Moving the profitability needle

For dairy producers, 2020 has been one wild ride. Coming into the year, market forecasts were pointing to an improved market that had finally rebounded from the past four-plus years of dismal prices. Producers have seen Class III prices drop to as low as $12.14 CWT in May to more than $21 CWT in June and $24.45 CWT in July, fall to the $19s in August, and trend in the $16 range in the fall. Prices are expected to be in the $16 CWT range as we move into 2021.

"Dairy prices have always been sensitive to relatively small changes in supply or demand," says Robert Cropp, emeritus professor in the department of agricultural and applied economics, University of Wisconsin-Madison. "And this year's events made those price fluctuations even more extreme."

Experts stress that the key to profitability in the months and years ahead is not only ensuring the right things are done when it comes to cow management but also ensuring the marketing pencils are sharp: Be ready to take advantage of every opportunity to lock in a profitable price, as well as all programs available to help mitigate market risk.

"It is imperative that producers use price risk management tools to protect milk price and profitability," Cropp says. "We keep fire and car insurance, and pay premiums in hopes we never have to use it. But these programs are used to protect in case disaster strikes. Dairy price risk management has a cost, and there are times it won't need to be used. But the point is that it is there to prevent disaster when prices go lower.

"In my January outlook, I was quite optimistic prices would rebound. But I still recommended producers use the risk management tools available to them," he says.

Prices skyrocketed in June and July, yet even with these higher prices, Cropp says the market may be overly optimistic. "Slowing exports, or another round of the virus, and we could see prices erode. Those who locked in prices at that time are smiling now."

The key is to use the tools that are available to lock in a price that is profitable. "These are unprecedented price swings in the dairy market," he says. "It is nearly impossible to pick a high or low. However, these tools are incredibly powerful and can help you lock in a price that makes you a profit."

The COVID lesson

In the midst of COVID-19 market uncertainty, a number of producers were faced with having to reduce milk production by 10% to 15%. One way they responded was to cull the bottom 10% of their herd.

"The interesting fact was that there were producers who culled 10% of their cows, and they got more milk from the 90%," says Mike Hutjens, professor emeritus, animal science, University of Illinois, Champaign-Urbana. "The takeaway here is that the cows remaining responded well because of more cow comfort, less crowding, and more bunk space."

Hutjens says it's a mistake to just pull back on rations in order to cut back on production or lower costs. "If you are balancing your rations for 80 pounds of milk, then balance for 70 pounds of milk, your good cows may drop 10, 15, or 20 pounds of milk. These are your most efficient and most profitable cows. Do not take the 'A' team off the field," he says.

Another mistake is to cut back on the additives and micronutrients in an effort to save your way into profitability.

"That simply won't happen. Cutting back on essential nutrition on your herd can have long-term impacts on animal health, reproduction, and somatic cell counts. If you are looking at trying to maintain profitability, you want and need healthy cows," Hutjens says.

With markets paying a premium for fat and protein content, Hutjens says a feeding program that maintains or increases protein and fat (within reason) is a bonus.

"These bonuses are being driven by the cheese market," he says. "And while cheese prices have been a yo-yo this year, I expect component premiums to remain high."

On the feed front, Hutjens remains optimistic. "If you have to buy feed, prices look favorable moving into the fall," he says. "Of course, we could have weather events that impact our final totals and could impact price. So producers should be aware of feed costs and lock in prices if needed."

What will 2021 bring?

Prognosticating dairy market prices into next year will remain challenging, especially in the wake of COVID-19 events.

"It's definitely a challenging time being in the business of providing market outlooks," says Ben Laine, dairy analyst for Rabo AgriFinance. "We had the initial disruptions that closed schools and restaurants, then moved to logistics and trade disruptions. We now seem to be moving to a time in which the market will look at the broader economy and how it will impact dairy demand."

Laine says that while general economic signals are not where they had been predicted moving into 2020, they are generally better than economists had envisioned at the start of COVID-19 lockdowns. "The real story will be volatility in the dairy market," he says. "I don't see that changing."

And with that volatility, using risk management tools will be crucial.

"This event was a very good reminder that as good as the dairy market was looking moving into 2020, major unforeseen events can have a tremendous impact," Laine says. "Market uncertainty means producers need to take advantage of opportunities."

Study the price probabilities

Cropp began doing dairy price forecasting in 1974. "At that time, it was relatively easy to do forecasts because the market was remarkably stable," he says. "When federal price support programs went away, we started seeing increased volatility. And today, with 15% of our dairy products going to the export market, we have an additional area that impacts prices."

Experts note it's nearly impossible to determine the exact high or low in a market.

"What you have to study are the probabilities of prices going higher or lower," Cropp says. "If the market is offering a price that gives you a profitable return, lock it in. You can't go broke making a profit."

Hutjens says the bottom line is to control the controllables. "Producers can't control the price of milk," he says. "But you can control everything else, and that includes your marketing."