Dairy producers are cautious entering the New Year, facing markedly lower milk prices in 2015, according to the Northwest Farm Credit Services" quarterly ag commodity and economic outlooks.
1) Strong balance sheets and perspective: Experience and strong balance sheets create stark differences between producers" current position and losses experienced in 2008-09. Northwest dairies are well positioned for managing lower milk prices, fueled by strong 2014 profits. USDA"s annualized 2014 on-farm all milk price is forecast at $24.00/cwt., $4 above the 2011 record. Recalling lessons from 2008-09, producers have reinvested in their businesses. Balance sheets are recharged with equity and operations are more efficient. In many cases, early 2015 cash flows are bolstered with 2014 milk checks delayed to the New Year. Although most haven"t grown cow numbers, many have maximized existing facilities capacity and productivity. Examples include capital improvements in equipment and increased emphases of genetics and increasing per unit production. Aggressive culling throughout the year has recently paused as many postpone cull and other cattle sales to 2015.
2) Continued, low feed prices: Northwest hay prices are expected to soften with lower dairy prices. Corn and soybean meal prices remain well-below year-ago levels and historic highs. Production costs are forecast at a four-year low, capped by lower grain prices. Facing lower milk prices, dairies are building lower-priced feed rations to manage expenses and improve margins. The region"s hay growers will feel the impact of the changing dairy economy. Prior to recent lower milk prices, dairy demand for hay sustained prices and swelled dairies" hay inventories with pre-pays for 2015 feed supplies. Demand for dairy quality hay is expected to soften in 2015, pressuring hay prices lower. Early reports for 2015 project in-field silage prices between $30 and $35/ton.
3) Lagged global response: World dairy production is expected to continue its rise through the first six months of 2015, driven by the spring flush and expiring European milk quota. Blimling and Associates" December 2014 Global Briefing notes milk production in New Zealand, Europe and the U.S. could eclipse 2014 by 2% through the first six months of the New Year.
4) Slowing Chinese milk powder imports: Analysts expect Chinese imports to be well-off highs hit in 2014. Slowing demand and a strong dollar constrain U.S. dairy export opportunities.
In Northwest dairy industry news, Glanbia Foods announced an $82 million investment and 50 new jobs over the next two years in Twin Falls and Gooding, Idaho. Glanbia Foods processes one-third of Idaho"s milk production, or more than 12 million lbs. per day. The company"s capital investments are expected to add value and meet demand for high-value whey products, but not necessarily add capacity or increase milk demand. In Washington, Darigold"s Sunnyside plant expansion is proceeding. Increased plant capacity is expected to be met by existing milk production in the Yakima Valley. Darigold"s announcement of milk price deductions to producers associated with milk price swings and sharply lower finished product prices highlights marketplace volatility punctuated by international dairy commodity prices, a strong U.S. dollar and lower export demand.
Hay industry impacted
The dairy economy and other factors pushed Northwest hay markets into a lull, with prices under downward pressure heading into 2015. According to the quarterly Hay Market Snapshot, drivers most impacting the hay industry in the Northwest include:
1) Dairy profitability: Dairies in the Northwest and California experienced strong profitability throughout 2014, but falling milk prices are expected to pinch profits and decrease hay demand in 2015.
2) Lower exports: The impact of higher hay prices and market disruptions are resulting in lower export volumes from West Coast ports.
3) Cost of competing feed: Lower prices for soybeans, corn and other grains are incentivizing dairy and cattle producers to reduce hay usage. A mild winter with relatively little snowfall has allowed cattle producers to continue grazing livestock later than usual.
Hay market activity was heavy early in 2014, but slowed throughout the year. Ahead of the holiday season, markets entered a lull. Buyers appear to have contracted most of their needs for the season, and falling milk prices and challenges facing hay exporters have created a cautious tone in the market. Generally, growers are increasingly willing to accept price reductions to move remaining inventories.
Hay production in 2014 was up in the Northwest and California, according to preliminary estimates from the USDA National Agricultural Statistics Service. Production increases were driven primarily by increased acreage in Washington and Oregon, and higher yields in Idaho and California. Some industry analysts question the accuracy of the USDA"s preliminary figures, believing that drought had a more significant impact on hay acreage and yields. USDA may revise and lower its production estimates.
