Close up of line of cows being milked at a dairy
PRODUCTION AND PROBLEMS RISING: Rising milk production, slower rising demand and shifting market logistics continue to squeeze dairy margins.

Dairy challenge: Keep production costs below $17.50

Penn State’s new dairy outlook says $17.50 per cwt is the 2018 mark for cash-flowing milk

Penn State University’s November Dairy Outlook showed little optimism for 2018 milk prices. Markets continue to move sideways with little prospect for forecast price improvement, according to Rob Goodling, Extension coordinator for the outlook.

If 2018 price forecasts are realized, the majority of Pennsylvania dairy producers will need to have a cost of production below $17.50 per hundredweight to cash flow. That’ll pose a significant challenge to many dairies.

Milk price projections for 2018, based on Class III and Class IV futures for January through August, range from a $15.35 low to a $16.14 high for Class III; $14.11 to $15.40 for Class IV; and $16.63 to $17.41 for Pennsylvania’s mailbox price.

Components only game in town
Shipping more components remains the best way to improve income. Over the last 17 years, Federal Order 1 butterfat tests have increased an average of 0.14%; protein tests have risen 0.11%. That’s according to a recent Northeast Market Administrator’s bulletin.

But those averages don’t reflect the increases achieved on many well-managed farms. During many dairy advisory team meetings, the conversation focuses on the forage quality and management needed to achieve an average of 6 pounds of components produced daily from each cow in the herd.

Blame the cyber economy?
The majority of Pennsylvania dairy farms are concentrated in the south-central and southeast counties. A recent study commissioned by the Center for Dairy Excellence found that the industry continues to grow and concentrate there. That same area has a tremendous transportation network, which has been a benefit in moving milk to market — note the words “has been”.

Over the past 10 years, this transportation network has attracted a large number of warehouses, or logistics centers, to the area. Proponents of logistics centers forecast that there’s no end to the amount of these structures needed.

These logistic centers are located along this transportation grid for the same reason that the extensive food processing industry in located there — half of the U.S. population can be reached within a 12-hour drive.

Some contend the biggest impact of these logistics centers to dairy is the farmland taken out of production to build these centers. But these logistic centers affect the dairy industry in a much less obvious way.

Anecdotal information indicates that average laborers may earn a wage of $14.50 an hour. As a result, dairy farms within a reasonable commute of any of these centers find they’re faced with a minimum wage floor set by local competition for laborers. If dairies aren’t willing to match the wage rates, it becomes increasingly difficult to recruit and retain employees.

Many Pennsylvania dairies already have a cost structure too high to compete successfully with dairies in other parts of our nation, mainly due to feed costs. Higher labor costs won’t be helpful.

Download the full Penn State Extension Dairy Outlook with price projection tables and graphs.

To explore feed costs and estimated income over feed costs at varying production levels by zip code, check out the DairyCents or DairyCents Pro apps.

Source: Penn State University

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