Navigating Volatile Milk Prices: Strategies for Dairy Farmers to Thrive
What’s happening with my milk check? How can I stay profitable at this price? These are likely the questions dairy producers are asking as they open milk checks in the recent months. So let’s discuss a few ways to handle getting through the next several months.
The milk price has been highly unpredictable in the last few years, and it’s unlikely to change soon. Under “normal” situations, a 1% change (considered acceptable growth) in milk production would significantly impact prices. However, this time, milk production from the previous year has changed less than 1%, yet milk checks have dropped considerably in the recent months.
Firstly, I want to emphasize that most dairy farms are currently operating efficiently or close to their peak efficiency. Even with that in mind, now is the time to review the cost of inputs and adjust purchases if possible. For example, one client of mine took the time to review expenses and found areas where supplies could be purchased at a lower cost without sacrificing quality. Not everyone will find these opportunities, but assuming you’re already getting the best price isn’t a reason to avoid checking.
Building cash reserves and paying down operating debt when possible is definitely a good idea. In some cases, this may be all that’s needed. Delaying capital purchases will help in the short term. The items you can’t afford to buy now will still need to be replaced in the future.
It’s also crucial to have someone you can talk to openly and honestly about your situation. This could be a peer group that meets regularly. If you used to have a group like this but haven’t met in a while, it’s time to get the group back together. Personally, I have a couple people I can call on bad days to improve my outlook. Our discussions aren’t necessarily about the problems; they’re people who are fun to talk with and make me laugh. It’s a great way to relieve stress.
As mentioned earlier, the milk price is volatile and will continue to be so. Some of you may be tired of hearing this, but there was a time when acting on a higher milk price was possible. Does the market care if the milk price is high enough to cover your costs? My experience says “no, it does not”. Historically, the milk price remains high for about 12-15 months, followed by 18-24 months of low milk price. Look at the charts; this shouldn’t be a surprise to anyone. In many conversations with my clients, our discussion wasn’t about if prices would fall, but rather when and how far. Yet, many did not take advantage of the prices available at the time. In my opinion, you try to extend the high price (when offered) for as long as possible.
In conclusion, take time to learn from what has happened. The current drop in milk prices will happen again in the future. Call you peer group together. Has anyone in the group prepared better for the current situation than others? If so, find out what they did. If not, have good talk with your peer group about what could have been done differently. Most importantly, develop a plan to be better prepared for the next downturn.
Jon Zander is a Dairy Lending Specialist with Compeer Financial. For more insights from Jacob and the Dairy Lending Team, visit Compeer.com.