Dairy industry going through ‘the long scrape’

posted Feb. 5, 2018 7:43 a.m. (CDT)
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by / Heidi Clausen, Editor | ​heidi.clausen@ecpc.com

MADISON — What the dairy industry has been going through the past few years is more than an ordinary, cyclical price trough, according to Mark Stephenson, director of dairy policy analysis at UW-Madison. It’s really more like a “long scrape,” with milk prices staying persistently low for an extended period, he says.

“We’re going into our fourth year of prices not covering the full cost of production,” he said Jan. 25 during the Wisconsin Agricultural Outlook Forum at UW-Madison. “It hurts, but it hasn’t hurt enough” to reduce milk production to the levels needed to help raise milk prices paid to farmers.

The U.S. dairy industry has become increasingly dependent on trade, and when export sales sour, as they have recently, so do milk prices, Stephenson said. The major downturn being seen in milk prices has been accompanied by a “collateral downturn” in exports.

“It can’t be over-emphasized at this point in time,” he said of the importance of trade for dairy. “Hopefully, we’ve got some prices that will begin to move product a lot more.”

Stephenson said dairy producers continue to produce too much milk for the market because the milk price hasn’t dropped below the “fixed” cost of production. Meanwhile, farmers have been consuming capital for about three years, but that’s beginning to change. Open accounts with feed companies and other businesses are growing. Milk per cow continues to grow but at a more modest rate, perhaps because some farmers no longer can afford to feed for high production, he said.

Milk output continues to increase in Wisconsin, Michigan and New York, he said. Collectively, these three states produce about 15 million pounds of milk each day — enough to support three dairy plants. Michigan “desperately” needs another processing plant, he said, as milk from the state continues to spill into nearby states such as Wisconsin and New York.

“We have seen a lot of erosion of premiums over the last few months,” he said. “We need more exports or fewer dairy cows.”

Stephenson looks for an upturn in the market by the second quarter of this year. The world supply of milk fat — considered a “luxury item” — is tight, while the world supply of milk proteins is excessive, he said. The U.S. must find new, emerging economies as dairy product buyers. Closer to home, he said, the relatively strong U.S. economy is helping consume dairy products but not quickly enough.

“Basically, 2018 will feel like 2016,” Stephenson said, adding that All-Milk prices will be down about $1.55 per hundredweight for the year, reflecting declining premiums.

Trade key to livestock, grain

Grain prices also are expected to be less-than-stellar this year, according to Brenda Boetel, agricultural economist from UW-River Falls. “Production is the theme. We’re really good at producing, and it shows.”

Despite strong crush levels for soybeans, she said, meal and oil output has trended lower, indicating poorer quality. Also, the U.S. share of exports to China has been shrinking as China has tightened its import specifications on beans, allowing only 1 percent foreign material, while No. 2 U.S. beans can have up to 2 percent. Meanwhile, Brazil has enjoyed good growing conditions and increased sales. The USDA has revised export expectations for beans, Boetel said.

Corn acreage in the U.S. is expected to be down this year, with more ground planted to soybeans, she said, but because farmers are such efficient producers, production likely won’t suffer as a result. Exports are weaker, and more corn is going to cattle feedlots.

“They use the most of our corn, so that’s a good thing,” she said.

Boetel said there likely won’t be much price movement either way this year, as “there’s not a lot of potential for the corn price to go up or down.” However, the soybean market “is still overpriced,” and it could trend down by summer unless there’s a major weather event.

Things to watch in 2018 include the North American Free Trade Agreement negotiations, China and the value of the dollar, she said. “If we leave NAFTA, it would have significant trade implications for these commodities. ... Our reliance on exports is growing.”

Outlook speakers agreed on the growing importance of trade agreements for Wisconsin agriculture. Stephenson said “it left a big vacuum” when the U.S. walked away from the Trans-Pacific Partnership.

“Trade solves a lot of our oversupply problems. It would be a big loss (to leave NAFTA),” said Paul Mitchell, agricultural economist at UW-Madison and director of the Renk Agribusiness Institute. While not a trade issue, he said, China’s increased purchasing of soybeans from Brazil could be a preemptive action in case they no longer could get them from the U.S. in the future.

Beef margins likely will shrink in 2018 as production increases, Boetel said. U.S. beef production is expected to be up almost 5 percent in the year ahead, reaching record levels. Also, 2018 will be the fifth straight year of record-setting poultry production. The U.S. pork industry has entered its fourth year of record production; more than 20 percent of U.S. pork is exported, and those sales are projected to be up 4 percent this year.

Commercial beef production is the fastest-growing livestock sector, according to Boetel. The U.S. cattle herd is expected to be up 650,000 head this year, to 94.2 million. Herd growth could stabilize later this year, but even greater production could be seen in 2019 as this year’s calves go on feed. Carcass weights will continue to rise.

“We are good and efficient producers,” she said. “Markets will favor industry participants closer to the end user. Growing beef supplies but limited packer capacity means increased packer bargaining power.”

Boetel said 30 percent of U.S. beef exports go to Japan, where the U.S. faces a 39 percent tariff. A lack of bilateral agreements could be devastating to the livestock industry, she said.

Livestock holds greater profit potential than cash crops at this time, she said. “Typically, as livestock does well, corn and soybeans don’t do so well, and vice versa.”

All eyes on potatoes

Checking in with Wisconsin’s specialty crops, potatoes continue to be big in Wisconsin, which ranks third behind Idaho and Washington for production. Mitchell said “Wisconsin’s the biggest of the little guys.” The value of Wisconsin potatoes reached a record high of $323 million in 2016, and acreage was the largest since 2005.

“High yields, high production, more acres, and prices look good,” Mitchell said, but “will the U.S. potato industry (mostly in Idaho and Washington) oversupply the market?”

The cranberry industry is struggling, Mitchell said, and “I don’t see that ending. ... The cranberry market is down, and it’s going to stay down. Oversupply is the problem.”

Wisconsin cranberry production was down last year. The state produced 62 percent of all U.S. cranberries in 2017. Wisconsin’s yield average has averaged 60 percent higher than other states over the past five years, he said. “We grow a lot of them, and prices are a problem. Right now, the problem with cranberries is they’re very storable, so we have a lot of stocks.”

Wisconsin ranks a distant second in the U.S. — trailing California — for processing vegetables, mainly sweet corn, green beans, peas, carrots and cucumbers, Mitchell said. The state produces 7 percent of the country’s processing vegetables, compared to California’s 62 percent.

Overall, Wisconsin’s planted acres of specialty crops have been falling, and crop values also are declining. Contributing to the decline has been more automation — meaning fewer jobs — and a steady decline in the demand for canned vegetables, according to Mitchell.






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