Editor’s note: Penn State’s Dairy Outlook report is back after a brief hiatus following the retirement of Jim Dunn. The monthly report will now be a collaborative effort by writers Rob Goodling and Dave Swartz, and researchers Tim Beck and Virginia Ishler.
The chart of income over feed costs has also changed to include actual milk income and breakeven lines, and adjusted to reflect an increase in daily milk production from 65 pounds per cow to 75 pounds.
None of the dairy market’s leading indicators are signaling much improvement in price this month, and futures prices are moving sideways with little prospect for change.
The dairy industry in the United States is expected to produce 217 billion pounds of milk this year, a record for milk production.
In fact, over the past five years, we have set a new record for milk production each year.
Cow numbers in the United States are at a record high for recent years at 9.4 million, and production per cow has been increasing between 2 and 3 percent each year.
Dairy exports have clawed their way from 13 to 14 percent of production compared with last year. Although the U.S. dollar has shown some slight weakening in late summer against the currencies of our main trading partners, expectations are for the dollar to significantly strengthen against foreign currencies over the next five years.
If the Federal Reserve raises the interest rate at its December open market committee meeting, the dollar will strengthen further, which could add headwinds to increased dairy exports heading into the first part of 2018.
Of course, the dairy export picture — indeed, the entire agricultural commodity export picture — is somewhat clouded by several significant bilateral and multilateral trade agreements currently being renegotiated.
Cheese and powder inventories in the United States are at historically high levels. In fact, total cheese stocks in the United States are three times what they were in 1987. These inventories are expected to be a depressing factor on price for some time to come.
Of course, butter is being celebrated as the current star of the dairy industry. Americans are consuming 20 percent more butter per capita than they did in 2000.
This domestic butter demand has been given credit for helping to support the U.S. milk price through these times of low exports, slumping Class I use and increasing milk production.
However, as some of the other main dairy exporting areas of the world increase their production for the rest of 2017 and into 2018, more milk fat will be available for churns worldwide.
After a year of production losses in Australia, Argentina, New Zealand and the European Union, both Argentina and the EU have once again started to increase their milk output.
Since these countries, along with the United States, are the main dairy exporting countries in the world, any increase in their milk supply is usually seen as a negative factor for increased dairy product exports and increased U.S. milk prices.
The lone bright spot for the dairy industry in Pennsylvania this year has been an increasing milk margin. Using September’s numbers, the milk price improved only 3.7 percent year over year, but the margin improved 9 percent.
Obviously, this improvement was due to slumping feed prices. Because there is little prospect of the milk price rising, it will be critical for dairy producers to protect their margin by limiting any risk to feed prices.
USDA just came out with a report on this year’s grain crops that added to what the market expected and pushed the already low grain prices slightly lower.
The United States has had three years in a row of record corn and soybean crops, and the soybean crop this year is expected to set another record for total production due to the acres planted.
In fact, the acres of soybeans planted this year is close to equaling the acres of corn planted. Over the past 10 years, soybean acres have increased 38 percent as crop producers have shifted away from wheat, cotton, hay and, recently, corn.
However, even with another record crop of soybeans, the demand for beans for domestic crush and export is expected to also set records, so producers should not let a large bean crop lull them into a false sense of security on feed prices.
Remember, the protection of the milk margin is key to profitability in these times.
In 2017, as we recover from the low prices of 2015 and the low margins of 2015 and 2016, Pennsylvania’s dairy industry seems to be separating into two groups.
The first group is made up of dairies where costs are being controlled, a profitable margin is being made and that profit is being held to return some liquidity to the farm operation or used to expand.
These farms are seeing opportunities for expansion because they have ruthlessly controlled costs and believe they can obtain an increased profit by building their dairy enterprise.
The other group of dairies in Pennsylvania have not been able to control costs and even with low grain prices are not rebuilding liquidity.
These operations, after burning through their equity during 2015 and 2016, have not been able to rebuild equity in a way that would make lenders comfortable with extending additional credit to them for expansion.
In some ways, as the industry bifurcates along successful cost control and maintaining margin, it seems like we are living through a watershed moment in our state’s industry.
Just how big a change these times will make on our industry remains to be seen, but the potential for significant restructuring of our state’s industry seems great.
Rob Goodling is a dairy Extension associate in Penn State’s Department of Animal Science. Dave Swartz is Penn State Extension’s interim assistant director of animal systems programs. Virginia Ishler is an Extension dairy specialist. And Tim Beck is an Extension dairy nutrition educator.