Drastic price declines and widespread milk dumping seemed disastrous during the pandemic’s darkest days.
But the industry’s ability to adapt and respond to major market disruptions allowed many Northeast farms to remain profitable last year.
Chris Laughton, Farm Credit East director of Knowledge Exchange, gave an in-depth look at how operations performed during a recent 2020 Northeast Dairy Farm Summary webinar. The information was based on survey responses from more than 200 farms.
“I don’t know how many industries could handle losing half their market in three weeks or at least shifting that market,” he said. “Grocery and retail sales increased while food service decreased. Dairy had to adjust to that in a short period of time with virtually no warning. I think it was remarkable how quickly and how well that adjustment was made, but it was not without short-term pain.”
“A remarkable amount of milk had to be dumped in April,” he said. “By May, dumping subsided. Through supply management and adaptation of processing facilities and supply chains, it was basically resolved in one month. As quickly as June we start to see a pretty remarkable recovery. By July prices were almost to their 2019 peak.”
Profitability increased to an average of $663 per cow, up from $447 in 2019. Government initiatives such as the Coronavirus Food Assistance Program played a major role.
“If there were not those government support programs, it would have been a profitable year for most average dairy farms in the Northeast, but it would have been much more limited,” Laughton said. “There’s question marks about what’s going to happen without the government support we had last year, which was really kind of a unique year. I don’t think we’re going to see that kind of support again.”
2020 by the Numbers
Farms responding to the survey had an average $450,000 in net earnings. But the range of profits varied widely.
The bottom quartile of farms had losses of $74 per cow, while the top quartile had net earnings of nearly $1,300 per cow.
In many instances there was a direct correlation between farm size and profitability.
“But it wasn’t a guarantee that all large farms did well,” Laughton said. “In fact, only one-third of the top size farms made the top profit quartile, meaning that some of those large farms had just average earnings and some lost money.”
And for the most part, profits did not translate into savings, as last year’s positive results followed a period of extremely low milk prices from 2016-18.
“Farms didn’t really have any extra cash for four years in a row, so the past two years of positive cash earnings were really a chance to catch up on expenses that had been put off during leaner years,” Laughton said. “Farms made ends meet through increased borrowing during that time.”
Some 2020 earnings were used to pay off debt or finance capital improvements.
“Much of the earnings realized in 2020 were reinvested in farms, into their operations and facilities,” Laughton said.
Laughton credited producers for keeping costs basically flat, resulting from substantial belt-tightening and efficiency increases set against a backdrop of increasing input costs.
“Each farm has its own unique net cost of production based on its characteristics and cost structure,” he said.
The $18.11 net cost of production in 2020 was 30 cents more than in 2019. Fortunately, the milk price ($18.48) exceeded this even though it was 70 cents lower than the milk price of $19.18 recorded in 2019.
The 70-cent decrease was due to the COVID-related price crash during the first half of 2020.
Total debt per cow decreased slightly to $3,981 per animal, largely a function of increasing average herd sizes, as there are more cows to spread debt across than before.
Net earnings per cow have fluctuated along with milk prices.
“There’s basically a disconnect in most agricultural markets including dairy between the macro and micro, meaning what’s often good for individual producers sometimes is not good for the industry at large,” Laughton said. “When earnings are high, farms tend to increase production, which makes sense for them individually, but that often shifts the balance between supply and demand and results in lower prices.”
While not a crisis, total liabilities per cow is a concern.
“It took 29 years for the average cost per cow to climb from $2,000 to $3,000, but only eight years to reach $4,000 where it’s plateaued,” he said.
The increased debt load reduces farms’ ability to adapt to changes in milk prices and input costs, he said.