How dairy farmers feel about their 2015 net financial results will depend on what part of the country they are located. Table 1 summarizes the net revenues for 2015 by region.

The lower Midwest region is the only one that shows a $0.43 per hundredweight (cwt) excess of revenues over expenses. All other regions shown in Table 1 reflect a deficit of revenues to pay for expenses and required debt service payments.

What are the material financial differences between the various regions? Milk price and feed costs, although there is no surprise there. The lower Midwest region’s dairy farmers had a $2.61 cwt higher milk price and a $1.63 cwt lower feed cost than California dairy farmers, where the greatest 2015 deficit of revenues existed.

You may notice another fact is illustrated in Table 1: Except for feed costs, all other operating costs are very close in amount per cwt among all regions.

Our firm’s clients are located in 31 states and produce more than 10 percent of the milk in the country. Our average dairy client milks more than 2,000 cows per day. We produce the financial data, as shown in Table 1, to be used by individual dairy farmers to compare their costs with the averages of their peers.

Obviously, everyone wants to show results better than our averages, and the result of doing so will improve everyone’s profit potential.

In 2014, we producers – I am 20 percent owner of a 2,000-cow New Mexico dairy farm – were led to believe the milk export markets had finally matured, and hundreds of millions of dollars of processing plant capacity expansion was planned.

We found out that China overbought milk products in 2014, creating a six-month-plus excess inventory situation and, at the same time, the European Union dropped their milk production quota plan, allowing more milk to enter the supply pipeline.

The Soviet Union also stopped buying milk products to some extent as well, adding to the milk inventory glut. I guess one could argue that our milk export market had not matured.

And, as a result, since 2014 producer milk prices have mostly tumbled, and with what we know today, producer milk prices are not likely to recover until the end of 2017.

Let’s look at what has changed, financially, since 2014.

Table 2 compares producers’ 2014 financial results with 2015 and includes our estimates for 2016.

It is incredible how fast things changed in 2015 from 2014’s financial picture. In 2015, solely because of the export market deteriorating to pre-2013 levels, milk product inventories in total are at record highs. Therefore, the extra 7 percent of U.S. milk not exported is now in inventory, and these inventories are growing worldwide every day.

It should be no surprise to any of us producers that milk prices should fall, considering this excess milk product inventory situation. Table 2 reflects the decline in 2015 of milk price, cull cow prices and bull calf sale prices per cwt (offset somewhat by $1.20 per cwt lower feed cost).

All totaled, it is $3.14 per cwt of reduced revenue, creating an overall $0.91 cwt loss average in 2015.

Most of the price declines from 2014 into 2015 occurred throughout 2015 and continue into 2016. Therefore 2016’s financial results will reflect a full year of these illustrated price declines and will likely result in a $2.42 per cwt average estimated loss across all regions.

Additionally, as indicated above, there may not be any material price improvement for well into 2017.

A very important and well-disguised fact looming on the financial horizon for dairy farmers is the debt load farmers have had to take on since 2009. Table 1 shows an average of about $0.71 per cwt cost for “interest” expense.

Throughout the decades of the 1980s and 1990s, interest expense averaged about $0.90 per cwt, but the interest rates averaged 7 to 8 percent in those years compared to our current 3.5 percent average interest rates of today.

This illustrates that the average dairy farmer is carrying far more debt than in the past decades. These added debt servicing requirements, and the chance at higher interest costs in the future, require attention to future planning.

What can we do now?

In order to survive the 2009 dairy financial crisis, dairy farmers (if they had the equity) borrowed money to finance their 2009 losses. With an increased debt load and bleak, near-term profit potential of the current situation, what can dairy producers do to provide a greater chance for their business’ sustainability?

The very first thing I advise clients when I’m asked, “What do I do now?” is to watch spending. There is no budget for any discretionary spending whatsoever. There are no funds to pay for “like to haves” when there are not enough funds for “need to haves.”

Investing today for future benefit will, indirectly, use up your equity lines of credit, making those credit lines unavailable to finance impending losses. I tell clients: “You can make those improvements and buy that equipment or feed your cows. You can’t do both; the money is not there and will not be for another year.”

The most overlooked item by producers is the role they should play in the milk prices they receive. We can produce benchmark cost reports, and farmers can try to cut costs to remain in the top half of their peer groups, but becoming the best at cost-cutting will not yield a higher milk price.

Quarterly, while going over their financial statements with clients, and after going line by line through the various expenses, looking for ways to reduce costs, I ask this question: “What have you done to try to improve your milk price this quarter?”

Nearly everyone believes that by delivering their milk to the processor, the processor or their co-op will get them a sustainable milk price. “Well, how is that plan working?” is my usual follow-up question.

The most important function every dairy farmer must undertake, like it or not, is to be very active with how much they get paid for their milk. Instead of allowing others to take on that responsibility on your behalf, and you diligently working on all the factors that negatively impact your milk price, you can change and improve your world.

From my perspective, there is 5 percent too much milk in our country at this time, so temporarily cut production and work with other major milk-producing countries to do the same. My discussions with producers in these countries reveal they would reduce production when surplus milk conditions exist “as long as the U.S. would do the same.”

I would predict that if we reduce milk production by 5 percent, my projected 2016 loss shown in Table 2 of a negative $2.42 per cwt could turn into a $1 per cwt profit. So producers, what are we waiting for? You have the power and influence to make this happen.  PD