There is a lot of volatility in the marketplace right now, according to Chuck Nicholson, who spoke on the cyclical nature of the dairy marketplace at the 2015 Dairy Financial and Risk Management Conference, hosted by the Center for Dairy Excellence.
“The markets will rebound, but it could get worse before we see that,” he said, talking to the group of 115 bankers, lenders, accountants and others who attended the sixth annual event, which was held in Harrisburg in September.
Nicholson, an associate professor with Penn State’s Smeal College of Business, opened this year’s conference evaluating the U.S. dairy trade environment looking out to 2020. “The U.S. has only become a consistent large net exporter of dairy products since 2010,” he said.
“Factors that led to this transformation included income and population growth in dairy-importing countries, which created a strong dairy demand, and the value of the U.S. dollar on the world market which, until recently, was favorable toward exporting.”
In his presentation, Nicholson reviewed a model that he and Mark Stephenson from the University of Wisconsin developed to analyze the effects of different world scenarios on the U.S. all-milk price and the incomes of average-sized dairies in the U.S. through 2020.
The scenarios tested included a baseline projection, a scenario with increased production growth in the European Union, a scenario for a slump in New Zealand milk production with a rebound two years later and a scenario for increased access to U.S. markets for cheese and butter. The models looked at how the scenarios affected the U.S. all-milk price, net farm operating income and producer revenues.
Below are highlights of what they found the impact would be on:
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The U.S. all-milk price: There was less than $0.02 per hundredweight milk price variation for the 2015-2019 time frame among the scenarios, but in individual years the variation was noticeable.
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The net farm operating income for a medium-sized dairy farm: The scenarios showed a $1,200 deviation in the average annual on-farm income among the three scenarios. There was also noticeable income variation in individual years among the three scenarios.
- The total cumulative impact on U.S. producer revenues: The European Union production growth scenario resulted in a decrease of $1.6 billion in revenue to U.S. producers, while the New Zealand production slowdown scenario showed an increase in revenue of $206 million. The scenario with additional cheese and butter imports into the U.S. was shown to lower producer income by $462 million.
Exports equal opportunity
Nicholson spoke about the tremendous opportunity the export market holds for the U.S. dairy industry. “We expect annual U.S. exports and their net value to grow from 2014 to 2020,” he told the group. “If economic growth continues as it has, we expect the growth in exports over the next six years to double the 2006-2011 average, but economies in China and Asia overall are slowing.”
In their analysis of the four scenarios, Stephenson and Nicholson looked at the effects on total export value for the U.S. With the European Union production growth scenario, exports fell by $49 million per month.
The scenario with the fluctuation in New Zealand’s product showed an increase of $19 million per month. Finally, the scenario with additional cheese and butter imports actually improved the value of U.S. exports by $39 million per month.
To support the discussion on exports, Dominic O’Brien, a senior marketing representative for the Port of Philadelphia, spoke about opportunities within the Philadelphia port system. According to O’Brien, Delaware River ports imported $5 billion of food products, including $2 billion in fruit, in 2014.
The facility is number one in the U.S. for imports of Chilean fruit, cocoa beans, bananas, Australian meat and New Zealand dairy. Exports are also moving through the port system.
“In 2014, 12 steamship lines carried 14,690 metric tons of dairy products amounting to more than 8 percent of U.S. dairy exports to Puerto Rico, New Zealand, Australia, Chile, Trinidad, Colombia, Guatemala, Belgium and Brazil,” O’Brien told the group.
Products exported included refrigerated cheese, milk powder, canned milk, cheese, refrigerated yogurt, nonfat dried milk and powder, refrigerated mozzarella and frozen yogurt for Kraft Foods, Fonterra, Nestlé USA and others.
Higher margins didn’t equal better preparedness
Chris Laughton, director of knowledge exchange at Farm Credit East, led a panel discussion during the conference on “What We Learned in 2014.” He presented an overview of the “2014 Northeast Dairy Farm Summary,” compiled from 368 dairy farms located in Connecticut, Maine, Massachusetts, New Hampshire, New Jersey and New York.
The summary showed that profitability more than doubled in 2014, from $490 on average to $1,176. Farm milk prices increased significantly as well from 2013 to 2014, up $4.22 per hundredweight to $25.52. “Net earnings for the farms included in the report were the highest in 35 years,” Laughton told the group.
Wayne Brubaker, with Pennsylvania Farm Bureau Member Services Corporation Business Services, followed Laughton to present an overview of their 2014 business analysis that includes 400 Pennsylvania dairy farms.
While the MSC summary showed very similar results to the Farm Credit East summary, Brubaker offered insight that the organization shared with their producer customers when they saw the impending low price cycle approaching in 2014.
“In the spring of 2014, when milk prices were at unprecedented highs, we encouraged clients to improve liquidity in preparation for a downturn and suggested that they build up working capital so that they have three months of operating expense and six months of living expense in cash,” Brubaker explained.
“Our challenge to our customers was that they pay all accounts payable, pay back lines of credit and set aside 500 to 1,000 dollars per cow in cash.”
Brubaker said that, despite their encouragement, customers didn’t follow all of their suggestions. “What actually happened was not all farms were able to ‘catch up,’ while many farms decided to prepay, but not all prepaying was from cash. Also, mom got her new kitchen.”
Kurtis Groff, a partner at Simon Lever LLP, shared his perspective on his dairy clients compared to his non-agriculture clients. “The wild fluctuations in income and expenses, weather-related and animal health challenges, regulatory and consumer impacts, 24/7/365 demands, tight cash flow, low family salaries and global economic impact make dairy farming a very complex business,” he told the group.
“To manage the volatility, dairy producers should know their ability to handle a downturn, their cost of production, their reserves and their plan. Most importantly, make sure you are consulting with your lender.”
