Only the smart survive: Looking for resilient dairy farms

Can it get any better than this? Last month, the Class III milk settled at $23.35/cwt, an increase of $2.20 over January and $6.10 over February of last year.

As of Friday, March 14, the Chicago Mercantile Exchange (CME) futures markets for March Class III closed at $23.28/cwt. For the balance of 2014, the Class III futures averaged $20.35/cwt.

On the feed side, corn has inched up, with CME May futures now at about $4.86/bushel, with no noticeable changes all the way to next December. Soybean meal futures for May are currently trading around $444/ton, steadily dropping to $362/ton by next December.

Using prevailing cash prices for feeds, we estimate that the feed costs to produce a hundredweight of milk in Ohio and western Pennsylvania are in the $10.50 to $11/cwt range. This leaves milk margin over feed costs somewhere between $13 and $15/cwt, resulting in net margins between $5.50 and $7.50/cwt.

At this rate, a black and white cow producing 22,000 pounds/year would net between $1,200 and $1,600 for the average Ohio and western Pa. dairy producer, or three to four times what is considered average year.

I am not endowed with unusual powers, yet I know that dairy producers feel a whole lot better now than in 2009!

Will it last?

I have repeatedly written and said that projecting milk prices even just a couple months ahead is a risky proposition. There are just too many things impacting milk and feed prices — too many things that are frankly nearly unpredictable.

Let us look at the feed side first. As of now, the markets are expecting an average U.S. crop for corn, and a better-than-average crop for soybeans, the latter due to an increase in acreage going to soybeans.

What do you think would happen to feed prices if the spring planting was delayed due to unfavorable weather? What would happen if the Midwest experienced another drought?

Mind you, it is also entirely possible that the weather will be near perfect, with timely rain, plenty of sunshine, and Goldilocks temperatures (not too hot and not too cold…).

World trade

Now, let’s turn to the milk side. If you are a regular reader of this column, you know that dairy exports have much to do with current milk prices. The U.S. is now exporting close to 16 percent of its milk solids production and has become the No. 1 exporter of cheese in the world.

That’s a lot of milk that doesn’t have to look for a domestic belly!

The world’s trade of dairy products has seen a phenomenal growth over the last few years, primarily from Southeast Asia and China. In fact, China is now importing more than 50 percent of ALL the whole milk powder traded on the world market.

These massive exports, which currently are a blessing, could also cause prices to go south.

We are not the sole dairy exporters. Although the U.S. is now an important exporter of dairy products, the largest share of exports still belong to the European Union (EU) and Oceania (New Zealand and Australia).

As dairy prices have increased or plateaued in the U.S., dairy product prices have retreated in Europe and Oceania. Skim milk powder prices have dropped 0.5% in Oceania and 4.3% in Europe over the last two weeks.

Production is up an estimated 4% in Europe and 5% in New Zealand. At some point, production will be increasing in the U.S. as well. There should be a lot of milk ready for exports within the next few months.

The Chinese economy

Last week, the Chinese premier warned of severe challenges facing the Chinese economy. The Chinese government is implementing policies for a slower, but more sustainable, growth.

The rates of growth in factory output and investment have fallen to multi-year lows; they are growing, but at a much slower pace. As of now, dairy imports from China are very strong, but many people wonder for how long.

Facing volatility

So we now live in a very volatile dairy economy. The dairy farms that do best in the long run will not necessarily be those who do best during the good times; it will be those farms that have set themselves up to be resilient through the bad times.

These farms will build strong cash reserves during good times. These farms will control a significant portion of their feed production. These farms will have low to moderate debt and will build some flexibility in their debt repayment schedule. These farms will manage their money as wisely during the good times as during the bad ones; and they will know their cost of production!

For how long?

Keeping all this in mind, I still see very strong dairy margins at least until late spring, and above average margins until early fall. Thereafter, there is much uncertainty in regards to feed prices.

Meanwhile, you should set up your farm to be among the resilient ones.