Converging circumstances weigh down PPDs
In the 19 years prior to 2020 and the COVID-19 pandemic, the monthly difference between Class III and Class IV prices had exceeded $5 per hundredweight (cwt.) on only six occasions. In 2020, that difference occurred six more times. For deeper perspective . . . that was just six times in 228 months prepandemic and six times in the first 12 pandemic months.
“In two of those months, the spread was greater than $10, and in three more of those months, it was greater than $7 per cwt.,” Cornell’s Chris Wolf shared during the May 5
These wide differences in Class III and Class IV prices have framed the discussion surrounding negative Producer Price Differentials (PPDs) in 2020 and have contributed a great deal of fodder to the discussion of Federal Milk Marketing Order (FMMO) change.
Is a single federal order in our future?
Hoard’s Dairyman DairyLivestream, commentators including Cornell’s Chris Wolf, Dairy Farmers of America’s Ed Gallagher, and dairy policy consultant Alan Zolin responded to the question, “Is it time to consider more consolidation in federal orders?”
Just as those involved in the dairy industry across the country would differ in their responses to this question, the panel had varied perspectives.
“Not if it’s strictly consolidation. There are a number of things I would do, but I wouldn’t consolidate how pricing works now,” Wolf shared to initiate the conversation. Instead, he suggested separating out and balancing volatility rather than making a single order applicable to the whole country.
The No. 1 economic factor is the individual
One of the beautiful things about dairy farming in the United States is the variety. There are a number of ways to milk cows and be successful. So, when the question, “What economic factor matters the most?” was posed to a panel of dairy loan experts during the February 17
Hoard’s Dairyman DairyLivestream, the conclusion was simple it depends on the farm.
“Generally, you tend to stay in your band, but you can fluctuate between them,” Miller commented of data presented on dairy farm profitability by quartile. “Frankly, it’s only in a couple of areas. It’s in heifer raising costs, feed expense, to some degree equipment investment, and in the capital structure,” Miller went on to say about expense variables that impact a dairy farm’s profitability. In 2019, the top 25% of herds in the Northeast Dairy Farm Summary earned $925 per cow while the bottom 25% lost $325 per cow. In speaking of “band,” Miller made referen
Dairy risk is as volatile as the milk markets
While bank standards for assessing loans haven’t changed, the risks associated with dairy operations certainly have changed during the pandemic. That has been abundantly apparent with the rise and fall of the milk market in the past year. Panelists on the February 17
Hoard’s Dairyman DairyLivestream discussed a few of these alterations in risk assessment and advised dairy farmers to regularly evaluate their finances, make adjustments when needed, and steer clear of recency bias.
“The title of the webinar is ‘How are we evaluating farm loans these days?’
“The answer is the same way that we always have,” explained Sam Miller, who is the managing director of agricultural banking at BMO Harris Bank. He outlined a few of the key metrics they evaluate before granting loans including the operation’s core strengths, balance sheet, profitability, cash flow, liquidity, price risk management, and the industry forecast.
Three factors defined 2020 dairy financials
If volatility has been the defining characteristic of the dairy industry during the last few decades, 2020 was one for the record books. As last year’s books get finalized, Cornell’s Chris Wolf explained that three factors contributed to the financial health of dairy farms.
“We’re starting to get some idea of what the dairy farm financials looked like for 2020,” he explained during the February 17
Hoard’s Dairyman DairyLivestream. “There’s a pretty wide range of performances; maybe even wider than what we’ve seen in recent years.”
There seems to be three factors that are driving what kind of year farms had: