MENOMONIE — First, the good news: Farm-level milk prices will be higher in 2019 than they were in 2018.

The bad news is that they still “won’t be great,” Mark Stephenson, director of dairy policy analysis at the UW-Madison Center for Dairy Profitability, told agricultural bankers attending the 36th annual Western Wisconsin Ag Lenders Conference Jan. 10 in Menomonie.

Noticeably absent from this year’s conference were Wisconsin Farm Service Agency staff, off the job due to the federal government shutdown.

With the government closed, many U.S. Department of Agriculture reports are not being released this month, including an important one on the final size of the 2018 corn and soybean crop, making planning for 2019 difficult. Some functions, such as the collection of price data by the Agricultural Marketing Service, have continued.

The unavailability of critical crop and livestock reports will have ripple effects throughout this year, even after the government reopens, according to Brenda Boetel, commodity marketing specialist at UW-River Falls.

Unless circumstances for dairy exports change significantly and soon, Stephenson told bankers, it’s hard to be overly optimistic about 2019 milk prices. He predicts that the average Class III price will be $1.10 higher this year than last, and the All-Milk price will be up $1.15, reflecting weak premiums.

While farms have been going out of business at an alarming rate, he said, the U.S. hasn’t lost any of its capacity to produce lots of milk. Recent declines in cow numbers have not been enough yet to offset rising output per cow.

Meanwhile, a high level of dairy product stocks still hang over the world market and U.S. cheese stocks built up during the holiday season, dampening optimism about milk prices. Stephenson said the market should begin to deplete stocks this year, and “when that happens, we’ve got room for the world prices to move up.”

Milk prices have been “range-bound,” with the U.S. All-Milk price at $16 to $18 per hundredweight, for the past five years, Stephenson said. This may be the new “normal” for the dairy industry.

“It’s kind of a break point for us in the dairy industry,” he said. “We’ve lost a lot of farms, but we haven’t lost enough milk, not deep enough to really discipline the marketplace to produce less milk.”

Based on conversations he’s had with bankers nationwide, Stephenson said the current situation varies from that of 2009 in that, nine years ago, the “trough” was deep enough that no farm was cash-flowing. Producers culled heavily, often going below barn capacity, and they analyzed cows individually to see if they were covering their variable cost of production.

“That brought our production back into alignment,” he said.

But while current milk prices are low, they aren’t “desperately low,” he said, and “some farms have cash-flowed through the whole thing.”

Lenders are seeing a $10 range each year in the cash costs of production on Wisconsin dairy farms, according to Stephenson. About a fifth of farms have cash-flowed through this price trough, while 30 percent have had to borrow more money, another 30 percent have had to restructure loans, and 20 percent never really recovered from 2009 and now are “in real trouble.”

Some annual attrition of dairy farms is normal in Wisconsin, Stephenson said, and the typical rate is about 3.5 percent to 4 percent. But that figure began to creep higher in 2017 and, in 2018, it exceeded 7.5 percent.

Recession predicted

Positive factors for dairy in 2019 include slowing rates of growth in U.S. and world milk production, shrinking world stocks, El Niño, improved trade and a relatively strong domestic economy, with low unemployment.

However, Stephenson said some signs point to a coming recession, and that could hurt dairy consumption. Other negative factors include strong milk output in New Zealand; slow gross domestic product growth in some countries, such as China; and prolonged trade negotiations.

Trade retaliation has had an impact, as perception often becomes reality, he said. The futures market has lost $1.50 to $2 per hundredweight, while trade models indicate the real impact should be closer to 50 to 75 cents.

Trade mitigation will pay producers about 4 cents per hundredweight on impacted milk, Stephenson said, but “that’s insignificant, really, for farms.” More meaningful efforts have been the Margin Protection Program, which will have paid about 62 cents per hundredweight, on average, last year on farms’ first 5 million pounds of historic production, and the farm bill’s new Dairy Margin Coverage program, which looks especially promising for small farms.

“That will return some real dollars for producers and provide a nice floor,” he said.

The resolution of trade tensions with China would make a big difference for the U.S. dairy industry, Stephenson said. China’s per-capita dairy consumption remains small and is expected to grow. Historically, China has bought about half of all U.S. whey; the U.S. supplies about half of all export markets for whey worldwide. Also, small dairies in China are exiting the business, causing milk production to contract.

While Mexico has begun buying U.S. dairy products again, the U.S.-Mexico-Canada Agreement has not yet been implemented and still must be ratified by Congress.

Stephenson said the U.S. — the third largest exporter of dairy products in the world — won’t see full milk price recovery until dairy exports bounce back to about 18 percent of the milk supply.

“We’ve been in a prolonged milk price downturn now,” he said, “but it’s not as deep as in 2009. The difference is the drop-off in exports happened in an economy that’s generally strong. Domestic consumption is good. Excess product has stayed home but stayed home in a robust economy consuming more dairy.”

However, iif exports don’t pick up soon, and the U.S. falls into a recession, that would be a concern, he said.

Dairy is a good buy

Contrary to what some people believe, dairy product prices haven’t been increasing in the stores during this downturn on the farm, Stephenson said. They just haven’t dropped in correlation with farm-level prices. Dairy products are a good buy, he said.

Fluid milk sales continue to fall precipitously, he said, adding, “Clearly, consumers are making different choices with regard to fluid milk.”

But it’s not all bad news: Per-capita cheese consumption is on the rise, at 37 pounds per person annually, and the U.S. population is growing. Per-capita consumption is about 50 pounds in Germany and France.

“Cheese has been a great story for the U.S., and there’s still room for us to consider growing this category even further,” Stephenson said. “Instead of drinking our milk, we’re actually eating our milk.”