Dairies waiting for hay
Following record 2022 hay prices, dairies have been holding off on rebuilding hay inventories. For western dairies, alfalfa is a major feed component and typically their largest production cost. For Idaho dairies, feed expenses on average accounted for 65% of the cost of production per cwt in 2022, up 26% from 2021. Many dairies have been purchasing hay on a strictly as-needed basis and prices have softened by more than $50 per ton for old-crop dairy quality hay from the same time the previous year. Dairies are banking on a larger, more affordable 2023 hay crop to rebuild their inventories. However, they will likely need to keep waiting as scattered storms across the West have delayed first hay cuttings and impacted quality. While lower hay prices will alleviate some production cost woes, haying conditions must first improve before dairies start to buy.
Strong prices incentivize culling, but dairy inventory remains strong
Strong cull cow prices have provided a financial incentive for dairies to remove low-performing cows. Cull cows are averaging $1,200 per head in early June, more than $300 per cow higher year over year. The combination of strong cull prices and high feed costs increased March 2023 slaughtered dairy cows to 306,200 head, numbers last seen in 1986 during the Dairy Termination Program. The Dairy Termination Program was a USDA program to improve milk prices by removing 12 billion lbs. of milk from markets and allowing dairies to bid on a federal payment in return for slaughtering or exporting their cows.
The national cow inventory rose to a year-and-a-half peak in March 2023, right before the start of spring flush (excess milk production). Many operations have seen milk prices fall to breakeven levels or below in 2023. The increase in culled cows in March was a financial decision for many producers to cut back on costs. For better prices, the dairy industry will either need less milk supply (helped by increased culling) or greater demand. Even with the increased culling, milk production has increased month over month throughout 2023 as producers confront diminishing margins and many may consider further herd reductions to curtail production costs.
Weakening export demand
U.S. dairy exports are decreasing due to high prices and stagnant markets. This is concern for the dairy industry, as milk production is growing faster than demand. The high cost of U.S. dairy products (which for most products are above competitors) and unfavorable exchange rates are contributing to the decline. China, the largest dairy importer, reduced imports in the first quarter of 2023, putting downward pressure on global dairy prices. A global downturn (which analysts expect in Q3 or Q4 of 2023) will hurt all dairy exporting regions causing a global contraction in the dairy markets. However, in the short run exporters will mainly compete on prices.
Profitability
Dairy margins have been squeezed throughout 2023 with lower milk prices and persistent high production costs. Feed costs and inflation have been the key drivers of elevated production costs. Between 2021 and 2023, dairies in the Northwest experienced nearly a $4 per cwt increase to their breakeven milk price driven by increases in interest expense (up an average of 13% year over year), labor costs (up 14%), and feed (up 26%). At the same time, Federal Milk Marketing Order (FMMO) Northwest milk prices have declined by more than $9 per cwt for Class III and nearly $7 per cwt for Class IV year over year. Idaho’s average milk prices fell $7 per cwt in a year to $20.7 per cwt in April 2023. While analysts expect feed costs to decline this summer, it will likely not be enough to offset the impact of declining milk prices and the overall impact on producers’ finances.
Dairy margins will remain tight for the foreseeable future. Dairy farmers should know their breakeven and if necessary be prepared to make changes to their operations to protect profitability. To mitigate higher feed costs dairies have been purchasing hay on an as-needed basis only, waiting for forecasted lower hay prices expected in the fall. Dairies have also started using alternative feed sources that are more affordable, such as silage. To reduce the impact of inflation and higher product costs, dairies are working with their network to negotiate better feed and input prices. Implementing risk management strategies, like Dairy Revenue Protection insurance, will help provide a financial safety net against weakening dairy prices. Tight margins are a challenge for all dairies.
