestic production growth is helping to support the recovery of prices heading into the second half of 2015. “In my opinion, as the U.S. dairy industry becomes a bigger player in the world market, the more pricing will become unpredictable,” Balbian said.
It’s critical that dairy managers focus on maximizing the return from each cow and every acre. It’s often believed that to improve profitability either prices should increase or that the volume of milk produced should increase. “In reality, it’s not that simple. It’s complex,” Balbian said.
The approach to achieving increased profitability will be different for every farm, though the basics are similar at every dairy. Balbian encourages dairy managers to:
- Observe performance and know where you are starting
- Track meaningful numbers
- Start with a goal in mind
- Consider a profit team that includes key employees and/or consultants
- Increase milk per cow
- Maximize the value of milk
- Milk the right cows and cull low performers
- Fine tune replacement program
Expanding the herd is not necessarily the solution for improving profitability. “An unprofitable business is unlikely to turn profitable simply by expansion,” he explained, “there should be a positive profit margin per cow or per hundredweight prior to considering an expansion.”
In addition to better controls on the farm programs available to dairy farms can also increase profitability. “Dairy farmers can take advantage of hedging or forward contracts to smooth out volatile price swings,” Fredericks suggested. Such programs are typically offered by the local cooperative of handler buying the milk.
For long term success, “get back to and really good at the basics, such as feeding, reproduction and milk quality,” Balbian concluded.