Will your dairy handle the milk price slide?
May 30, 2022
As I write this, prices for the rest of the year are north of $22 per hundredweight (cwt.). Yes, input costs are high, which cuts into that high price, but nevertheless, profit margins likely look good and are welcomed on dairy farms across the country. For those who locked in lower input prices for 2022 early, congratulations for making a good decision. However, everyone will be facing the need to buy inputs again at some point. What will the price point of those input costs be and what will milk prices look like 12, 18, or 24 months from now?
Historically, the answer to that second question is a bit scary. The figure shows the Class III monthly milk price since January 1996. A cyclical pattern quickly emerges and upon closer inspection, months of record highs were followed by a significant crash. The median difference between the peak month (red dots) and the following low month (yellow dots) was 14 months and $8.82 per cwt. On the low side, 25% of the time it took seven months to get to the low price, and on the high side, 25% of the time it took 20 months to get to the next low in prices.
A dangerous and wrong conclusion is to use those statistics to say that anywhere from seven to 20 months from now we will be around $15 to $16 milk prices. A much safer way to use this information is that historically there is a strong precedent that at some point a significant reduction in milk prices is likely to follow a record high.
That should not be shocking news to anyone in the dairy industry. However, the two questions that one might ask themselves are:
• How sticky will the input prices be this time? More specifically, will prices fall as fast and by as much?
• Second, what are you doing today, when there are profits, to prepare for that potential future that may not look so good?
What’s strategically best depends on where your dairy operation is today. The possibilities include paying down debt, getting capital assets in a good place, capital improvements that boost production or cost efficiency, any restructuring that gets liquidity to a place that can accommodate lower prices, and marketing for profit margins.