Last week, the Federal Reserve enacted its second consecutive 0.75%-point interest rate increase to help combat the highest inflation rate the economy has seen in four decades. This interest rate increase impacts everything on a dairy farm—from cash flow to costs at every point in the dairy supply chain. According to Tanner Ehmke, the lead economist for dairy at CoBank, the increase in interest rates puts another strain on dairy farmers’ ability to build.
“Rising interest rates are obviously going to be an additional cost to dairy farmer’s pocketbooks,” he says. “This is coupled with the already high cost of feed, high cost of labor, high cost of transportation, and other high material costs. If you want to build another barn, those costs are still high from materials like lumber, steel and cement. Higher interest is one additional cost that the farmer is going to have to carry.”
When looking at interest rates’ impact on dairy consumer demand, Ehmke says consumers are trading down.
“The consumer is trading from high-cost food products to lower-cost alternatives,” he says. “For example, instead of buying imported smoked gouda, they might trade down to a brick of Monterey Jack. So, they’re still consuming cheese.”
As consumers trade down, they are also trading down package size. For example, instead of purchasing a full gallon of milk, they are buying a half gallon.
“Or they are trading down brands. They are trading from brand to a private label,” Ehmke adds. “The good news is that consumers are not necessarily cutting dairy out of their diet. In fact, dairy products are an affordable alternative for protein and fat.”
During a recession, consumers look to nutritional value and Ehmke reiterates that dairy wins, as penny for penny it has a great nutritional value.
Bright Light
Global demand for dairy is still very strong and dairy prices in the U.S. are still a bargain compared to other countries like New Zealand and Europe.
“We’ve got a positive story here in the U.S. for dairy in that there’s demand for our products,” Ehmke says. “I think a long-term story here for U.S. dairy is there’s an opportunity for us to play an even larger role in the global export market.”
Ehmke says that the challenges facing the EU - with environmental regulatory pressures, hot and dry weather, coupled with Russia’s invasion - puts the U.S. in a more competitive standpoint on a more competitive footing in the global export market.
“You’ve got a lot of pressures there on Europe that don’t seem to be going away anytime soon,” he says. “So, by comparison, the U.S. dairy industry is in a strong position.”
Growth Trend
According to the June USDA Milk Production Report, herd size is considerably less than a year ago. While we are down year-over-year, states like Texas and South Dakota hum a different tune.
“The long-term trend here is for continued migration of the herd to the inland states, like Texas and South Dakota,” Ehmke says.
The reasons for this trend are many—urban pressure along the eastern seaboard, regulatory pressures, rising costs of labor and more.
“You have rising costs of labor along the coast, and those costs are rising faster than in the central states,” Ehmke says. “I think that’s among the long-term pressures that will lead to more inland movement of the herd. I think you’re going to continue to see that in places like Texas and South Dakota going forward, along with other states. I think they’re going to continue to see growth, whereas the coastal states are going to be under that pressure.”
Head Up; Eyes Open
Ehmke advises to keep your head up and keep an eye on what’s going on within your state, but also as a global economy.
“Keeping an eye on what’s going on with the state of the global economy is important because we’re increasingly becoming more and more export-focused,” he says. “What does that look like long term and how do you position yourself to benefit from that?”
With a strong dairy demand, especially in Mexico and Southeast Asia, there is a positive dairy story. However, Ehmke says the real question is how do we position longer term for that?
“I would say in the middle of all this volatility, don’t forget, keep your eyes on the bigger picture that we are becoming more competitive, globally, compared to our competitors in Europe and Oceania,” he says. “I think that’s the positive story here that we need to keep focused on for the long term.”
