That increase is second only to South Dakota, and it surpassed Texas. Unlike many of their neighbors to the west, Wisconsin hay and forage production was up, boosting inventories and helping buffer feed costs. Looking back at last year’s USDA preliminary estimates, 2021 Wisconsin milk production grew by about 1 billion pounds, up more than 3%.
For Matt Lange, business consultant with Compeer Financial, Baldwin, Wisconsin, his clients are “attentive and prudent.”
“I am not sure I have ever seen a time when producers have been so in tune with all the variables impacting their industry and operations,” Lange says. The outlook for stronger milk prices has most producers seeing black on their bottom lines in 2022. “However, the black ink is not yet dry,” Lange says. “There are higher feed, fuel and fertilizer costs, and margins, while black, might not be as positive as the milk prices would suggest.”
Many factors are creating cautious optimism among dairy producers, according to leaders of two dairy cooperatives headquartered in Wisconsin and with membership stretching throughout the Upper Midwest.
“Rising milk prices have planted seeds of hope that 2022 can be a prosperous year,” says Tim Trotter, CEO of Edge Dairy Farmer Cooperative, based in Green Bay, Wisconsin. “Yet, the costs of feed, energy and labor still loom large, tightening farm margins – even if we do reach near-record milk prices. It feels like dairy farmers have entered each of the last five years with promises of strong milk prices. There are always unforeseen turns in the market, and it seems many farmers now await the proverbial ‘other shoe’ to drop.”
Jeff Lyon, general manager of FarmFirst Dairy Cooperative, headquartered in Madison, Wisconsin, characterizes the general mood as “changing.” Any discussion with his producer members revolves around optimism over current milk prices but turns to concern that higher costs will negate those prices.
“There is uncertainty, especially when it comes to farmers wanting or needing to invest in their operations, whether it’s equipment or their facilities,” Lyon says. Supply chain issues add a question to the concern and uncertainty. “Can I get the inputs, equipment or parts that I need, and if I can get them, what are they going to cost?”
Despite COVID-related market disruptions and volatility over the past two years, the consensus is that dairy farmers overall are in good financial shape going into 2022, Lyon says. For those who participated, the Dairy Margin Coverage (DMC) program helped fortify income.
With risk management and government assistance helping make ends meet, Trotter says many producers are likely in the strongest financial position since 2014-15.
Attention to cash flow, revenue and equity positions, paying off outstanding bills and paying down lines of credit were common actions among producers in 2020 and 2021, Lange says. While that simple but effective mindset didn’t maximize profits, it did help put many of them on strong financial footing entering 2022 and in position to take advantage of opportunities when they arise.
“Because of the uncertainties, increased costs and availability, many producers have held off on expansions or capital purchases, which has helped them secure stronger liquidity positions,” Lange says. “Most of the dairy operations I work with are sitting in the best working capital and liquidity positions they have had in the last decade.”
Lange puts concerns facing dairy producers in three buckets: input costs, supply chains and “black swan” events.
Input-cost worries start with feed. With rations running 2-3 cents per pound of dry matter higher than recent years, feed costs are up about $1.80 per cow per day. While milk production and projected Class III milk prices appear to provide ample income over feed costs, purchased feed costs could be a challenge for some herds and keep margins relatively in check, Lange says.
Besides rising fuel and fertilizer costs, the incremental rise in labor costs and limits on labor availability are driving changes in day-to-day operations and long-term business decisions. Lange cites some clients who lost key personnel to non-ag jobs and have had to outsource calf and heifer raising. More dairies are evaluating any and all possibilities for automation.
Looking at supply chains, several of Lange’s producers have been waiting 10-12 months on new equipment orders. For operations looking to expand, the uncertainties of cost, delivery of materials and availability of contractors looms.
If that list isn’t long enough, producers have expressed concerns about the unforeseen events that could trigger a major disruption, including COVID restrictions and international unrest.
High costs of production continue to place stress on many farms – especially the smaller ones, Trotter says. In addition to feed and fuel, “help wanted” or “short staffed” signs are everywhere.
“If you can find good help, you will probably have to open up your checkbook in a competitive labor market, further increasing your costs,” he says. As such, a priority for Edge is legislative reform on immigrant labor.
