Three factors defined 2020 dairy financials
Maggie Gilles, Kansas Dairy Farmer
February 18, 2021
If volatility has been the defining characteristic of the dairy industry during the last few decades, 2020 was one for the record books. As last year’s books get finalized, Cornell’s Chris Wolf explained that three factors contributed to the financial health of dairy farms.
“We’re starting to get some idea of what the dairy farm financials looked like for 2020,” he explained during the February 17 Hoard’s Dairyman DairyLivestream. “There’s a pretty wide range of performances; maybe even wider than what we’ve seen in recent years.”
There seems to be three factors that are driving what kind of year farms had:
Where their milk is marketed
What kind and how much government payments they received in 2020
What was their use of risk management programs and how that worked out
Likely none of these contributing factors surprise dairy business owners, and yet the first of the factors was mostly out of the control of dairy farmers.
“As far as where the milk was marketed, it’s a lot about the supply chain, the contracts, the products, and the outlets where the milk was ultimately ending up,” the Cornell extensions specialist explained. “We’ve had really uneven effects of this pandemic on different industries, and it really shows up in food away from home versus food at home. The result is a really wide range in farm milk pay prices, and that’s going to continue to be an issue as we’re still not out of the woods in this pandemic.”
The impact on government payments could be somewhat guided by individual farms and their choices, but payment limits, how the farm was organized, and how the programs worked played into the result of this second financial key.
Risk management mattered “Finally, the use of the risk management programs was really important for the farms that had contracts entering 2020,” Wolf shared. “We had that massive roller coaster ride in Class III where we had cheese prices below $1, then up near $3, and then back down and back up again depending on the government purchases through the food box program, which again we’ll have to see what happens with it.”
While Class III was a roller coaster, Class IV prices were much more consistent but consistently depressed near the bottom of the market. That has been caused by the production of butter to balance markets in 2020.
“A lot of it is sitting in inventory at this time, and we’re going to have to figure out how we’re going to eat our way out of it or get it exported so that we can get those prices back in line,” he concluded.
While these were leading factors in 2020, Wolf anticipates that some will carry over into the new year while we can expect others to have virtually no impact in 2021. It’s anticipated that government payments will look much different this year. On the other hand, milk marketing and risk management will likely be even more crucial.