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Bracing for Short-Term Volatility to Benefit from Long-Term Opportunity

May 2012 Issue
By John Frey, Executive Director
Published monthly in the Lancaster Farming Dairy Reporter
and provided to Progressive Dairyman readers.

In December I was invited to represent the Center for Dairy Excellence on the U.S. Dairy Export Council Operating Committee. USDEC is a non-profit, independent membership organization that represents the global trade interests of U.S. dairy. The center has been a member of USDEC for several years, and I was honored to be asked to serve on its board.  In that role, I get the opportunity to attend USDEC’s meetings where they discuss current market dynamics and what short-term and long-term trends are playing out in the industry.

Early this month, at USDEC’s Spring Board of Directors and Membership Meeting, USDEC President Tom Suber commented that the current state of the dairy industry is a painful re-affirmation that market cycles will continue to persist even as demand, over time, continues to outstrip supply. Coca-Cola executives Ray Dudenhoeffer and Sandy Spangler-Hackler shared how dairy will play a role in their 2020 business plan goal, providing one example of how sizable dairy opportunities will continue to present themselves as our industry continues to grow and evolve.

Unfortunately these long-term growth opportunities will not eliminate down price cycles in the marketplace, like the one that is happening now. In April, the center hosted Dairy PROS meetings for dairy professionals. Held three times during the year, these meetings provide a format for roundtable discussion regarding a key issue in dairy.

The April series of meetings focused on “milk marketing and risk management.” Dairy professionals learned more about how risk management continues to play an increasingly greater role in ensuring the long-term success of individual dairy farms. During those meetings, the Penn State Extension Dairy Team offered five steps to a successful risk management plan.

The five steps they suggested included:
1)      Tracking and monitoring your “Income over Feed Cost.;”
2)      Calculating your annual cash flow and determining your break-even cost;
3)      Using that breakeven cost to implement the appropriate risk management actions;
4)      Identifying the opportunities to improve your feedstock quality and production while reducing costs; and
5)      Identifying the production and financial bottlenecks that are limiting your profitability.

Penn State offers more information about these five steps on their website at www.das.psu.edu/dairy-alliance. They also have spreadsheets that can help you calculate the information listed above. Knowing your risks and developing a sound marketing plan also involves being aware of what issues your dairy will face in the next six to twelve months.

During the Dairy PROS meetings, the center offered a summary of ten issues that will affect dairy farms in the near future. A few of the issues included in that list were: 

1)   Milk Margins, which fell to $9.19 per hundredweight in March, the lowest level in the last 24 months. Class III milk futures for April - August are at $15.48 per hundredweight, while corn and soybeans futures for the summer months are at $6.51 and $14.39 per bushel, respectively. Based on these prices, margins are expected to fall even more.

2)      Forage issues, with early reports of forage shortages coming in from across the state. Last fall’s extreme weather conditions prevented many dairy farms from harvesting enough corn and other forages to carry them to the 2012 harvest. Farmers who anticipate shortages are encouraged to find supplies now as excess forages this summer may be scare and pricey.

3)      The 2012 Farm Bill. The Senate Ag Committee staff is preparing a draft bill for Chair Senator Stabenow to present as the mark-up vehicle. The bill is expected to contain the Margin Protection and Market Stabilization programs from the Dairy Security Act as the major provisions in the Dairy Title.

4)      New market requirements, which are demanding higher quality milk. Any supplier that wants to export dairy products into the European Union must prove that milk used to make the product meets the EU’s standards for raw milk. In order to obtain USDA certificates to export product, suppliers must monitor and report any farm with a rolling monthly average of greater than 400,000 SCC or 100,000 SPC to the USDA’s Ag Marketing Service (AMS).

You can view the complete list by clicking here.

At the Center for Dairy Excellence, we are excited about future opportunities for dairy, both in the marketplace and on the farm, despite the current downturn in milk pricing. Knowing the challenges at hand and having a risk management plan in place could help your dairy operation work through short term volatility to reap the benefits of those long-term opportunities.For more information about the Center for Dairy Excellence, visit the web site or call 717-346-0849.