Celebrate Dairy Month with Our Dairy Outlook
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Each year, a team of AgChoice employees compile a Dairy Industry Outlook document, which includes an analysis of global, national, and local trends along with a price forecast for the current year. We recently interviewed Mike Hosterman, AgChoice ag business consultant, and Heather Weeks, AgChoice senior loan officer, who are two of the main authors of the Dairy Outlook. Together they shared highlights from the report to help us better understand factors impacting the dairy industry. You may also watch our Dairy Outlook webinar or read the Dairy Outlook report.
Heather, let’s start with you. What have milk prices looked like over the years in Pennsylvania and how do recent years compare?
You can see the trend lines overall for the last 15 years show fairly stable prices, but with a significant amount of variation year-to-year. The last few years going back to 2015 however, have shown fairly stable, although if you're producing in the Pennsylvania dairy industry, probably some might say middling to maybe below average or you might say probably some challenging milk prices depending on your outlook there.
Then if you look to most recently, 2019 and then into 2020, where you see how we have actually compressed our prices and that Pennsylvania milk price actually has come down and matched that Pennsylvania or that Class III price.
Another question for you, Heather. What are Pennsylvania dairy farmers doing to manage the milk supply?
When we look at how supply management affected farms from a cost perspective in 2020, it costs the average farm who did have an effect to supply management on average about 15 cents a hundredweight for all their milk shipping over base. So when you look at that, we know that not all base programs were applied equally throughout the year, not all base penalties were applied for all months on the year, and not all had all milk shipped. But what we do is if you take the entire total based penalty and divide it out by total pounds shipped, it comes out to around on average 15 cents on all of that milk. So if you're looking at how that's going to affect you this year, we know that supply management is still a factor and we know that it varies drastically from co-op to co-op.
Lastly, Mike, could you tell our listeners about risk management and how farmers use risk management on their farms?
Risk management, is it a buzzword? Is it needed? Risk management is something that we're seeing more and more producers do and are encouraging more and more producers to do it. 65% of Pennsylvania farms have signed up for DMC in 2021, the Dairy Margin Coverage Program, which is up from last year.
As a consultant, we're always trying to figure out how producers can make the most money. As we went into 2020, I can sit here and tell you, I told some farms, no, we shouldn't sign up for DMC. The Outlook was great. Prices were looking good. Some of those farms were larger farms. Why would we want to spend a few thousand dollars to protect 5 million pounds of milk when prices were looking good? But we didn't anticipate the black swan and COVID and all of a sudden we're all kicking ourselves for not taking advantage of it.
I think we learned an important lesson there. Risk management through DMC is cheap and producers should be signed up for it. I would love to see that get 100% of Pennsylvania dairy farms signed up. That's probably a little bit unrealistic, but it is something we need to be encouraging producers to do.
We should be signing up for DMC. It is a fairly cheap insurance that gives us protection on the downside and it did generate dollars last year for those farms that signed up for it. It also is generating dollars this year. In the first two months of year, we didn't see a whole lot come in, but in the last two months, I'm starting to see from cash flows where DMC is giving producers a return. So again, it is a valuable tool that producers should be signing up for.
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