USDA will release Dec. 1 Hay Stocks in January, providing an estimate of carryover for use as winter feed. Year-over-year increases are likely, but hay stocks across the Western U.S. will primarily be comprised of lower quality hay. Stocks of higher quality hay are expected to remain in short supply heading into 2015.
Although some speculate that alfalfa acreage will increase in the Western U.S. in 2015 given the lack of attractive crop alternatives, uncertainty with irrigation water availability in drought affected areas will likely limit significant expansion. Without significant improvement to drought conditions, production of existing alfalfa stands will be threatened in some areas.
In 2014 West Coast hay exporters faced significant challenges in 2014. Export demand is down from previous years given high hay prices, the strengthening U.S. dollar, and market disruptions. Trace amounts of genetically modified (GM) alfalfa were identified in hay shipments when China adopted a more sensitive testing protocol. The change significantly lowered the acceptable GM trace tolerance. Demand for hay from China remains strong, but finding hay that is in compliance with the new standard has been difficult. Some West Coast exporters have cautiously resumed shipments to China after adopting the new test, but the risk that hay will be rejected remains high.
Exacerbating these challenges, the strengthening value of the dollar is making U.S. hay exports relatively more expensive. The impact is most acute when considering sales to Japan, which were down 10.5% compared to October of last year. The West Coast is also experiencing a slowdown in container exports due to a labor dispute. Exporters have missed shipping opportunities due to shifting schedules. Ocean carriers can also charge a $300 per container congestion fee, which adds to the difficulty.
Looking ahead, 2015 may be the first year in recent memory where weaker hay demand from the dairy industry is not offset by growth in hay export markets. However, a favorable resolution to negotiations of a new testing protocol with China for GM hay would bolster the outlook for hay demand and prices, as would improved demand from the UAE. Additionally, a contract between the International Longshore & Warehouse Union and the Pacific Maritime Association would remove uncertainty from the markets and likely decrease costs to hay exporters. However, a quick resolution to the contract dispute is not expected. On December 29, the Pacific Maritime Association called once again for federal mediation to help break the deadlock.
The outlook for hay supplies in 2015 may also support hay prices. Short supplies of high quality alfalfa persist, and the potential for continued drought may limit hay production in the coming year.
Market activity for agricultural real estate in the Northwest slowed in 2014, according to the fourth quarter summary. While land values showed a mostly positive trend, increases were not as dramatic as they were between 2012 and 2013. When considering land value appreciation, competition for available properties likely overshadowed increasing concerns over interest rate increases, declining commodity prices, and water shortages in specific areas.
Demand and market activity are reportedly mixed throughout the region, and are generally dependent upon property type and/or market segment. Market observers in Idaho, Montana, Oregon and Washington confirm buyers are still looking for good quality agricultural properties; however, the shortage of these properties on the market reduced market activity.
Over the past two years, the majority of agricultural real estate transactions did not hit the open market. Sales were mostly private treaty, generally between landlords and tenants, or with realtors who were involved in a lesser capacity than is usual. Interestingly, sales of properties marketed directly to investors and through auctions are becoming more common.
Values for irrigated cropland and dry cropland show slight increases. Although the trend in values for grazing land showed a slight decline between 2013 and 2014, market observers report that this land class is increasing in value – supported by strong profitability in the cow-calf industry.
Key drivers in agricultural real estate markets remain low interest rates, less attractive investment alternatives compared to farmland, and buyers with the ability to pay in cash.
Although some dairies in Western Washington and Southwest Idaho began construction of new dairies and made improvements to existing facilities in 2014, dairy facility sales were limited in 2014. With strong milk prices throughout the year, many dairies showed interest in expanding their land base for growing feed and managing nutrients. Competition between dairies, farmers and investors were a factor supporting strong land values in major dairy producing areas; however, the dairy industry faces a downturn in milk prices during 2015 which may temper demand.
Market participants are cautious about the direction of land values. Anecdotal reports suggest potential buyers are becoming increasingly cautious about the direction of land values. Declining prices for many commodities, water concerns, and rising interest rates are issues that may impact demand and temper land values going forward.
Water availability will continue to play an essential role in land transactions. Drought conditions remain a concern in areas of the Northwest. Portions of Oregon, Idaho and Washington experienced abnormally dry to extreme drought conditions. Reservoir storage in many areas was nearly or completely exhausted at the end of the 2014 irrigation season. Continued, ample moisture is needed in order to mitigate drought impacts. In particular, mountain snow packs need to improve in order to assure adequate snow melt and reservoir recharge.