How to Take Advantage of Dairy’s Solid Margins
Feb 12, 2014
A lender offers advice on what to monitor -- both on your dairy and beyond -- as 2014 yields dairy profitability.
By Lori Teigen, AgStar Financial Services
2014 has definitely started out with a bang for dairy producers. Between the challenges brought on by colder temperatures and a current average Class III milk price exceeding $19.30/cwt. for 2014, producers are left wondering what to expect next.
We’ve been hearing many questions from our clients, ranging from what to do for contracting milk and feed prices, to handling high costs of land rents with current commodity price levels, to wondering if they will have enough inventory on hand until next harvest.
Risk management: a critical conversation
Risk management, particularly margin management, continues to be a critical conversation every dairy producer needs to be having on your operation. Significantly higher milk prices over the past few months are offering opportunities for producers to lock in good margins throughout 2014. It is critical to remember, however, that margin management is not just looking at the price of milk and the price of feed. It’s vital to look at the correlation between those prices. Margin management will be imperative to the long-term success of your operation. Simply cutting costs today to reduce expenses can be a short-term fix, but it’s usually not the best solution for the long haul.
Remember, margin management requires discipline and consistency as markets can be volatile. In addition to knowing both your cost of production and cash flow requirements, understanding the markets is also important. This is key for being able to take advantage of margins at the right times. Utilize your team of advisors to help with marketing decisions and making sure you truly understand each of these factors.
Evaluate your feed inventories
With winter kill and prevent plant last year, many producers were able to get a good handle on their 2012 feed inventories as inventories were lower than they have been in quite a while. The effects of last year are still leaving some uncertainty among producers this year on how alfalfa fields will be affected by this winter. Unfortunately with weather conditions during our growing season, many producers are having feed-quality issues in forages, which are affecting production. The main thing to keep a close eye on is ensuring you have enough feed to get through until the 2014 harvest. Haylage inventories may need to get stretched this year, which will impact affecting rations.
Feed quality issues in the U.S. have played a role in the Class III prices due to the affects on production and, therefore, supply and demand. Furthermore, in the past, dairies raising all of their forages had the advantage over producers buying their feed. Will this shift going forward give producers buying feed the advantage?
Global economics impact milk prices
Lastly, continue to stay in tune with global dairy economics and how it affects our milk prices. U.S. dairy exports continue to remain strong and are currently over 15% of U.S. milk production, a gain of 2% since 2012. The U.S. export market is a big driver in the milk prices, making it critical to understand the impact of global markets. Cheese stocks have been declining and are 20% lower than they were recently, when cheddar cheese prices were at record levels. Many commodities are reaching low inventories. That, combined with unseasonably high prices, creates considerable volatility in the markets. Throughout 2013, U.S. prices were very attractive in the global markets; however, those competitive margins have started tightening.
Current markets are providing great opportunities for producers to take advantage of solid margins going forward into 2014. Continue to keep an eye on the margins available while keeping your own operation’s cost of production in mind. Continue monitoring feed inventories and pay attention to what global dairy trade is doing, as it will affect your farm’s profitability. Best wishes for a successful and profitable 2014.
Lori Teigen is a Dairy Industry Specialist at AgStar Financial Services. More content from Lori and AgStar’s other industry experts can be found at AgStarEdge.com.