Milk producers are going into the fourth year of relatively low milk prices, and the financial strain is increasing.
The unusually high prices of 2014 took a big drop in 2015 and dropped further in 2016. There was a bit of a recovery at the end of 2016, but they fell again the next spring.
There’s obviously a wide range in profitability across farms. Some were prepared for the downturn and have been able to manage their cash flow through the last few years, but it’s getting harder now, said Mark Stephenson, director of the Center for Dairy Profitability at the University of Wisconsin.
“The problem is working capital is pretty chewed out now and a lot don’t have as much equity as they should have going to banks,” he said.
Some might have problems getting operating loans or good loan terms. And many won’t have money for upgrades or repairs, making it less efficient and more expensive to make milk, he said.
There have always been downturns; the thing that has changed is what has become the dominant cycle in milk markets, he said.
Price cycles and volatility in milk production are nothing new, but a generation or two ago, they were seasonal. They were disruptive but predictable, he said.
That 12-month cycle still exists, but it is less impactful. A short-term change of 50 cents to $1 per hundredweight of milk isn’t as big a deal on $16 to $20 milk as it was on $5 milk, he said.
But starting about 15 to 20 years ago, the industry moved into new territory with an additional three-year cycle that is far more impactful. Swings in milk prices can approach 50 percent, he said.
Analysts are still trying to understand all the factors in the three-year cycle, but it started about the time the U.S. entered into exports. And exports certainly play a part. If anticipated sales overseas don’t happen, product backs up into the domestic market and milk prices fall, he said.
Other shocks are also a factor, such as weather impacts in the Southern Hemisphere’s pasture systems. Poor conditions can bring a big price surge in milk, sending a market signal to dairy producers that the world wants more milk.
Producer response to that signal in the U.S. would mean 40,000 independent decisions on whether to increase milk production. If everyone decides to increase production at the same time, prices collapse, he said.