Dairy farmers should be prepared for an extended period of low margins, likely exceeding beyond the first half of 2016.
That’s pretty much the consensus view of a panel on the dairy market presented at the 2016 Dairy Strong Conference sponsored by the Dairy Business Association here in Madison, Wis. this week.
“I would love to tell you we’ll see a [recovery] by the second half of the year,” says Mary Keough Ledman, a dairy economist with Keough Ledman Associations. But that’s not likely to happen, and if it does, it might only be a cheese market rebound to $1.65 to $1.80/lb, which would translate to $16.50 to $18/cwt Class III prices.
“I’m not talking about $1.90 to $2 cheese, and a whey price (currently less than 30¢/lb) at 50¢/lb.,” she says. Those types of prices are required to get to levels seen in 2014, and they’re not likely to happen anytime soon due to the more than ample milk supply in cheese producing regions.
In November, income-over-feed-cost margins were about $10 the Midwest and New York, $9 in Idaho and $8 in California. Come February and March, those margins will likely erode $2 to $3/cwt. So Ledman’s advice to dairy farmers is pretty simple: “Hunker down. And I would not put one more cow onto your operation until I ask my milk buyer if he has room for her production.”
Those views were shared by Bob Witt, a senior dairy lender with Wells Fargo and David Rinneard, a regional sales manager with BMO Harris Bank.
Witt, who has about 20% of his clients in California and the Southwest, says conditions there are worse than in the Midwest. “If you’re in the Southwest, the basis (the difference between the producer mailbox price and Class III) ranges from -$1 in times of milk surplus to 50¢/cwt when milk supplies are tight. Right now, they are negative, and the losses of 2015 are stretching into 2016,” he says. “We’re in for a couple of tough years.”
In 2016, clients will start to see equity erosion, says David Rinneard, regional sales manager with BMO Harris Bank. “Risk management will be fundamental to success,” he says. At the same time, he has some clients who are planning moderate expansions in 2016.
“They’ve planned for expansion, and they’ve squirreled away cash the last two years to make it happen,” he says. But with lowered milk price expectations, some might shelve those plans for 12 to 18 months.