The dairy world is changing
Tuesday, August 1, 2017
Posted by: Sam Miller, managing dir., head of ag, BMO Harris
Dairy farmers face both opportunities and challenges every day – managing production, financials, labor, feeding, nutrients, youngstock, input costs, milk revenues and many more areas of the business. Over the past 15 years, the U.S. dairy sector has changed from a largely domestic market to a significant global dairy market participant. This change has been positive by providing new and growing markets for whey protein, milk powders and cheese.
This transition has also had negative outcomes. Prices collapsed in 2015 and 2016 due to a worldwide flush of milk as Europe eliminated milk quotas. At the same time, sanctions on exports of dairy products to Russia eliminated a major global buyer. Dairy farmers (and their bankers) now pay close attention to news from around the world to understand if there will be an impact on milk markets and global trade. Currency rates, government stability, economic conditions in export markets and other trade issues – as well as the potential for retaliation – can have a beneficial or adverse impact on milk or other agricultural prices on farms in the U.S.
Keeping a finger on the pulse of consumer trends and preferences is also important for dairy farmers. The growth of Greek yogurt has shifted milk consumption from fluid to yogurt. It also changed the market for milk in New York and Idaho due to investment in processing capacity in those states. Meanwhile, consumers’ rediscovered taste for fat has turned the tide for consumption of whole milk while bringing butter back in vogue. Both the elements of flavor and the simplicity of the label – for butter, the ingredients are cream and salt – are behind the increased consumer acceptance for dairy products. The recent announcement of Amazon’s agreement to purchase Whole Foods could be another game changer for food buying trends. This is certainly something for anyone in the food production business to keep an eye on.
What should dairy farmers do about all these changes? Stay informed about the issues that can impact your business. The upcoming renegotiation of NAFTA, for example, could have positive or negative implications for the dairy sector. How the U.S. and China manage the challenges on the Korean peninsula could be another impact. If more consumers buy groceries through Amazon Prime, how will that impact the demand for dairy products?
More important, be certain you have the best control of your dairy’s manageable areas – that is:
- Know your cost of production.
- Produce a good quality product.
- Have a strong market for your milk.
- Maintain good liquidity and a strong balance sheet to negotiate the ups and downs of the markets.
- Understand your options to manage price risk.
Yes, the dairy world is changing, and with that comes both opportunities and challenges. Be prepared to meet them both.
Sam Miller is BMO Harris Bank’s managing director, head of agriculture. With more than 30 years of agricultural banking experience, he coordinates and leads production agriculture and agribusiness-related banking activities.