Dairy farmers doing more with less

What happened

According to the most recent USDA Milk Production report, the dairy herd is shrinking, yet production remains mostly unchanged. The report, released on May 20, indicated April production in the 24 major producing states totaled 18.3 billion pounds, down 0.20% from April 2023.

Yet, the average number of cows on farms in the 24 major producing states was 8.83 million, down 55,000 head from the same time last year and 6,000 head less than in March. Production per cow jumped from 2,056 pounds to 2,064 pounds, or 0.39%.

Those added pounds leave milk production virtually unchanged. This all suggests greater efficiency at a time when lower cow numbers were expected to be supportive for prices.

Why this is important

Expectations for smaller cow inventory with efficiencies in production suggest higher prices are not likely to be sustained in an inflationary environment. The good news is producers have learned how to produce more with less. While this is good for consumers, it is a challenge for anyone in the milk production business.

Dairy prices have recently rallied to over $21 in front-month futures. Supply that is mostly unchanged suggests that demand will need to develop at higher prices. This is unlikely. Conversely, one might expect the opposite. That is, prices could decline (quickly) as higher prices curb demand, and erase selling opportunities. Sticky inflation is causing consumers to stretch their dollars, implying that higher dairy prices will be met head-on by cautious buyers. The implication of all of this is that selling opportunities for producers may be short-lived.

Market volatility is constant, and the recent rally could arguably suggest the market is now in an over-bought state. This would suggest prices are vulnerable to a quick break. 

What can you do?

Now is not the time to get comfortable with higher prices. Stay in touch with your advisor and work on strategies to defend prices. Whether this is in the form of hedging, forward contracting, options, or insurance, shifting risk is just one of the daily management tasks that every producer faces.

Work on a strategy that best suits your operation. Get positions or contracts in place to give yourself peace of mind, knowing what you will do in any market environment.

Editor's Note: If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.

Disclaimer: The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involves significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy, or discipline will guarantee success or profits. Any decisions you may make to buy, sell, or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of the National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. Unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.

About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.