2022 State of Dairy: A melding of moods and concerns

Now that we have a firm hoofprint in a new year,

Editor / Progressive Dairy

Progressive Dairypresents its annual “State of Dairy” editorial package.

From my perspective, there’s more commonality in both the overall moods and concerns – regardless of geography – than during any time in recent memory. Even the terms expressed by a vast majority of those providing insights and observations are almost identical: optimism and caution. Perhaps that’s because the U.S. dairy industry is consolidating, and its producer base is shrinking.

The USDA’s semiannual estimate of cattle inventories indicated there were fewer dairy cows and replacement heifers to start the new year. Milk cows, at 9.38 million head, were down 1% from the previous year. Milk replacement heifers, at 4.45 million head, were down 3%. (Detailed statistical analysis of state and national dairy herds and milk production will be featured in the April 1, 2022, issue of Progressive Dairy.)

For the most part, optimistic attitudes are based on outlooks that milk prices will be the highest since 2014. Adding caution and apprehension, however, are high costs for inputs of all sorts, if you can get them. Labor pains are acute. Finding a balance between milk supply and demand affects short-term production and long-term investment. Federal Milk Marketing Orders (FMMOs) and trade policies are elephants in almost every geographic room, although specific debates vary.

There are obviously issues that impact individual states and regions differently. Those include drought in the West and fluid milk sales declines in the Class I-dependent Southeast.

Partly personal

To kick off the overview, I’ll turn to some folks I consider longtime friends.

I’ve known Sam Miller, managing director and group head of agricultural banking for BMO Harris Bank, for decades. At one point, we even lived in the same city in Wisconsin’s Fox Valley.

For Miller, several factors are contributing to dairy producer optimism, led by higher milk prices, a belief the economy is learning to live with the pandemic and increased dairy product exports. Financial positions for most dairy producers, and for the industry as a whole, have improved from recent years.

Setting limits on that optimism are concerns over labor availability and costs, and the inflationary impacts on almost every expense category. Geopolitical concerns that may affect export markets stretch from the borders of Russia-Ukraine and China-Taiwan all the way to dairy farms from New England to the Pacific Northwest.

Mark Stephenson, director of dairy policy analysis at the University of Wisconsin – Madison, regularly produces a map identifying the centroid of U.S. milk production. While we don’t know exactly where the U.S. milk centroid is to start 2022, it’s been somewhere in Kansas over the past couple of decades.

As a lifelong resident of Wisconsin, my only connection to that state as a youth was concern that Dorothy would make it home from her journey to see the Wizard of Oz. Then, I met Lynda Foster. With her family, Foster operates a 180-cow, Lely robot dairy near Fort Scott and the last remaining dairy in Bourbon County. She’s a past member of Progressive Dairy’s editorial adviser board.

For the Fosters, higher milk prices are providing a hopeful start to 2022, tempered by memories of how quickly prices and outlooks can change. As the calendar turns to another cropping year, there’s caution due to worries over costs and supplies of inputs to produce the feed for their dairy herd.

Supply chain challenges are causing delays for items used every day on the farm, adding to cow health treatment headaches even under the best animal care management efforts. “I have had more back orders than I’ve ever seen on just normal daily use products like dry cow treatments, mastitis treatments, medicine for use on uterine infections or heel warts. How are we supposed to take care of our animals when we can’t get the products we need?” she wonders.

So far, their milk production is below limits set under a base-excess program implemented on Jan. 1, 2022. What impact that has long-term is unknown. Labor is a concern even though the Fosters were one of the first to install robotic milkers in the area, in 2016. She’s seeing much greater interest in automation investment among fellow producers.

When it comes to potential FMMO reform, Foster has heard pleas for change grow louder. She recalls the important roles dairy cooperatives and federal orders have had and continue to play to strengthen the U.S. dairy industry – and doesn’t want “the baby thrown out with the bath water.”

“As a whole, the dairy producers are still hanging in there. The risk management tools and government assistance programs were definitely a lifesaver to many of us,” Foster said. She’s worried, however, that higher projected milk prices will give producers a false sense of security, and they’ll reduce use of risk management tools.

Strong demand, both home and abroad and enhanced through dairy checkoff programs, adds to her positive outlook. “I feel the state of dairy is still in good shape and hopefully will improve this year,” Foster concluded.

Feed concerns

It varies by state and region, but we already know U.S. dairy producers enter 2022 facing the third-lowest hay inventories since 1977.

Ev Thomas of Oak Point Agronomics Ltd., Hammond, New York, finds nervousness on several fronts when it comes to producing other major dairy ration components this year. That concern starts with crop production input costs and product availability, especially fertilizer. He advises producers to work with crop advisers when it comes to soil testing and manure applications in an effort to reduce costs.

“Most dairy farms are running a significant nutrient imbalance,” he said. “More nutrients are coming onto the farm as fertilizer and purchased feed than are leaving the farm as milk and cull livestock.”

In addition to fertilizer, one issue less frequently addressed has to do with glyphosate. With about 90% of U.S. corn and soybeans produced from genetically engineered seed, glyphosate has not only almost tripled in price, but supplies have dwindled due to production issues in China and Louisiana. With seeds previously ordered, producers may not be able to swap Roundup Ready crops for conventional seed.

What’s ahead?

Resilient domestic demand for dairy products will combine with the continuation of a global economic recovery that will support higher-protein diets and demand for dairy products around the world, according to Tanner Ehmke, CoBank’s lead economist for dairy and specialty crops. The outlook of higher milk prices has slowed U.S. cow culling rates somewhat and boosted prices for replacement animals, a sign some producers are positioning themselves for growth.

However, although dairy farmers are showing signs of improved profitability, growth in U.S. milk supplies are not expected to return for several months. A period of financial healing, along with base-excess programs, will slow the pace of growth, as will labor tightness, construction and input costs, and supply chain backlogs.

Stephenson’s map for 2022 is likely to show cows and milk production are migrating to the center of the U.S. As noted in a Progressive Dairy article last fall, that movement is closely linked to large-scale regional cheese processing capacity, according to Ben Laine, dairy analyst with RaboResearch. Now and into the future, the “sweet spot” for expansion of both dairy farms and cheese manufacturers will be tied to economies of scale for milk production and buyer availability and processing capacity. With the ability to manufacture, store and move cheese longer distances, dairy expansion is being driven to the Upper Midwest and Plains states, Laine explained.

Speaking on a recent Dairy Download podcast, Jackson Takach, chief economist and senior director of strategy, research and analytics with the federal agricultural Mortgage Corporation (Farmer MAC), notes dairy is trailing crops (corn, soybeans, wheat and cotton), poultry and pork in terms of investment and growth among other ag sectors, in part due to the extreme run-up in costs and market disruptions caused by the pandemic, especially in food service outlets.

Takach said he believes producers shouldn’t see dramatic changes in interest rates on operating loans in 2022. Instead, the increases will work their way into next year’s loan renewal season.