Ag outlook: dairy to drop, but profits may not

Milk cows
Cows in a milking parlor.

WOOSTER, Ohio — The cyclical nature of the farm markets will continue in a big way in 2015, bringing favorable profit margins for livestock farmers, and much tighter margins for grain farmers.

Speaking at Ohio State University’s Ag Policy and Outlook Conference, Dec. 8 in Wooster, experts addressed some of the biggest cycles, which include some major changes in crop and land value, and livestock.

Just two years ago, grain farmers were enjoying record prices for corn, soybeans and wheat, with corn selling for almost double what it is this fall. Today, it averages $3.57 per bushel, according to the U.S. Department of Agriculture’s National Agricultural Statistics Service.

One of best

Barry Ward, ag economist and production business leader with OSU, said the crop period of 2006-2012 was “probably one of the very best periods of crop returns that we’ve ever seen.”

Related: Ohio Grain Farmers’ Symposium

The high returns allowed farmers to pay down debt and build equity — which they may need to survive the next few years if we see tighter margins.

“We’re going to have to live off some of this equity in this transition period,” Ward said, adding that grain farmers are “going to need strong balance sheets to survive.”

According to Ward’s estimates, the 2015 returns per acre of corn, with a yield of 163 bushels per acre, would only be $13.34 per acre.

Soybeans, with a yield of 48 bushels per acre, would average a return to land of $74.71 per acre. Higher yields would increase the returns substantially.

Costly inputs

Most input costs, like rent and land, are expected to remain at or about current levels. Property taxes, on the other hand, have risen significantly.

Ward said there may be some lowering of rents, but it will take careful negotiation between the operator and land owner.

On the livestock side, however, farmers will mostly welcome lower grain prices, which lead to lower feed costs.

Beef and dairy have both experienced a record year, with the all-milk price at one point topping $25 per 100 pounds (cwt.) in 2014. However, indications are the milk price will soon drop, by as much as $4-5 per cwt.

Higher domestic prices for dairy is expected to hurt U.S. exports. Also, more milk is being produced, and the value of the U.S. dollar is rising — all things that could lead to a lower milk price.

“Clearly it will be down from this record-setting year of 2014, but I don’t think it’s going to be terrible at all,” said OSU Dairy Economist Cam Thraen.

Still profitable

The reason dairy farmers should still be profitable — at least in part — is because feed inputs are falling faster than the milk price.

This means the sales-to-input ratio should still be positive for many farmers, and it also means they may want to hold off on signing up for the farm bill margin protection programs — at least for now.

In order to benefit from federal margin protection, the feed-to-milk price margin would need to fall to $8, something Thraen said is unlikely to happen through all of 2015.

He calculates margin forecasts on his website, www.aede.osu/research/ohio-dairy-web/dairy-security-act.

Other reasons the dairy market will remain strong: the lower cost of oil and transportation fuels, and the fact dairy products continue to be used in a wide variety of foods.

Disposable income

Crude oil is now selling for the mid $60s per barrel, compared to $100 per barrel just a couple months ago.

Lower fuel costs will undoubtedly help farmers’ inputs, but this also leaves more disposable income in consumers’ pockets — potentially to spend on dairy foods.

Thraen said the recent price shift has resulted in about a $1.5 trillion transfer of wealth from oil producers, to consumers.

More specifically, he said each 10-cent decline in gas prices adds about $11 billion to the U.S. disposable income.

Of course, all commodity prices could be impacted by the kind of growing season we have in 2015, as well as the growing season of countries across the globe.

On the land

Matt Roberts, OSU ag economist, said the world is in “the most peaceful, prosperous time in human history.”

While there are isolated conflicts and wars, he said in reality people are living better than ever, which means more demand for higher quality foods.

The one constant is the limited supply of land — which forces crtitical decisions about which crops to grow, and where.
“Land is the scarcest resource in agricultural production,” he said. “It’s ultimately — particularly in crops — where everything comes down to.”

A big change on the land is the amount of crops being grown for ethanol. Once seen as the fuel of the future, ethanol now finds itself competing with lower oil and natural gas prices, and reduced consumer travel.

“I think it’s an understatement to say things have changed,” Roberts said, adding that the political will to pursue ethanol, and to mandate it be blended into fuel, just isn’t there.

“The public love affair with biofuels, globally, is over,” he said.

Ethanol is struggling to compete with the shale gas drilling boom, and is a tough sell when it costs the same or more than gasoline.

However, Roberts said if oil and gas prices fall much further, those lower prices will likely push some production off line, which could put a halt to lowering fuel prices.

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