Strategies for managing your farm's profitability in 2016
One of the most common questions I receive from dairy farmers is “What is the price of milk going to do?” A close runner-up is “What should I do given the current milk price?” Finally, in times like this, the question often is “When will it get better?”
There are no easy answers to any of these questions. I always joke that I do not have a crystal ball and I am not omniscient. And although the price of milk certainly matters since it is revenue, a farmer’s cost of production or expenses matter too.
First, let us talk about what establishes price: supply and demand. Simply put, if we supply the market with more product than it is demanding, prices fall. If we produce less than the market demands, price increases. Supply and demand are dynamic, which means they can change. For example, if dairy exports increase, this causes demand for dairy to increase. Similarly, if there is poor weather in Ireland and feedstuffs are in short supply, milk supply may drop, and price may increase.
So what is driving the market right now? Just like I mentioned above, supply and demand drive markets. In 2015, China imported less dairy products and this drove markets lower. Chinese imports have picked up in 2016 and it remains to be seen if this trend will continue for the duration of this year. Additionally, milk supplies have been strong both domestically and internationally. With demand down and supply growing strong, this causes prices to drop. I often get the question “Does this mean farms need to go out of business in order to regulate supply and demand?” Not necessarily. That is only one side of the equation. If China, or anywhere else for that matter, continues to consume more dairy products, then demand will balance out the supply. And often times it is an adjustment of both supply and demand to bring prices back to equilibrium.
Now I would like to turn to the question of “What should I do?” First and foremost, know your cost of production. That is, how much money does it take for you to make a hundredweight of milk? Carefully examine your expenses. Are there areas where you are overspending? Are there surprises? Are there any “nice to haves” in your budgets? You can use FinBin data to compare other farms' costs to your own. Sometimes comparing your operation to another can provide new ideas or opportunities. Be sure to cut costs wisely. Cutting feed costs or other items associated with a cow's milk production will lead to a decrease in your income!
Second, be sure to talk to your lender, if you have one. Make sure you are on the same page. Your lender can be a very important partner in managing costs. There may be an opportunity to restructure debt or adjust payments.
Third, look for ways to maximize your assets. Are you breeding cows back quickly? Do you have equipment that you could rent out or share with another producer? What are you doing to ensure optimal cow health?
Finally, create a risk management plan. There may not be much you can do about today’s milk price, but risk management is a way for you to proactively manage your future milk price. If you know your cost of production, you can determine your “breakeven” milk price. This becomes your price floor or minimum price you’ll accept for your milk. You can create a plan for how you will market your milk in future months based on this breakeven price. Additionally, you can go a step further and also lock in prices for your feed and energy inputs. Risk management is NOT about beating the markets; it IS about creating a plan that allows you to escape some of the volatility that exists in the dairy markets. Furthermore, it allows you to establish a margin level that works on your farm, so you can ensure profitability.
To answer the last question “When will it get better?”, I will say it is hard to know. It comes down to - you guessed it - supply and demand. A drought and hot temperatures in the U.S. could cause milk supply to decline and push prices back up. Likewise, continued renewed buying from Asian markets could cause demand to surge. Conversely, strong European production or a decline in demand from overseas markets could cause low prices to stay longer. It is important to take a little time each day or week to read up on market factors and understand what is driving supply and demand for dairy products.
Times of low prices are not easy for any dairy farmer. Take it one day at a time. Do your best to proactively manage your finances. It will not change the milk price, but it will give you some control and hopefully options to help you survive in difficult times.