Dairy farmers suffer financial pain in 2016

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Like 2016, 2015 was not a kind year for many Ohio farms. The Class III milk price averaged $15.80 per hundredweight (cwt). The Federal Order 33 Producer Price Differential added another 44 cents per cwt to the price received by farmers shipping Grade A milk (the majority of Ohio milk is Grade A,) resulting in an average statistical uniform price of $16.24 for the year.

This is the minimum price that all Grade A shippers should have received for milk at test. 2014 was a much different year, with the average statistical uniform price reaching an unprecedented $23.16 per cwt of milk.12_15 daiy excel chart 1 web

This dramatic drop in milk price resulted in net return per cow dropping from $1,266 per cow in 2014 to $36.42 in 2015 (Table 1). Yes, $36 per cow, a 97 percent decline in net return per cow. That is not a typo.

Different situations

While the upper third of dairy farms generated less per cow in 2015, the return per cow should have been enough to do what it needs to do: make principal payments, pay income taxes and pay the sole proprietor a wage.

Any dollars left after that could be reinvested back in the farm, invested off the farm, or stashed for the next poor year.

The biggest challenge was for the other two-thirds of farms who had low or negative net returns per cow. A nastier punch followed — 2016 milk prices are even worse. Through November, the Class III price has averaged $14.67 per cwt, with the producer price differential averaging 40 cents through October.

With the statistical uniform price hovering below $15 — and dipping into the $13s in March — the pain is felt by all, even the farms in the top third.

One bad year, whether caused by high input costs or low product prices generally causes a serious look at expenses and a push for more efficient production.

Costs were cut in 2015, and reviewed again in 2016. Anything left to tighten has been tightened.

As 2017 approaches, milk markets are looking somewhat better, but are not offering the relief hoped for.

The reason

What is causing this industry-wide bloodbath?

Bottom line is that more milk is available for sale than there are buyers, either domestically or internationally.

In the past, government programs supported a milk price that was sufficient to ensure a plentiful, safe, domestic supply for all citizens of the U.S. and a reasonable livelihood for those that produced it.

The program worked well. Most of us cannot recall a time when there was not enough milk and food for all.

Dairy farmers were not rich, but could work hard and make a decent living for their families. The program did not include any production controls; no American wants to be told what they can or cannot do.

Milk production increased and excess milk moved into the global marketplace. With everyone free-producing milk as they chose, the support program was modified several times to reduce the cost to taxpaying citizens.

It first shifted to a minimum “support” price. Then the 2014 farm bill legislation changed it dramatically, to a program to protect a margin selected by individual dairymen if they chose to pay a premium.

A “catastrophic” margin of $4 per cwt would be available for only $100 per farm, while farmers could choose to purchase additional coverage to up to $8 per cwt. for a set premium.

Total failure

While it sounded okay in theory, it has been a total failure. Trying to devise a plan that could calculate one margin based on feed and milk prices that would be effective for the entire country is an impossible task.

It has been very successful in minimizing payout to reduce taxpayer expense above the dollars generated by the premiums. Farmers who purchased coverage up to the $8 per cwt margin level for 2016 have yet to generate an indemnity payment that would even cover their substantial premiums.

Difficult year

Few dairy farmers would consider 2016 to be anything but catastrophic. We do not have a problem ensuring a sufficient, quality milk supply for our fellow citizens.

However, sustained low prices are wreaking havoc on Ohio’s and the United States’ dairy farms. There are no easy answers, and it is a vicious problem.

Milk prices are low because there is too much milk.

At the industry level, if we produce less milk, prices should go up. But at the farm level, if milk production is cut, the individual farmer loses even more money, threatening years of hard-earned equity and the future of the farm.

Agriculture has been characterized by constant and substantial change over the past 30 years. It will continue to change, but we and all of our fellow citizens need to think hard about how and where we produce food for us, for our children, and for their children and grandchildren.

There are complex and difficult problems without simple answers. Decisions will be made for us if they are not made by us.

Be part of the conversations and the solutions. The complete 2015 Ohio Farm Business Summary and benchmark reports for dairy, crop and whole farm business analysis will be available on the Ohio Farm Business Analysis & Benchmarking Program Website at http://farmprofitability.osu.edu shortly.

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