Canadian milk and dairy products are recognized for their variety and high quality, and the quality standards and commitment to animal welfare also contribute to a strong reputation – all of which help demand.
On the U.S. side, the market scenario isn’t as positive. According to BMO Economics, industry conditions have been weak for nearly five years as low milk prices have kept smaller and even larger, higher-cost producers under existential pressure. The USDA estimates more than 2,700 dairy farms, or 6.8% of all U.S. dairy farms, closed in 2018; meanwhile, the Federal Reserve Bank of Minneapolis has noted an increase in dairy farm bankruptcies. While U.S. dairy prices have improved this year, many producers remain under pressure.
This, in part, explains the push in the new Canada-U.S.-Mexico Agreement (CUSMA) to help U.S. producers. But the expectation is the Canadian dairy sector will be one of the hardest sectors hit by the new agreement. According to some reports, it is expected that production will, at best, stay stable or decline in the short term as a result of increases in U.S. dairy imports and declining domestic demand for fluid milk.
Thinking about the day-to-day impact, this means dairy farmers may be producing less product because the overall market will have a higher percentage of product from the U.S., as well as cheese from Europe, as imports rise under the previously negotiated Comprehensive Economic and Trade Agreement (CETA). Ultimately, this will put downward pressure on farm finances, and farmers will have to look for ways to offset any loss in revenue. It’s increasingly important to look to control anything that gets you to the bottom line when there is less control over the top line.
Two key things will help: optimizing production and reducing major farm costs.
On production, it’s important to look at the incremental costs of producing milk. Farmers who look to maximize total production per cow will often have much higher costs than farmers who aim to produce milk for the lowest cost per hectolitre. A concerted effort on optimizing profitability, as opposed to total production, will translate to cost savings; these savings will lead to increased profitability.
Major costs – primarily feed – must be considered as well. Feed costs represent a large portion of the production costs for milk, and producers should evaluate their feeding program with their nutritionist – sometimes even minor changes to the balancing of feed rations, using substitute ingredients or changing feeding processes can result in tremendous cost efficiencies or increases in production.
As well, additional actions can help. When having conversations with dairy farmers, we discuss the following guidance:
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An extra farm hand: When up against external headwinds, it’s important to remember you have an external network of advisers – an accountant and banking partner – that can help. Meet with advisers regularly either to come up with or assess the financial plan for your farm. This will help provide a broad look at where money is being spent on the farm (and opportunities for cost savings and growth). The stronger the relationship farmers have with their advisers, the more the advisers will be able to help find solutions most likely to fit particular circumstances.
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Evaluate quota holdings: Quota holdings typically represent one of the largest investments on the farm. With production levels expected to remain stable or possibly decline in the near term, it will be crucial for farmers to be more strategic about quota holdings and ensure they are generating a return. In some cases, farmers will not fill existing quota and continue to buy additional quota, all while seeing under-credits expire.
As the quota is not being filled, the farmer doesn’t end up generating any return on his or her investment; this can be a drag on capital. Here, too, having that conversation with advisers can be a good idea; they can help ensure capital is being allocated appropriately to ensure the long-term health of the operation and that strategic investments are being made which are suitable for both the short and long term.
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Adam Vervoort
- National Manager of Agriculture
- BMO
- Email Adam Vervoort
