Wisconsin’s dairy farmers may understand history better than weather conditions or how to get the most milk out of their cows so it’s doubtful any of them are planning a frivolous spending spree with their extraordinary profits from this record-setting year in the industry.
A golden combination of record-high milk prices and record-low feed costs are leading to profits in 2014 that are six times higher than previous good years for some state dairy farmers, dairy experts are saying.
Some dairy farms that milk the state average of 117 cows will enjoy profits after expenses that exceed $200,000, some farms milking 500 cows will clear $1 million and some big operations that milk 2,500 cows will clear $5 million, according to calculations from Randy Greenfield, a dairy specialist for Vita Plus, a Madison-based livestock feed company.
“Financially, for a lot of farmers, this will be the best year they will ever have,” said Greenfield, who based his calculations on dairy farmers’ financial records that he has studied and discussions with agribusiness consultants.
Dairy farmers are calling this a healing year because they are using their profits to pay off debt accumulated when they couldn’t pay their bills in 2009 after milk prices collapsed that year under the weight of too much production, Greenfield said. They are also casting a wary eye at 2015 because milk prices are expected to plummet and there is concern that a scenario similar to 2009 could unfold.
“There’s going to be a big drop, nobody is trying to whitewash that,” said Mark Stephenson, director of dairy policy analysis at UW-Madison.
That’s why farmers like John Judd aren’t getting too excited about the record profits they’re enjoying this year. Judd said most dairy farmers are bracing for the worst.
“There are no frivolous spenders among dairy farmers anymore because they all lost their farms,” said Judd, who owns a 75-cow dairy farm on land where Robert La Follette grew up in the town of Primrose in southwest Dane County.
A World Agricultural Supply and Demand Estimates report said that Class III milk prices that reached an average high of $22.50 to $22.60 per hundredweight this month will drop to $17.15 to $18.05 by November 2015, because milk production remains high but demand has been slowed by shrinking export sales.
Despite a price drop of 22 percent, dairy farmers should survive it, Greenfield said. “Most dairy farmers will still make money next year. It just won’t be as fun as this year when they made a lot of money,” he added.
One reason for the optimism is that feed costs are expected to drop again or, at the least, stay the same. “It’s relative prices that matter,” said Brian Gould, an agriculture economics professor at UW-Madison. He explained the profit margins are neutral if milk and feed prices are both high or low. But problems for dairy farmers occur when, like in 2009, milk prices drop considerably and grain prices stay the same. Or, in 2012, when grain prices rose while milk prices stayed the same.
“Now, we’re going to get back to prices where they are both OK,” Gould said. “In a relative sense, we’re getting back to more normal margins.”
Besides stable feed costs that should offset the drop in milk prices, dairy farmers also should benefit from fertilizer and fuel costs that are expected to stay the same, if not drop, in 2015, analysts are predicting. “Some farmers may have to tighten their belts, but they are used to that,” said Mary Elvekrog, Badger Financial assistant vice president and dairy specialist. “But 2015 could end up being a good year and, at the least, an average year for dairy farmers.”
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There are signs in foreign markets that are signaling that U.S. milk prices could drop as low as $13 per hundredweight. Dairy farmers lose money at that number.
If it drops that low, Stephenson said dairy farmers are fortunate there are better programs to help them through tough times, such as the USDA’s Margin Protection Program that was part of the 2014 farm bill.
The Margin Protection Program protects dairy farmers when the difference between the all-milk prices and average feed costs (the margin) drops below a dollar amount specified by the farmer. A drop in Class III milk prices won’t be bad news for everybody. Consumers could see a slight decrease in the cost of milk at the grocery store. It also will cost cheese makers less to make cheese, and consumers both in the U.S. and abroad should benefit by paying less for it.
“High prices for products tend to dampen demand for those products,” Stephenson said. “Cheese makers prefer lower (milk) prices than higher prices. They know they’ll sell more to consumers if they view it as a good buy.”
Export sales of ag products have sagged partly because the U.S. dollar has strengthened and products like American-made cheeses are more expensive than cheeses from other countries, Stephenson said. “Our prices are still above the world prices by enough that it has shut off a lot of those (exporting) avenues for us,” he added.
Greenfield said he was amazed to learn that some farmers he works with are going to clear $6 per hundredweight of milk this year. That is the key number in his calculations to determine how much farmers are going to earn after expenses. Stephenson didn’t dispute that number and said some dairy farmers will make more than that.
“That’s an amazing number. But not all farms,” Stephenson said. “Some will make much less, too.”
The average number could be above $4 per hundredweight, Badger Financial’s Elvekrog said.
“It used to be that clearing $1 per hundredweight was a great thing, and I know some farmers would love some years just to reach zero because that meant they covered their expenses,” Greenfield said.
Once the harvest is over, farmers will talk more with their accountants about paying down debt, prepaying for next year’s seed and fertilizer this year so they can claim it as an expense on their taxes or buying new machinery for the milking or feed phases of the operation, Elvekrog said.
“It’s OK to pay taxes,” Judd said, “as long as the tax money is spent the right way.”
Stephenson said some dairy farmers were enthusiastic shoppers at the World Dairy Expo last month at the Alliant Energy Center. “People were thinking, ‘Maybe we can buy something this year’. In previous years, we had higher corn and feed prices and many of those farmers were buying equipment. I guess this is the dairy producers’ turn this year.”
Elvekrog said dairy farmers she has talked to have been very appreciative. “By nature, they are positive people,” she added, “So this has been nice to see this year. They know this is special.”