The March 12, 2018, issue of Progressive Dairyman featured our annual regional snapshots of “the state of dairy” around the U.S. Expanded reports for individual regions are highlighted in this online series.
Vermont dairy farmer Bill Rowell calculates his latest milk check was more than $2.50 per hundredweight (cwt) below his cost of production. With lower milk prices forecast for 2018, dairy farmers in the Northeast are apprehensive as planting season approaches.
Chris Laughton, director of the Farm Credit East Knowledge Exchange, said the mood in the Northeast is one of concern. While many are struggling, some farms managing to make it work in the current environment are cautiously optimistic.
Farm Credit East’s annual Ag Outlook report forecasts 2018 milk prices to be about 10 percent less than 2017, with dairy farms’ net incomes expected to fall to 2016 levels.
Based on those financials, most dairy farms are experiencing very tight margins, Laughton said. “Some higher-cost producers are facing a loss, while more efficient operations are still able to earn positive returns,” Laughton said.
“I think we’ll see breakeven or a small loss for the average farm on an accrual basis and a larger cash shortfall when debt service is accounted for,” Laughton said. “I think we’ll see financial results below 2016, similar to those of 2015,” he said.
On the heels of three consecutive years of capital cost consumption and deferred investment, facilities, machinery and equipment have wear on them and will need investment, Laughton said. As a result, balance sheet erosion will likely stress producers in 2018.
The disappointing forecast is the combination of a number of factors. The major one is that milk production, both at home and abroad, continues to outpace demand growth.
Even though there has been some milk processing capacity added in the past year – and more scheduled to come online in 2018 – too much milk offered at distressed prices is pressuring over-order premiums paid to dairy farmers. In addition, milk is being dumped, a situation Rowell calls a “misuse of farm assets.”
Despite burdensome milk supplies, the dairy industry seems unable to embrace discipline when it comes to managing those supplies, Rowell said. The financial impact continues to drain farm equity.
“The co-ops have been remarkably adept at finding a home for milk, but we’re definitely seeing capacity constraints,” Laughton said. In general, butterfat demand remains high, so there are plenty of markets for cream, but skim is in surplus.
Pennsylvania
Like others in the Northeast, dairy farmers in Pennsylvania are bracing for the short term, according to Alan Zepp, risk management program manager at Pennsylvania's Center for Dairy Excellence (CDE).
Pennsylvania was one of the states impacted by Dean Foods’ decision to terminate milk marketing contracts. (Read: Dean Foods terminating milk contracts effective May 31.)
Among all states, Pennsylvania has the second largest number of dairy farms, while ranking sixth in total milk production. Many small family-run dairy farms face serious concerns about their viability.
More than 900 producers completed a statewide survey last summer, representing about 16 percent of the dairy farms in the state. Preliminary results of the survey showed farms with under 200 head continue to struggle with stabilizing milk price volatility and decreasing production costs.
Labor issues and environmental pressure associated with the Chesapeake Bay continues to build. Dairy farmers in Rowell’s home state of Vermont face increased environmental and water quality regulations and costs.
Zepp said the major regional issues haven’t changed a great deal from a year ago:
• Finding a home for milk and the downward trend in milk consumption. Starting the year, production and processing capacity were more in balance than last year, but there is still more milk than the market can handle. Processors are not taking on new milk supplies. There has been discussion about new plants and processing capacity, but so far it’s been a lot of “what ifs,” Zepp said. With the reliance on Class I utilization, declining fluid milk sales continue to have a negative impact.
• Premiums/basis have not returned, and there is no reason to expect they will in the near term. As the new year got underway, prices were at or below breakeven for most farms. The Pennsylvania Milk Marketing Board over-order premium on fluid milk produced, processed and purchased in Pennsylvania fell from $1.60 to 75 cents per cwt on Jan. 1.
Quality premiums have also dropped or disappeared. Basis, calculated as the difference between Class III and the Pennsylvania all-milk price, was $2.48 per cwt over the past 24 months, down from $3.12 per cwt for the 36 months prior to that. Most cooperatives are charging “marketing assessments” to defray the extra hauling and other costs to handle the current supply, Zepp said.
A study released earlier this year suggested additional dairy processing investment in Pennsylvania could generate $34.7 million annually in combined revenue generation and cost savings.
The study, prepared by Drs. Chuck Nicholson, Mark Stephenson and Andrew Novakovic, was part of a comprehensive look at competitiveness and growth opportunities within Pennsylvania’s dairy industry. They estimated investing in two plants processing volumes of 4 million pounds of milk per day and producing non-American types of cheese (Italian and specialty cheeses) would result in the largest reduction in supply chain costs. These plants would reduce hauling costs for Pennsylvania dairy producers by an estimated $5.9 million per year.
“In the Northeast, Pennsylvania is the most net surplus state of them all,” said Stephenson, director of dairy policy analysis at the University of Madison – Wisconsin.
Labor hard to find, costs rise
For dairy and all sectors of agriculture, the availability and reliability of labor continues to be a major challenge, according to Laughton. Producers report increasing difficulty hiring and retaining both production and supervisory labor.
Preliminary data from the Cornell University/PRO-DAIRY 2018 Dairy Farm Business Summary and Analysis Program report showed milk shipped per farm increased by 2.4 percent, resulting from a combination of an increase of 4.7 percent in average herd size offsetting a decrease of 2.2 percent in milk sold per cow. Among the 36 large New York farms (average of 953 cows) analyzed, labor costs increased 7.2 percent per hired worker equivalent. When adding other costs, total production costs among the farms analyzed were up 84 cents per cwt.
Feed conditions vary across the Northeast
Many farms in Pennsylvania had good crop years in 2016 and 2017, and hay and silage inventories are good, and feed costs are lower, Zepp said.
Laughton said 2017’s wet growing season challenged forage harvest, leading to variability in quality. Forage quality is below average in much of New York, he said.
Rowell said feed quality and reserves are adequate for the most part, and good-quality dry hay, hay silage and corn silage are reasonably available at fair prices in his area. With tight income, however, even low feed prices create challenges.
Exports provide glimmer of sunshine
An improving global economy and the potential for increased U.S. dairy exports are welcome news. Further weakening in the U.S. dollar will make U.S. exports more competitive.
“I don’t foresee a huge increase, but even a modest improvement will support our producer prices domestically,” Laughton said.
Recent improvements in futures prices provide a glimmer of optimism for the second half of 2018, Laughton said.
“We're still looking for that bright spot we keep hearing about,” Rowell said.
One thing that will help sustain the dairy industry in the Northeast is its foundation.
“The dairy industry in the Northeast has very deep roots,” Zepp said. ”There is a strong infrastructure, with many families that understand dairy farming.”
Read also:
Northwest turning to short-term
Two forms of concentration in the Southeast
Texas and New Mexico optimistic 
ILLUSTRATION: Illustration by Kristen Phillips.
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Dave Natzke
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