As dairy producers look to the future, some things appear milky white — that is, lacking clarity and direction. Many producers are unsure what to expect five to 10 years from now. Among the factors clouding the outlook:
- Milk supply. Production per cow continues to grow. The September USDA 20-state milk report shows the average cow producing 49.22 pounds per day, an increase of 1.25 pounds when compared to just one year ago. The USDA predicts 2000 milk production will increase by 3.5 percent when compared to 1999 — and 1999 was 3.4 percent higher than 1998.
- Feed. The USDA’s October Milk-Feed ratio of 3.15 is down slightly from this summer, but still in a profitable range for most producers. Many western producers have moved east to capitalize on low feed prices.
- Demand factors. Commercial disappearance of dairy products increased by 4.4 percent during the first quarter of this year, and by 1.5 percent in the second quarter, when compared to 1999. New designs in fluid milk packaging, new product innovations and the continued popularity of cheese will boost consumption even further.
- Low prices. The industry has hit the low of the business cycle, with prices near price support levels.
- Declining numbers of producers. Recent numbers from the American Farm Bureau Federation suggest that approximately 4,500 producers left the industry during the past year. But the number of cows per farm continues to increase, as low-cost producers continue to survive and, in most cases, expand.
- Growth in processing capacity. Cheese production will continue to increase as a result of new facilities coming online or the expansion of existing plants. A rough estimate of the milk needed to fill these expansion projects — located primarily west of the Rocky Mountains — is 40 million pounds per day. Do cheese manufacturers know something that producers don’t? Or, will excess cheese flood the market?
Despite these often contradictory factors, I am bullish on the industry. Not everyone will survive, but that is characteristic of any changing industry.
Dairy producers have a reputation for being resilient and facing challenges head-on. That must continue in the future.
When the industry begins a downturn, it is absolutely necessary for dairy producers to rethink their positions. Ask yourself difficult questions, such as: Should I expand now? Should I reduce debt? Among the hardest questions: Should I exit the industry? Can I survive the downturn? For how long?
Meet with your financial advisers. Review your business situation and the outlook for your area.
Anthony DeRose is a senior vice president of Wells Fargo Bank in Tulare, Calif.