Having a steady market for your milk was not of much concern to dairy farmers until the growth of the last few years changed how we think about market access. And if it wasn’t on your mind before 2020, the pandemic probably changed that.
The limitations of the market were most clear in the base plans that some cooperatives were forced to implement last spring to limit production. Some have been rolled back, but a new milk imbalance looming due to the influx of cows added to the national dairy herd in the last six months means they could return in full force. The panelists of the February 17 Hoard’s Dairyman DairyLivestream discussed how dairy farmers might deal with base penalties as they try to pencil out 2021 financials.
Base is getting to be a more common conversation, especially in the northeast part of the country, described Roger Murray of Farm Credit East. “That’s probably the number one question we get overall is, ‘Should I buy base or not? What is a base worth even if I could find one?’” he asked.
If you’re limited in expanding your production, Murray typically advises three ways to improve profitability: milk quality, ration adjustments, and overstocking.
“There’s a lot of folks out there that could make another 30 to 50 cents a hundredweight just by improving their quality and being consistent with it,” he stressed. “That doesn’t count against your base, that’s just increasing the quality.”
Ration changes must consider a number of factors, but the one he pointed to deals with milk composition. “Milk components might not be worth quite as much as they used to be, and so feeding extra cost into that ration to boost components might not be as profitable as it was one, two, or three years ago,” he said. Further, he noted that reducing overstocking can often improve cash flow and profitability.
Of course, Murray noted that every lactation is a long-term investment, and these decisions don’t come without consequences. “The decisions that the farmers are going to have to make depends on how long you think this is going to last,” added Chris Wolf, Cornell University economist. “If this is going to be a three-month or a two-month problem, it’s not the same decision as if it’s a six-month or 12-month problem.”
Have a home
Sam Miller, who manages agricultural banking at BMO Harris Bank, noted that the picture has been different in the Midwest. “We hadn’t seen in our core Wisconsin market a lot of the base plans until the last couple of years and in particular, 2020. We haven’t had the same type of discussions that Chris and Roger talk about having in the Northeast, but it certainly is an issue.”
Miller pointed out that farmers are now trying to balance two different situations. After the milk dumping of last spring, soaring prices later in the year gave people the itch to add more cows, which has now already been done across the country. In those situations, he is cautious, particularly if it involves investing capital in something like putting up a new barn.
“Our number one question is, do you have a home for that milk?” he asked. “That means just not a verbal from the field man, do you have an agreement with that processor? Is there a slot for that milk?”
The reinforcement of base plans could change the answer to that question, and it’s a consideration all dairy farmers must make if they are facing expanded production, even if it’s on a smaller scale.
Miller stressed that, “Everyone should have a good arrangement with their processor, whether it’s a co-op or a private business, to make sure that they’ve got a slot and a home [for their milk], because if you don’t, you’ve got financial problems.”
An ongoing series of events
The next broadcast of DairyLivestream will be on Wednesday, March 3 at 11 a.m. CST. Each episode is designed for panelists to answer over 30 minutes of audience questions. If you haven’t joined a DairyLivestream broadcast yet, register here. Registering once registers you for all future events.