Dairy prices continue to challenge local producers

Wednesday, February 8, 2017

Monett Dairy Day economist hoping for better prices in 2017

Facing a market that tolerates very little change, dairy producers heard several ways to view their situation but no clear path to prosperity from Scott Brown, University of Missouri agriculture economist, during the Monett Dairy Day conference.

According to U.S. Department of Agriculture statistics displayed by Brown at the conference, February futures prices for milk have risen to $1.44 per gallon to produce milk for the consumer ($16.73 per hundredweight or $0.1673 per pound of milk, with a gallon of milk weighing 8.6 pounds). That’s very close to 2011 levels, coming down from a recent high of $2.11 per gallon ($24.53 per hundredweight) in 2014, and up from a 2016 low of $1.27 per gallon ($14.77 per hundredweight).

“Milk markets are incredibly inelastic,” Brown said. “Sometimes we’re better off to short supplies. If we can effectively manage supplies, the price difference can be astonishing in any inelastic market.”

The nation is divided into regions by national policy. Missouri is in the southeast region, placing production against the Atlanta, Georgia, market. Producers in Georgia receive better prices because they are closer to a more populated market than southwest Missouri, but that market controls local prices. Brown showed the dairymen how to view price trends in the southeast region to see the range of what they can expect for their product.

The lack of flexibility in the industry shows up region by region. Because milk has such a short shelf life, processors have the option to either sell it as skim or whole milk, or reprocess it as cheese or butter, which will last longer. If milk production rises, putting more fluid product in skim and whole milk on sale, processors turn more product into cheese if the market cannot support that volume. More milk can drive cheese and butter prices lower, and less milk can drive cheese and butter prices higher.

As a matter of national policy, then, Brown looked at options to improve the dairy industry. One suggestion floating is getting rid of federal orders for milk, which vary from region to region. Federal orders, he said, stabilize markets and provide reliable expectations. The size of federal orders in other regions also affects the big picture.

“Ten years down the road, federal orders may not matter,” Brown said. “We will figure out different ways to market milk. Any policy made at the federal level affects the path of the industry. It doesn’t generally affect the end point [the price paid to producers].”

Brown felt it was too early to guess what shape the next federal Farm Bill will take. He did not anticipate any change in Congress or what direction the Trump Administration would take. A few years back, there had been a push to eliminate federal contracts, but no longer. Brown saw no real changes coming in the next Farm Bill insofar as dairy policy that he could foresee now, and no serious discussion on the matter until 2018.

The Margin Protection Program (MPP), introduced in the latest Farm Bill and designed to provide an insurance policy to minimize losses, has not worked as envisioned. According to national statistics, most producers had only signed up for minimal coverage, at a rate barely worthwhile. Unfortunately, Brown said the higher support price did not justify the expense. The cost of producing an acre of corn went up even though the price of corn dropped.

“It’s easy to say you want margin protection when feed costs are skyrocketing,” Brown said. “There are a number of ways they can make the program more efficient. It will take Congress to allocate more.”

At the present time, Brown saw producers locked into a big picture. The volume of milk available offers few opportunities for options. Some milk plants, he noted, do not participate in federal contracts and thus are not in the regional pool. If producers can ship their product to one of those plants, they could see higher prices.

“Pork markets were affected by a huge disease outbreak in 2014,” Brown said. “That cut supplies. Prices went up. Dairy is more inelastic than pork. Maybe by spring we will have a hard time finding a home for all the milk we produce. More plants are coming online.”

California producers, he noted, are commanding higher prices because they are shipping product to Asia. Otherwise, higher production there would move east and impact the salability of Midwest milk.

Producers can control their position by signing milk contracts, though few use that option. A contract can protect a producer from falling prices, but can hurt by locking in low prices when the open market price hits a high.

“I’m not going to write off 2017 as the best year ever,” Brown said. “We’re going to see 214 billion pounds of milk this year. It’s going to be 225 billion pounds in 10 years. I look forward to less risk in international trade initially. We hoped trade would reduce volatility [in prices]. It hasn’t. The current administration deals with China differently – good or bad, I don’t know, but it’s different.

“Milk prices were not very good in 2016. I see excitement in 2017. I think prices will be higher. We’re growing the domestic milk supply. I worry about ag trade in the short run. Right decisions today could turn out to be the wrong decision tomorrow.”

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