I’ve been involved in agriculture in some way my entire life, and most of my friends and acquaintances know it. So given all of the publicity lately about the plight of farmers, especially Wisconsin’s dairy farmers, I frequently get asked by my non-farming friends, “How are dairy farmers doing these days?” My typical answer is something like, “It’s been a difficult five years,” but the real answer is; “It depends.” That answer usually creates a puzzled look and gives me an opportunity to clarify what’s been going on in the Wisconsin dairy industry over that timeframe. Let me recount some history along with some of the things the experts are saying that helps me answer this question.

The Recent Past

In 2014, milk prices reached their all-time high. Times were good. Plans for expansions were being made. Dairy farmers were meeting proactively with their tax accountants to see what could be done to limit their tax liability. It was clearly the best of times and all of us in the industry were wondering if this was a signal that good times in dairy are here for good. But those of us with deep agriculture backgrounds understand that a commodity-based business like dairy is cyclical, and leaner times are likely to come sooner or later. And that they did!

The Current Status

Fast forward to today. The monthly “All Milk” price average during the 53 months from the beginning of 2015 until June of this year was $17.61 compared to $24.58 for 2014. Unfortunately, the average cost of production for dairy farms in Wisconsin during much of that time frame has been right around $20/cwt. And that gap between $17.61 and $20.00 has been what’s been causing the pain for many in the industry. Cow numbers have risen every year since 2014, and production per cow has continued to rise modestly, but cost of production can be a big differentiator. With the futures prices suggesting a modest improvement in prices over the next 6-12 months, perhaps some bottom line improvement is on the way. But attention to costs is still critical.

So as we look at our customer base over that timeframe and see a wide range of financial results, we are constantly digging in to discover what causes those differences. Nobody wants to hear a banker talk about “management” as the big difference maker, so instead, I’ll frame it as “controlling the things a farmer/manager can control.” Over this five-year span, we’ve found a high correlation between financial viability and effective cost control efforts and attention. It’s become a big deal in the dairy industry. Most of our farms today are able to get good milk production from their herds. Genetic improvements, cow comfort and good nutritional protocols have gotten most farms to high levels of milk per cow. 

But our best financial managers understand and pay attention to their cost of production, and many of them have been able to lower it by $3-$4/cwt over the past few years. Not everyone can do this of course. Some have business models with limited ability to impact the cost of production. Some have debt levels that are challenging their break even prices. Some have been impacted by a low basis from their milk processor. And some have been impacted by weather events like winterkill and prevented planting because of too much rain. But controlling the things one can control is a key to success.

Looking Ahead

So given all of that background, what’s the outlook over the next year and/or the next 5 years? With ongoing trade tensions, that’s a hard question to answer. In the big, longer-term picture, the growth of the world’s population from roughly 7.5 billion people to 9 billion over the next 25-30 years bodes well for American agriculture. The economies where the bulk of this growth is happening are tending to be improving, making US ag products increasingly important to their diets. We have some of the most productive agriculture in the world, so Wisconsin dairy farmers will be important to meeting that need. But in the short run, it’s likely to be a bit choppy as politics and weather play their normal role in the prices farmers receive. How’s that for a long-winded answer?
 

Written by Dave Coggins

Dave is Executive Vice President - Chief Banking Officer of Investors Community Bank. He has been with the bank since 2009 and has over 40 years of lending and leadership experience, including 10 years as president of Business Lending Group and 24 years in various lending and leadership roles in the Farm Credit System. Dave holds a Bachelor’s Degree from the University of Wisconsin-River Falls. He is actively involved in many community/professional organizations, including serving as treasurer and finance committee chair for Progress Lakeshore and a member of the Wisconsin Bankers Association Government Relations Committee. He is also a past chair of the WBA Ag Bankers Section and is currently vice chair of the ABA Ag and Rural Bankers Committee.

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