In addition to state and regional dairy producers, organization leaders, processors and others, Progressive Dairy reached out to industry representatives with a broader view of the state of dairy entering 2023. Here are summaries of their comments.
Munch: A change in mindset
Returning from the American Farm Bureau Federation’s annual meeting, Daniel Munch, economist, says the organization’s dairy members were entering 2023 optimistic, with the understanding there is much uncertainty regarding market fundamentals. Biggest factors impacting operational and financial stability and strength in 2023 include input costs, natural disasters and regional regulatory variability.
“State-by-state changes in labor and environmental regulations and requirements have made dairy farming in parts of the country much more expensive,” Munch says. “Weather conditions and access to water and feed remain regionally challenging.” Interwoven through all these challenges is the Federal Reserve Bank’s attempt to fight inflation with interest rate hikes, affecting both producers and consumers.
Providing positives, declining ocean freight costs improved the outlook for continued strong exports. Domestically, food consumed away from home is inching closer to pre-pandemic levels, which could push domestic demand.
Munch sees plenty of opportunities for dairy ahead, whether it’s in smaller, specialty farms able to fully capture the essence of regional markets and benefit from niche marketing and high-end product lines; broader innovation in products to fill the ever-growing interest in fitness, protein and health, convenience and saving time; to growing export markets.
“How can the dairy industry strategically posture itself (in partnerships and otherwise) to give people access to dairy products whenever they want and as fast as they want? If the industry can answer these questions, I see much promise for growth,” Munch says.
In some cases, taking advantage of those opportunities will also take a change of internal mindset.
“As a younger and newer participant, I’ve seen blame games played among dairy groups and between individuals in leadership roles,” Munch says. “That helps no one. When we come together with a common vision to provide consumers an experience they desire, the U.S. market and the U.S. farmer are more than equipped to make that vision a reality. The benefits? Higher farm income, higher processor income and happier consumers. We’re only as strong as our weakest link, so I think we need to step back, re-focus and move forward collaboratively with confidence and poise.”
Kappelman: Resiliency and regeneration
As a cooperative with members across the nation, the factors impacting Land O’Lakes dairy producer members differ regionally, says Pete Kappelman, senior vice president of member and government relations. While many producers saw reasonable profitability in 2022, continuing that trend into 2023 is less certain, requiring proactive measures to protect margins.
Consumer demand for traditional and new dairy products through Land O’Lakes retail and food service sectors fuel optimism, Kappelman says.
“As we continue to see steady demand in the marketplace, production is still exceeding processing demand in many areas of the country,” he says. “As a nationwide co-op, Land O’Lakes continues to have a proactive relationship with member-owners to better align production with marketplace realities to maximize the value of member milk.”
As the industry moves toward sustainability commitments, farmers have a unique opportunity to partner with customers willing to help them grow their sustainable farm practices that are making an impact in reducing greenhouse gas emissions, he says.
Truterra LLC, a business of Land O'Lakes, Inc., was recently awarded up to $90 million through the USDA Partnerships for Climate-Smart Commodities program, with a goal of helping farmers adopt more regenerative agricultural management practices and help accelerate the decarbonization of key agricultural commodity supply chains.
As a dairy processor and marketer, inflationary costs are all over the board, with manufacturing, logistics and sourcing inflation continuing to drive up costs.
“Cooperatives all over the country are facing difficult but necessary decisions to protect their members’ equity and ensure their businesses remain healthy and viable in the short term,” he says. “However, we are very optimistic about the future of the dairy sector and are excited to capitalize on the positive momentum sparked in 2022.”
Dairy resilience can overcome universal and regional challenges, Kappelman says.
“In addition to sound risk management plans, producers are constantly evaluating new technologies and management practices that allow them to drive efficiencies, diversify their business and progress sustainable farming,” Kappelman says.
Miller: Margin compression ahead
As managing director of agricultural banking for BMO Commercial Bank, Sam Miller sees 2022 as a strong financial basis to help withstand changing conditions in 2023. Living in northeastern Wisconsin, Miller said Upper Midwest dairy producers made financial progress in 2022, thankful for strong milk prices and above-average crop yields and quality.
“Overall, dairy producers are in the best financial shape they have been in for at least the past 15 years,” he says. “Working capital and equity positions are in in great shape given the improved milk prices, government payments from a few years ago and asset appreciation for almost every asset class – land, buildings, livestock, equipment and feed.”
The biggest concern is 2023 is margin compression. While milk prices will likely be lower, farm expenses will be stubborn to reduce, Miller says. Crop input costs are expected to rise, as will costs for labor, parts, supplies and interest rates.
“Combined with milk futures lower than experienced in 2022, margin compression is highly likely. Fortunately, balance sheet liquidity and equity are in good shape, and some adversity can be absorbed by dairy producers,” Miller says.
Miller sees several factors are impacting herd and cow numbers, including availability of replacement livestock, cost to expand facilities, processing capacity and base or quota programs, availability and cost of labor, and uncertainty about future conditions with a high inflation rate and unknown direction for milk prices.
Reecy: Financials shape future
While entering 2023 in better financial shape, producers are cautious, says Michael Reecy, vice president of dairy-related business for Farm Credit Services of America, an agricultural lender with offices in Iowa, Nebraska, South Dakota and Wyoming and a customer base stretching from Michigan to California.
With a dairy portfolio of over 1 million cows in major dairy regions of the U.S., Reecy expects average net income per cow to be more than $1,000 per cow in 2022, greater than net income experienced in 2014. That improved income – with growth of milk production restricted by processing capacity – impacted where producers invested.
“Most of the earnings generated in 2022 has gone to strengthen working capital due to limited areas to deploy capital for production expansion because new and excess processing capacity is very limited,” Reecy says.
“Optimism in 2023 is much more limited compared to 2022 due to decreasing Class III and IV milk prices and higher input costs, specifically feed,” Reecy says. Inflation has impacted every cost within a dairy operation, to the point that overall cost of production is likely to average $20 per hundredweight or more. “This escalation of costs will be hard to bring down in the short run, and with milk future prices less than $20 per hundredweight in 2023, earnings will be quite muted. Lack of available replacement heifer supplies and high beef prices will keep dairy cattle prices very high in 2023.”
Seeking increased efficiencies of scale, continued and accelerated consolidation of production will be the theme for 2023, Reecy says.
“One of the bright spots is that production increases outside of the U.S. will likely be limited in 2023, thus creating opportunity for the U.S. producers to fill this void which will support milk prices.”
