Dairy 2014: A Pivotal Year

January 24, 2014 06:30 PM
Dairy 2014: A Pivotal Year

Prices, legislation and trade are all key

Duane Alberts and his brothers David and Richard were in the eye of the 2013 maelstrom that left thousands of acres of Minnesota and Wisconsin alfalfa dead from winterkill.

"We walked the fields on April 27, and we were shocked that our alfalfa wasn’t coming on like it should. There was almost no growth," Duane says.

Only five of the Alberts’ 400 acres of alfalfa came out of dormancy this past spring. Then a freak snowstorm on May 2, which dumped 10" to 12" of wet, suffocating snow on fields, added to the misery.

The Alberts, who farm near Pine Island, Minn., had never seen such forage losses. The farm has been in the family since 1917, with the fourth generation now involved—David’s children. This past year, they had to scramble for forage to feed their 600 cows plus youngstock. The winterkill was widespread. Eighty percent of alfalfa in southern Minnesota and 50% of Wisconsin’s crop (1 million acres) died.

The Alberts replanted 200 acres of alfalfa on land that had been corn in 2012. With a late frost-free fall, they got two cuttings off the new seeding. Even though corn went in late, it yielded 22 tons per acre. "That’s a very acceptable yield for us, given the late planting," Duane says.

The other good fortune was strong milk prices throughout 2013. "The real loss with the alfalfa winterkill was the protein," Duane says. "With milk prices just under $20 per cwt, that paid for the protein supplement we had to replace."

As they move into 2014, finding protein supplement remains a challenge. They recently bought their first-ever load of barley malt sprouts, and for the first time in a decade, purchased soybean meal.

Through perseverance, creativity and luck, the Alberts remain optimistic that 2014 will bring better fortunes.

California comeback. California, the nation’s largest milk-producing state, is beginning its slow recovery from the dairy depression that gripped the country in 2009.

"We’re cash flowing on a current basis, but we still have a mountain of debt left over from 2009," says Rob Vandenheuvel, general manager of California’s Milk Producer Council (MPC).

Lower feed costs and higher butter and milk powder prices are the reason. Corn prices are running $200 per ton, 50% less than in early to mid-2013, he says. Forage and hay supplies, however, remain tight due to high demand, lower supply and export hay sales to China.

But milk prices have finally rebounded, thanks in part to strong exports. California milk prices now hover above $20 per cwt, competitive with nearby states. For the past several years, California milk prices had lagged by $1 to $1.50 per cwt. Coupled with high feed prices fueled by
$6 and $7 per bushel corn, cash flows bled red profusely.

It’s difficult to know exactly how many California dairies exited the business in 2013. Anecdotal reports put the number between 100 and 150 dairies, which if accurate, represents upward of 10% of the state’s 1,500 dairy farms.

alfalfa field

New seeding alfalfa was needed to provide forage after a devastating winterkill in the Midwest in 2013.

Three of California’s large dairy cooperatives, California Dairies Inc., Land O’Lakes and Dairy Farmers of Amer­ica, are preparing a peti­tion for state producers to join the Federal Milk Marketing Order system. California has operated separately from the Federal Orders, relying on its own state order administered by the California Department of Food and Agriculture (CDFA).

But that reliance means producers aren’t competitive with the rest of the country. "Producers here are tired of battling with CDFA for higher prices," Vandenheuvel says. "We’ve tried hearings, legislation and lawsuits. Nothing worked."

This winter, for the first time in years, California dairy farmers are feeling optimism. "We’re on the verge of a farm bill that might offer something for larger dairy farms. We’re on the verge of getting a Federal Order in 16 months or so that would level the playing field. Our large co-ops are all positioning themselves to take advantage of export markets," Vandenheuvel says. "For the first time in years, hope is in the air that we might be getting close to recovery." 

A turnaround ahead. The rest of the dairy nation is also hopeful that better times are ahead.

Milk prices are strong. The 2013 U.S. all-milk price averaged $20, and USDA is projecting they’ll remain strong.

For 2014, USDA says the all-milk price average will range from $19.70 to $20.50. That bodes well for income-over-feed cost, with USDA projecting corn prices to be in the $4.05 to $4.75 per bushel range in 2014.

Rabobank agrees, thanks to strong export demand from China. "We expect [dairy commodity] prices to hold around current highs before easing from mid- to late 2014 with continuing supply growth in response to significantly improved margins," says Tim Hunt, a Rabobank analyst.

Other reasons for optimism include:

  • A new farm bill might be in the offing this year, as dairy lobbyists continue to discuss what should be included.

Everybody agrees that dairy price supports are out­­­moded, and income-over-feed-cost margin insurance makes much more sense. The current sticking point is whether a dairy market sta­bil­iza­tion program is needed along with margin insurance to avoid long, expensive periods of gov­ern­ment indemnities.

  • Immigration reform might also get some life in the House of Representatives this spring. The budget agreement as of late 2013 could lay the groundwork for compromise. Don’t expect it to be as favorable as the Senate version, which allows current illegal workers to stay if they meet certain conditions and has a method for new workers to come north. But the congressional leadership wants immigration reform done before 2014 elections.

Immigration reform is critical to the dairy industry. A survey by the National Milk Producers Federation (NMPF) found that nearly two-thirds of the nation’s cows were milked by immigrant labor.

NMPF estimates a loss of immigrant labor would result in closure of 4,500 dairy farms and loss of 1.34 million cows and 29.5 billion pounds of milk production. If that occurs, retail milk prices would soar 60%.

  • The Trans-Pacific Partnership (uptake) trade agreement is expected to be finalized soon. The agreement will still have to be approved by Congress—no small feat—and the other countries involved. The U.S. now exports 14% to 15% of its milk solids, up from a paltry 3% a decade ago. The TPP, once in place, could push dairy exports to 20% of production, on par with other proteins, such as pork.

The addition of Canada and Japan to the TPP negotiations earlier this year "has created a new paradigm in the TPP negotiations that, if done properly, could provide a significant boost to the prospects of an overall net positive outcome in the negotiations," says Tom Suber, president of the U.S. Dairy Export Council.

The TPP, even if approved by negotiators in 2014, will take years to implement. But it would set the process in motion, perhaps cementing the U.S. role in global markets for decades to come.

All in all, the coming year could be a pivotal one for the U.S. dairy industry. 

You can e-mail Jim Dickrell at jdickrell@farmjournal.com.

For more on milk prices, immigration reform and exports, visit www.FarmJournal.com/dairy_outlook

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