Increased profitability during 2019 was a welcome respite, giving Northeast dairies a chance to come up for air following a four-year stretch of extremely low milk prices.
And both gross and net margins are up $1.80 over last year, an indication that 2020 should be the best year since 2014 despite disruptions caused by the COVID-19 pandemic.
But industry analysts cautioned that this is still a period of extreme price volatility and any number of factors such as economic or public health changes, international trade disputes and loss of food service markets could dramatically alter third- and fourth-quarter performance.
“There is a great deal of uncertainty going forward,” said Chris Laughton, Farm Credit East’s Knowledge Exchange director.
“Things could change very rapidly,” said Bill Zweigbaum, a business consultant. “Retail demand, food service demand, supply chain disruptions, inventory, export markets, recession, government policy and, of course, whatever farmers do to influence total supply is also going to have a very large impact on what’s going on.”
Together they presented the 2019 Dairy Farm Summary and 2020 Mid-Year Dairy Outlook during a recent Farm Credit East-sponsored webinar.
The 2019 summary was based on responses from 267 farms, primarily in New York, and said profitability increased to an average of $447 per cow from minus $40 in 2018.
“That improvement was largely due to increased milk prices, as well as farmers keeping costs under control,” Laughton said. “However, we continue to see a wide range of results, some doing quite well while others struggle. The average farm size continues to grow. We again saw positive correlations between size and profitability, with larger farms tending to be more profitable. However, not all large farms did well, indicating that size is not a guarantee of success.”
Only about one-third of the farms with more than 700 cows made the top profit quartile, and some large farms lost money, he said.
“In general, most farms saw cash flow back to positive levels, but many farms are still recovering from prior years, resulting from increased debt they may have taken, or holdover accounts payable they may have had from prior years,” Laughton said.
Zweigbaum said the U.S. milk price had the biggest downward response to COVID of any country in the world. There was a 29% decrease in milk income in May, whereas most world markets only declined 5-15%.
“That may be because we have more real time data or perhaps due to the lockdown on food services and the American public’s use of outside dining more than a lot of other countries,” he said. “But our recovery has been coming very fast. Right now internationally what we’re expecting is kind of a V-shaped, rapid recovery for the dairy industry. Food service demand globally has recovered to about the 75% level. Retail demand has been very strong. So the U.S. will probably do quite well this year.” However, producers should keep a close eye on international developments, Zweigbaum said. Mexico and China are the two largest customers of U.S. dairy exports.
“Mexico is in a general recession right now with their gross domestic product down about 10% and their unemployment rate almost doubled in the last six months,” he said. “China, while they’ve been a good trade partner, has just closed a deal with New Zealand to close tariffs that had been in the 10-20% range depending on the product sold. Now there are no tariffs between China importing from New Zealand. So that could have an impact on U.S. exports in the last half of the year.”
Several positive trends are benefiting U.S. dairies, though. Labor costs, one of a dairy’s biggest expenses, were contained during the first half of this year, and unemployment will keep pressure on wages to remain steady. Also, the grain cost index was down 4.5% through June, and futures markets give no indication of upcoming increases. In addition it looks like forage quality will be higher than 2019, although localized variances due to drought could create issues for some farms.
The fuel index for the first half of 2020 was down 13.9%, and crude oil is currently in the low $40 range.
“So fuel should stay low for us and carry into the crop harvest for lower operating costs,” Zweigbaum said.
Risk management, weather and specific handlers will all have significant impacts on this year’s financial performance.
“There are going to be specific circumstances for each farm that are going to play a very large role in determining profitability,” Zweigbaum said