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Pennsylvania dairy farmers will likely have to get by on razor-thin margins this year as feed prices and milk production rise.

“It’s going to be a challenge moving forward, but the top farms (measured by efficiency, not size) are profitable,” said Mike Hosterman, an ag business consultant at AgChoice Farm Credit.

Hosterman presented the group’s annual Dairy Industry Outlook in an April 23 web meeting.

2021’s tight margins follow a year when most Pennsylvania dairies were profitable despite the massive market disruptions of the pandemic.

Two-thirds of dairies were in the black even without counting direct payments from USDA’s Coronavirus Food Assistance Program.

AgChoice is projecting a 2021 Pennsylvania milk price of $18.36 per hundredweight. That’s about 25 cents higher than last year and 50 cents higher than the five-year average.

But with feed prices rising and federal intervention likely to fall from last year’s extraordinary levels, Hosterman is projecting tight and potentially negative margins this year.

He sees capital expenditures, such as land, buildings and purchased cattle, straddling the line between farms making and losing money.

Dairies annually spend about $800 per cow on capital expenditures. Equipment is the biggest chunk of this cost, about 40%.

Average capital expenses are similar for the past three, five and 10 years, so it’s not clear that farms could drastically cut these line items to get to profitability.

Rather, Hosterman said farmers must be sure to budget for capital purchases — a category that he said too often gets overlooked.

To cover these costs in 2021, farms are increasing debt per cow and ending up with unusually long loan terms — as much as seven years on used equipment.

“We aren’t earning enough to make these types of purchases, so we’re relying on borrowed funds to do that more and more,” Hosterman said.

This situation isn’t sustainable in the long run. But depending on how their balance sheets look, farms should be able to survive in the short term with debt creeping upward. Some lenders will be willing to stretch out repayment terms because the farm has paid-off land as collateral, Hosterman said.

Meanwhile, to ease the pinch of rising feed costs, dairy farmers have been growing as much as they can themselves. Some dairies are double-cropping every acre they farm, he said.

Increasing Production, But is it Enough?

Increasing per-cow milk production remains an important way to improve farm efficiency, though each farm must consider how to manage production gains in the context of its buyer’s base program.

Pennsylvania crested 21,000 pounds of milk per cow last year. That’s a milestone for the state, though the U.S. as a whole is already speeding toward 24,000 pounds.

“We do have farms in Pennsylvania that can average that, and we do have farms that hit that mark. But on average, our farms continue to lag behind,” said Heather Weeks, a senior loan officer who worked on the Dairy Industry Outlook.

Low output per cow, combined with one of the nation’s smallest average herd sizes, gives Pennsylvania a relatively high cost of production.

Hosterman is also encouraging farms to sign up for risk management programs.

Heading into 2020, Hosterman told some farmers they didn’t need to buy Dairy Margin Coverage because prices were looking good. The pandemic’s disruptions soon made him regret that advice.

“I think we learned an important lesson there that this risk management through DMC is cheap, and producers should be signed up for it,” Hosterman said.

He’s also encouraging farmers to lock in a price floor with Dairy Revenue Protection. Milk production is likely to increase faster than demand this year, which could drive down prices, he said.

Government Payments

In 2020, 30 to 40% of dairy farms’ revenue came from government payments. Roughly the bottom third of farms used the money to stay afloat, while others used the money to pay down lines of credit or make long-postponed repairs.

“As much as my numbers say that two-thirds of the farms did not need CFAP, boy, what a blessing,” Hosterman said.

In addition to sending direct payments to farmers, the federal government supported prices through massive dairy purchases for the Farmers to Families Food Box Program.

Those programs clearly propped up the dairy industry through a difficult period, but that unprecedented amount of funding isn’t likely to continue this year. Nor should it, Weeks said.

Extending such policies would allow inefficient farms to continue in business and not improve. And that’s not a recipe for success with Pennsylvania being part of national and world supply chains.

“We’re competing with farms that are producing at either a Class III breakeven or even below that level,” Weeks said. “We need to be competitive in that market.”

As a believer in free markets, Hosterman said he doesn’t like the idea of federal milk price supports. But he also doesn’t want a short-term slump to knock huge numbers of farms out of business.

“We’re going to have to balance it,” he said. “I don’t think (the government) should set the price, but I think they need to be there to support us.”

Federal aid might be a bit easier to justify for agriculture than for other industries, Weeks said, because food is a necessity.

The full AgChoice Dairy Industry Outlook is available at bit.ly/DairyOutlook21

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