Farmers' milk prices rising, easing dairy farm losses, but for how long?

Wisconsin lost fewer dairy farms in June as higher milk prices kept more farmers in business. But some experts caution that it’s a “sugar high” that may not last, and farmers say they're not getting the full benefit.

As of July 1, there were 7,079 dairy cow herds in the state, down only 44 from a month earlier and one of the lowest exit rates in several years. For the first six months of 2020, the state lost 213 dairy farms, significant but far fewer than in the first half of 2019.

Boosted by government purchases of dairy products and the reopening of restaurants, farm milk prices have been rising.

“Farmers are doing a lot better. Milk prices today are at the highest level going back to 2014,” said Dan Basse, president of AgResource, an agricultural markets research firm based in Chicago.

“It’s a combination of things. I call it a ‘sugar high.’ Unfortunately, we believe the dairy markets will be oversupplied" toward the end of the year when government food purchases wind down, he said.

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Prices have vacillated in the pandemic. For example, milk that is used to make cheese was priced at $17 per hundred pounds, about 12 gallons, in January before slumping to $12 in May and then rising to around $22.

“The sharp drop in May was the result of the COVID-19 virus shutting down schools, universities, restaurants and food service, which caused a big drop in the sales of milk, cheese and butter,” Bob Cropp, a University of Wisconsin Cooperative Extension professor emeritus, wrote in a recent column.

In response, dairy farmers cut production, and some were asked to dump milk.

Then, government food assistance programs kicked in, helping to lower dairy product surpluses. Also, restaurants placed large orders to restock supplies as COVID-19 restrictions were eased.

Milk prices improved, in some cases nearly doubling.

Now, the question is whether it's sustainable.

“Hopefully, dairy farmers do not respond to higher milk prices by increasing production again,” Cropp said.

COVID-19 is the wild card

This fall, dairy processors will likely scale up the manufacturing of cheese, butter and other products for seasonal demand. But if there's a second wave of COVID-19 infections, higher sales over the holidays would be at risk.

“There is a lot of uncertainty as to milk prices for the remainder of the year," Cropp said. "Prices should remain strong for the next two or three months, at least, but beyond that, there's more uncertainty."

"This is not a good time to try and outguess the markets," said Kevin Bernhardt, a dairy economist at University of Wisconsin-Platteville.

Minimum milk prices are set by the U.S. Department of Agriculture using complicated formulas based on the wholesale market value of various dairy products such as cheese, butter and whey.

Many farmers see themselves as relatively powerless in an agricultural system based on large-scale efficiencies. Faced with few options to control the price for what they produce, they ramp up production and hope markets don't buckle under the strain.

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Most dairy farmers don't know what they'll be paid until 30 days after milk has left their farms. And under the pricing system, and what's called a producer price differential, they don't necessarily realize the full benefit of increases shown in the commodities market.

"A lot of that does not get directly to the farmer," said Bob Roden, a dairy farmer near West Bend.

“There are a lot of rumors about what we’re actually going to be paid for our June milk,” Roden said, adding that his cooperative told him to expect around $18 per hundred pounds, close to his break-even price.

“I will know what I actually got after July 18th,” he said.

The recent higher prices have helped farmers regain their footing after years of losses or barely covering their costs.

“What’s happened is farmers have borrowed against their equity in order to keep going," Roden said. "But we have dug some deep holes that we need to get out of, and that doesn’t change overnight."

COVID exposes cracks in the food system

The recent dairy crisis that began in late 2014 underscored changes in agriculture that have been taking place for decades but sped up more than many expected. Farmers are now engaged in a global marketplace that can be upended for months, even years, by trade wars, pandemics and climate change.

There's not much confidence in the higher prices now, said Daniel Smith, president and CEO of Cooperative Network, a Wisconsin and Minnesota group that represents cooperatives in dozens of fields including agriculture, health care and utilities.

“For all of us, COVID-19 is the wild card,” Smith said.

From cranberries to wheat, other commodities have also experienced price swings. For example, about 40% of U.S. corn goes into making the fuel additive ethanol, and those sales plummeted when Americans began driving less.

“When the ethanol plants shut down for COVID, a lot of that corn remained in bins. If we come up with a sizable grain crop this fall, there will be some pretty severe storage issues, let alone the impact on the market,” Smith said.

“The farmers are nervous as cats because they’re afraid that we’re going to stop buying corn. And they're right,” Randy Doyle, CEO of ethanol maker Al-Corn Clean Fuel, was quoted as saying in Successful Farming magazine this spring.

Rural Wisconsin is fueled by the money that farmers spend at equipment dealerships, feed mills, hardware stores, cafes and scores of other businesses. When dairy farmers stumble, businesses in rural towns lose their balance as well.

“I believe the full impact of COVID is still hanging out there," Smith said. "It’s going to impact our rural villages, cooperatives, businesses, all those things. We may see quite a drop in services and opportunities in rural communities."

Government programs have helped ease some of the pain.

“But we can’t keep putting Band-Aids on things. We have to come up with a long-term plan for the health of rural communities that works economically, socially and culturally,” Smith said.

COVID-19 has exposed cracks in the food production system, said Jim Goodman, president of the National Family Farm Coalition, and a retired dairy farmer from Juneau County.

Farmers dumped milk because processing plants were full, yet there were milk shortages in grocery stores. Slaughter plants shut down from the spread of coronavirus, resulting in meat shortages.

"The food system that many thought was so good because there was plenty in the stores at fairly affordable prices now seems pretty fragile," Goodman said. "If workers get sick in a processing plant, or if there are transportation problems, the whole system breaks down."

A third-generation farmer for more than 40 years, he called it quits in 2018.

Goodman loved the animals and the work and had endured hard times, but he couldn't see much of a future for his organic dairy operation that milked 45 cows.

He believes the loss of dairy farms, while it's slowed some, will likely continue until most small family-run operations have disappeared.

"I think that a farm like mine, once the cows are sold, is never going to come back," Goodman said.

This article originally appeared on Milwaukee Journal Sentinel: Milk prices surge, supporting dairy farms during COVID-19 pandemic