Dairy Farmers' Dilemma

Milk prices collapse, while feed costs remain sticky high.

An acquaintance was lamenting the sad state of the dairy business. She maintained that plunging milk prices with sticky-high feed prices were really squeezing dairy margins.

"Milk prices have plummeted through $15. February milk futures are $10, half their summer level," she

declared. "But when I go to the grocery store, cheese prices and butter prices are just as high as they were back in the summer when we had $20 milk. So we're getting no help what-so-ever from retail prices to boost demand."

I could not disagree.

She took a vote. "I suggested to my husband that he get a job and sell the cows," she said. "We took a family vote. I got out voted four to one.

"My husband did get an off the dairy farm job," she added. "Now the three boys and I are doing all of the dairying."

Calculating the squeeze. Comparing December 2007 to December 2008 prices, milk is down about 26%, steers and heifers are down 10%, while barrows and gilts are 5% stronger. Cull beef and dairy cow prices are down 12%.

However, despite sharply lower milk prices, dairy cow slaughter during 2008 ran a modest 1.5% higher than in 2007. The milk price collapse is still too fresh to trigger cow liquidation.

Dairy feed prices remain high. Again, comparing December 2007 to December 2008, corn prices are up 7%, cottonseed prices are up 30%, alfalfa hay is up 15%, while 24% lower soybean prices pressure soybean meal prices lower.

Agreed, comparing prices at two points in time does not adequately reflect relative profit picture of livestock operations, particularly when prices are experiencing the extreme volatility that persisted in 2008. Still, it's hard to argue that dairy producers are not in about as tight of a squeeze as anybody.

Tough questions. When will milk prices rebound? When will retail dairy product prices retreat? When will milk production margins get back into the black?

Those are all good questions but difficult to answer.

Milk futures suggest fall milk prices should recover into the low teens. But back no where near $20.

Retail food prices are sticky downward. Always have been. Always will be. That makes it tough to forecast when dairy margins will improve.

Planning pays. At our Farm Futures St. Louis management summit someone asked how they could plan with so much market volatility.

The discussion gravitated toward the notion that volatility makes planning more crucial rather than less worthwhile. The reasoning focused on two points:

1) If you run the numbers and it doesn't work on paper, how will you make it work on the farm?

2) By regularly running the numbers, you can identify times and opportunities when margins do exist. Then it's your choice on whether or not to protect the margin with contracts or option strategies.

Planning is necessary - precisely because we cannot forecast.

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