Dairy exports are surging, and added profit margins for U.S. producers means opportunities to expand facilities and add or upgrade equipment, says a Purdue extension dairy specialist.
Mexico continues to be the largest buyer of dairy products exported from the U.S., while growing demand in Southeast Asia for powdered milk and whey has also helped boost on-farm profits. Lower feed prices have also increased profit opportunities for dairies.
"These improved margins really provide an opportunity for producers to keep up on the things they've had to delay," Mike Schutz said. "That could mean doing facility or equipment repairs or even installing new and improved milking equipment that could ultimately lead to higher milk quality premiums – anything you can do to save on labor costs and improve operation efficiency."
Better crops, lower feed prices
Since 2009 dairy producers have faced a lot of volatility in milk prices. Between 2004 and 2008, record profits encouraged dairy farmers to expand the national herd at a rapid rate –but when global recession struck, the bottom fell out of the U.S. dairy markets, leaving producers with an abundance of cattle and more dairy products than they could sell. That resulted in a nearly 50% decrease in dairy prices almost overnight.
Prices have rebounded since then. According to Schutz, milk prices in 2013 were the most stable they've been since 2000. Feed prices, however, remained high due to the drought in 2012. Now, they have started to come down, thanks to a stronger 2013 crop.
"While dairy producers certainly welcomed the reasonably stable milk and dairy product prices last year, high feed costs still resulted in tight margins," Schutz said. "A large 2013 corn crop in the eastern Corn Belt, along with moderating demand for ethanol production, has driven down feed prices."
Another facet to the complex reasons why U.S. dairy margins are improving is that producers in Australia and New Zealand, both major dairy production countries, aren't able to expand quickly enough to meet the demands of Southeast Asian markets.
"U.S. exports to Southeast Asia, especially China, are growing because the Asian demand exceeds the expansion rates in Australia and New Zealand," Schutz said.
But even though this is good news for U.S. producers, Schutz pointed out that they still need to be cautious.
"Nothing right now leads us to believe the bottom will fall out of the dairy market in the near future unless something changes internationally," he said. "But at this point, we also can't forecast whether herd expansion would be a safe investment."