The Dairy Sector Requires Attention
The dairy sector is being impacted by a combination of issues right now – the milk and corn price relationship, water availability in certain Western States, trucking and supply chain issues, labor shortages, and overall inflation. Dairy farming has always required producers to have a positive outlook while faced with seemingly insurmountable obstacles and tremendous levels of unknown risks. Today, that optimism is running thin for many producers, with good reason.
Milk and Corn Pricing
Dairy producers are faced with input prices and sales prices over which they have little control, and those input and output prices are not tied together. This graph shows the relationship between milk and corn prices over the past 30 years. Clearly the cost of inputs and the price received for outputs are not tied together.
Shortening the period viewed to five years shows the following:
In October of 2021 milk was approximately $20 per cwt and corn was approximately $6.00 per bushel. While this pricing relationship is improved from earlier this year when milk was in the $16.00 to $18.00 per cwt range and corn reached nearly $8.00 per bushel, the relationship between milk and corn continues to provide stress to dairy producers. With the price of corn higher than $4.00 per bushel since September of 2020, feed prices for dairy producers have been elevated and difficult to manage for an extended period.
Water levels in California, and throughout the Western United States, are at critical levels. The map below shows the California reservoir system as of December 7, 2021. Several of the Northern California reservoirs are at approximately 50% of their historic averages. There are also issues throughout the Central Valley.
Water issues are not limited to California. The next chart shows the water levels at Lake Powell over the past five years. The 2022 readings are at the lowest levels recorded over that five year time period.
Water availability and the cost of water are key components of success for dairy producers. Depending on the region the dairy producer is located in, the impacts of water availability and cost today can be severe.
In California the cost of water and the availability of water, coupled with the overall regulatory environment, are causing problems with the cost structure for the producer, and are impacting the potential collateral values of the dairy operations.
A lactating dairy cow will drink 30 to 50 gallons of water per day. The feed that cow requires to survive also requires water to produce. The Wall Street Journal’s December 5, 2021 article helps those who are not involved in the dairy business understand the hardship farmers in California are facing.
Labor Issues, Supply Chain Issues, and Inflation
Dairy farm workers put in long workdays in conditions that office workers may find unacceptable. With the current labor shortages, the cost of labor and the availability of labor are both causing stress for dairy producers.
Supply chain issues reduce ready access to trucking which can require producers to carry higher levels of inventory of feed and other inputs, which can stress lines of credit and working capital management.
Inflation levels are impacting all other costs not directly impacted by commodity prices, water availability and costs, labor issues, and supply chain problems.
What options do dairy producers have?
Dairy producers and their lenders need to evaluate the combinations of costs of inputs, sale prices, and herd sizes that result in break-even operations or adequate fixed charge coverage ratio performance. FMG has developed the Operating Performance Matrix ® which helps identify the number of combinations of costs and revenue levels and herd sizes that combine for an individual producer to achieve break even or adequate cash
flow to service debt.
The Operating Performance Matrix ® analysis is explained in detail in the Focus Management Group dairy white paper available via this link. The Matrix analysis can be completed quickly and helps identify options a producer may have. It also quickly identifies producers at more risk from a cash flow and ongoing operations perspective.
Contact FMG to discuss ways to assist producers and their lenders in navigating these difficult waters.