U.S. dairy farms are caught in a market squeeze. Milk prices are moving sideways, feed costs are climbing and beef-on-dairy revenue, once a welcome boost to the dairy checkbook, is now tied closely to global beef supplies and trade policy.
“The dairy markets. All of a sudden, you’re hearing a lot of concern that don’t mess with our markets,” Bryan Doherty of Total Farm Marketing says. “You know, this is now vital to the dairy industry to have this dairy on beef, and the last thing we need right now is cheaper calf prices.”
For many dairy farms, beef-on-dairy has become a critical source of income. Crossbred calves and cull cows bring substantial dollars back to the operation, adding another revenue stream as milk margins remain under pressure.
“Farmers will tell you, look, we make only X amount a year from milking a cow. Now, we can make more from the calf she produces. Beef from those calves has become a big part of the income,” Doherty says.
Now, a cattle market pulling back from record highs, higher corn and soybean meal prices and new trade policies are all feeding back into dairy economics.
Imports Put Pressure on Beef-on-Dairy
USDA’s decision to allow an additional 300,000 metric tons of tariff free beef imports over a 90 day window has added another layer of uncertainty to the cattle market. For dairy producers, cheaper imported beef could put pressure on the market for calves and cull animals.
USDA has also rolled out a “rancher first initiative” aimed at helping rebuild the national cattle herd. Doherty says the program could help move the industry in the right direction, but rebuilding the herd will not happen quickly.
“Time will tell. It certainly does. It’s not going to hurt the idea of rebuilding the cattle market,” Doherty says. “My quick glance of that and read through of that is it’s a step in the right direction to try and rebuild the herd. Something has to give. The demographics don’t favor rebuilding the herd.”
For dairy producers, efforts to rebuild the national cattle herd come with an interesting tension. More beef cattle could eventually help rebuild beef supplies, but lower beef prices could also take some of the value out of one of dairy’s strongest secondary revenue streams.
Beef-on-Dairy Changes Breeding Decisions
Doherty says the importance of beef revenue is showing up in conversations with dairy farmers about breeding and culling.
“I work with a lot of dairy producers, and when you get down to it, they’re saying, ‘Look, beef is too important to us now to keep a cow in the herd longer if she’s not performing. If a heifer doesn’t look right, she’s got to go. But if she looks good, we’re breeding her to a black and white because we want the beef. This has become an important part of our revenue.’”
Strong calf prices and cull values can make the decision to market animals now more attractive than holding onto them in hopes of expanding the herd.
For producers, the value of beef-on-dairy also complicates the normal response to high feed costs. When feed gets expensive, reducing cow numbers can lower feed demand. When beef calves are bringing strong returns, however, there is more incentive to keep productive cows in the herd and continue breeding for beef value.
Feed Costs Add Another Squeeze
Feed markets are adding pressure from another direction. Higher corn and soybean meal prices raise costs for both dairy producers and cattle feeders.
“Now you’ve got feed prices, unfortunately, which have skyrocketed for producers,” Doherty says. “Corn is up a buck a bushel in the last 60 days, soybean meal is over $400 or $40 a ton higher than it was 60 days ago. That adds insult to injury, doesn’t it?”
Corn posted its strongest August rally since 2010, and market analysts now see $6 corn as a realistic possibility before the end of the year. Under the right conditions, $7 corn is also on the table.
Dan Basse of AgResource Company says the rally is being driven by concerns over U.S. yields, tighter global supplies and geopolitical risk.
“It’s concerns about the U.S. crop, but then it’s concern about the international market,” Basse says. He points to declines in global wheat and corn production among major exporters and ongoing concerns in the Black Sea region.
The U.S. corn crop is also facing questions. USDA currently has the national corn yield estimated at 180.7 bushels per acre, while the Pro Farmer Crop Tour estimate came in at 173.2 bushels per acre. Chip Nellinger of Blue Reef Agri Marketing says the market is currently pricing in a crop closer to 177 bushels per acre.
The next major test will come with USDA’s September 11 report. A lower yield estimate could give the corn market more room to climb, while a smaller adjustment could take some pressure off prices.
Basse sees a path toward even higher prices if South American production runs into problems.
“I still think we’ll see $6 corn before the end of the year, but I also believe there’s a 50-50 chance we could see $7 corn if there’s any hiccups in Latin America,” Basse says.
For dairy producers, a move from $5 corn to $6 or $7 corn would quickly increase feed costs. Producers who have not covered much of their upcoming needs could be more exposed if prices continue higher.
Milk Prices Offer Little Relief
While beef and feed markets add pressure, milk futures have offered little help.
“Milk futures have mostly moved sideways, with September around $16.35 and October near $17. I don’t see that changing anytime soon,” Doherty says. “We might get a bump in the market, but for prices to move back above $18 or $19, something has to change. Those are the prices the market has been expecting in the deferred months.”
Futures had been expecting fewer heifers to be kept for breeding and a gradual decline in cow numbers. Doherty isn’t convinced milk production will fall enough to support higher prices. With nearly 200,000 more cattle in the herd than a year ago, reducing milk production could prove difficult when beef-on-dairy gives producers another reason to keep cows in the herd and breed for valuable calves.
“We need to produce less milk, but that’s a tall order with beef-on-dairy right now,” he says.
The Long Term Opportunity
The near term outlook may be challenging, but Doherty sees a stronger story developing over the longer term.
“The bigger picture is good news. The U.S. is making the right investments in infrastructure to supply more products to the world in the years ahead,” Doherty says. “But that’s years away. The question is, can dairies make it through until then?”
Exports already play an important role in building demand for U.S. agricultural products.
Exports are good, and lower prices are helping build demand. But building demand takes time. It happens gradually until, all of a sudden, it takes off. We’re seeing some of that now in the corn and soybean markets,” Doherty adds.
Marketing Can’t Take a Day Off
With so many moving pieces, Doherty says producers cannot afford to ignore marketing decisions until markets become urgent.
“This is where consistent marketing management comes in. It never takes a day off,” he says. “You have to keep working at it when it’s not urgent, and you have to keep working at it when it is urgent.”
The feed market adds another reason for producers to have a plan. Corn has already made a sharp move, and analysts see a path toward even higher prices if production or weather problems emerge. Waiting for the perfect buying opportunity could leave producers exposed if the market continues higher.
The long term outlook may offer opportunities as U.S. dairy builds export demand, but producers still have to make it through the current market.
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