With supply chain challenges putting pressure on farmers, including waiting weeks or months for parts, more producers are turning to on-farm maintenance and being more proactive to prevent extended shutdowns in the parlor or the fields.
Many of the same issues faced by producers are affecting processors. “From a processors’ perspective, new COVID variants and employees getting sick could negatively affect a plant’s ability to have enough workers on staff regularly,” Lyon says. “Labor issues will also continue to affect the trucking industry, including but not limited to milk haulers.”
For the most part, the balance of milk supply and processing capacity in FarmFirst’s market has been good, supported by strong demand. “There are several plants in the process of expanding and modernizing, some of which have fallen behind schedule due to supply chain issues and labor shortages,” says Lyon, who expects those plants to be ready and taking milk by the second half of 2022 and into 2023.
The need to implement base-excess programs ebbs and flows, with communication being critical, Lyon says. “The biggest challenge for our milk marketing division, Family Dairies USA, has been the week-to-week changes in the amount of milk our buyers need to meet their orders. The COVID-19 pandemic has caused plant production schedules to go to two weeks instead of the traditional one to two months.”
Lange says base-excess programs have had little negative impact on most dairy operations in the region, with future over-base situations likely limited to a small percentage of producers.
“Base programs will likely continue to evolve and will likely change based on whatever the supply and demand requires at the time,” Lange says. “This is something that producers need to evaluate as they manage their risk levels.”
Both Lyon and Trotter have been attentive and active in evaluating potential Federal Milk Marketing Order (FMMO) reforms.
Lyon serves on the FMMO Task Force through the cooperative’s involvement on the National Milk Producers Federation’s (NMPF) Economic Policy Committee.
Large negative producer price differentials (PPDs) caught the attention of dairy farmers in 2020. While the Class I mover got the most attention in 2021, low Class I utilization in the region makes it an issue of less importance, Lyon says. The biggest challenge, he adds, is meeting regional milk marketing needs under what is a national program designed to address fluid milk, in an environment where fluid consumption continues to decline.
“In the Upper Midwest, our interests are with milk price determination issues like component formulas, incorporating other products in determining Class III and Class IV prices, the block-barrel spread, and updating make allowances and yield formulas to reflect higher component content of farmer milk,” Lyon says.
With a seat on a regional task force of six Midwestern dairy groups, Edge has spent considerable time and energy devoted to discussing FMMO reform, Trotter says.
“Among the areas in which our members would like to see reform are an increase in transparency, established terms of trade (such as payment dates, etc. in the event an order goes away) and regional flexibility. The needs of farmers in the Upper Midwest are far different than those of the Southeast, where Class I reform remains the top priority. Regional flexibility would allow farmers in different areas to customize an order to meet their specific needs.”
Trotter fears the threat that negative PPDs in several orders could bring the day in which the cost of running an order outweighs any benefits associated with them. “Research shows the Pacific Northwest may have already reached this point with seasonal PPD swings,” he says. “It is paramount that we not only find a solution before such a time arrives, but that we find the right solution, backed by thorough research.”
Lyon, Trotter and Lange all agree domestic and global demand will continue to strengthen U.S. and regional dairy producers going forward.
“While there are many challenges that dairy farmers will need to address in 2022, we are fortunate to have the natural resources, the infrastructure and expertise for the dairy industry to be a significant contributor to our economy for years to come,” Lyon says.
Even with an optimistic outlook, Trotter believes the Upper Midwest dairy community is approaching a critical moment. “An increased focus on traceability, sustainability and technology will ensure our dairy farmers are able to pass their legacy onto the next generation,” he says.
Overall, the dairy industry will continue to evolve and balance highs with lows, Lange says. Success for individual producers will hinge on management and business execution at the farm gate.
“Now is a great time for producers to be evaluating their prior year performance, meeting with their key advisers, making budgets, scenario planning, and implementing new procedures that improve their performance and margins to stay viable and competitive, regardless of what we see change in the industry,” he concludes.
ILLUSTRATION: Illustration by Corey Lewis.
2022 State of Dairy: A melding of moods and concerns
Northeast: A brighter price outlook, but uncertainty abounds
Southeast: The struggles continue
Mideast: Balancing multiple market forces
Appalachian market shares Southeast challenges
I-29 Corridor: At the intersection of growth and balance
Southwest: The neighborhood is changing
Water, regulations add to regional challenges
California in a ‘state’ of its own