Report says surviving volatility is the key to staying in business.
by Dennis Halladay, Hoard's Dairyman Western Editor
A report last month from a major dairy lender confirmed what many producers already knew: the long era of mostly gradual ebbs and flows in U.S. milk prices and production costs is over. In its place is constant unpredictable volatility that is often sudden, sometimes extreme and occasionally fatal.
The report's take-home messages are: get used to it, and you can't thrive if you don't survive.
"The U.S. cycle as we knew it died in the mid-2000s," says one subhead in "Dysrythmia: The End of the Old Dairy Price Cycle" issued October 10 by the Rabobank Food & Agribusiness Research and Advisory Group. "The death of the old dairy cycle warrants a new approach to planning," says another.
The bank's findings won't come as a surprise to anyone who survived 2009 and now struggle again in 2012. They also paint a picture that highlights financial caution over aggressiveness and focusing on long-term survival over short-term opportunity.
The report makes the case that for decades, regular and relatively moderate dairy price cycles were spaced at roughly three-year intervals as a result of two primary factors: little U.S. participation in global export markets and government support programs that provided a safety net against catastrophic downturns.
This cocoon of predictability began to crack in the mid-1990s as growing financial abilities outside the U.S. fueled greater competition for feed commodities. Rising demand also pushed world milk prices to or above U.S. support levels, creating a huge new alternative for dairy product sellers.
"The U.S. found itself suddenly part of the global market, ending decades of isolation. Diversity and unpredictability has long ensured that those playing in the internationally traded market have never experienced anything approaching a regular pricing cycle. Changed fundamentals and recent experience suggest that the U.S. dairy price cycle as we knew it is dead and has been replaced by something more erratic."
In conclusion, the report says, "Finding a way to survive this volatility is a precondition for long-term survival in the U.S. dairy industry."
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