A Candid Conversation with a Leading Dairy Economist
April 12, 2022
Simple mathematics doesn’t always add up. For example, producers get a higher milk check and then they pay all the bills, including that surging feed bill. However, factor in rising inflation, and a profit at the end of the month isn’t always guaranteed. Tanner Ehmke, the lead dairy economist with Co-Bank, talks about issues that he is closely monitoring, including sustaining higher milk prices to offset the heavily risen standard cost of production.
“On the feed side of things, given the dynamics with Ukraine and Russia is an already tight stock environment for grains, we’re not going to see any relief on [feed] prices,” he says. “I don't think until at least this fall. At the same time, we still have drought conditions across the western United States, hay prices are going to remain elevated.”
Factor in the lack of truck drives and Ehmke says this will be an ongoing issue that he doesn’t see getting resolved in the near future.
With labor, Ehmke says producer needs to think of it as a long-term issue.
“In the midst of all the volatility of feed costs and input costs, you still have to maintain the long view of your operation sustainability in this tightening labor market,” he says.
Technology becomes more attractive, and cash flows a lot easier when the cost of labor goes up.
“If labor is $15/hr., it doesn't really make a lot of sense financially to be investing in new technologies because labor is still affordable, but let's say it's $25. Well, now, the payments on a new machine or robotic milkers make a lot more sense,” Ehmke shares. “Because at the end of the day, the producer ends up owning an asset and making payments on something that is going to be more efficient financially than hiring people to do that work.”
Looking beyond the producer, Ehmke is also looking at the consumption side of things and what consumers can afford in their grocery carts, as well as at the restaurants.
“I think we're going to see some pushback with grocery prices as high as they are,” he says. “Plus, you have inflation, the largest the U.S. has seen in 40 years and wage rates are not keeping up with inflation.”
Ehmke shares that wage rates are rising at about 4.5% annually and the price of goods and services are rising at 7.9%.
“That creates a scenario here where the consumer is making less money and so they're going to be forced to make some decisions on what goes into groceries carts and what goes onto their dinner plates and there are going to be pushbacks,” he states.
With basic commodities, like wheat, potatoes and more at or near record high prices, that means consumers will have fewer dollars to spend on the products.
“I would imagine we're going to see more pushback at these higher price levels that the consumer is not going to be so eager to spend or to absorb these higher costs,” he says.
Regarding dairy products, Ehmke isn’t sure what that pushback will begin, but shares that he believes consumers will start by cutting back on fresh fruits and vegetables and meat products.
“Dairy products, like cheese and butter, will be traded down too at some point,” Ehmke says. “I don't know what those price points are, but there will be pushback.”