Roller-coaster year for state's dairy farmers

Minnesota milk producers are riding a roller coaster of prices recently, swinging from record profits for most of 2014 to potential losses in 2015.

Strong demand driven by China and other factors caused producers around the world to ramp up, but now China has dramatically slowed its buying, and there's a glut in the global market.

Marin Bozic, assistant professor in dairy foods marketing economics at the University of Minnesota, said that 2015 could be a bearish year for U.S. milk producers.

"Right now we are going from record-high profit margins in the dairy industry to a year that is widely considered to be quite problematic," he said. "Next year we will see lower milk prices — probably lower than cost of production at some Minnesota dairies."

The oversupply of milk will likely benefit consumers, who have seen one-gallon whole-milk prices climb steadily during the year to a high of $3.86 last month, compared to $3.49 in November 2013, according to federal reports.

But Bozic said some farmers worry that the rapid drop in prices will continue in 2015 and drive the cash they receive below average costs, affecting thousands of producers and related businesses.

Minnesota ranks eighth in the nation in dairy production, with about 4,220 dairy farms and 465,000 dairy cows, according to state agriculture officials.

"It's always embarrassing for any economist to look back at their own forecast, but I thought I should be a straight shooter and reveal how hard it is to predict what will happen next year," Bozic said. He expects prices in 2015 to average $17.50 per hundred pounds.

What has caused the whipsaw in prices is a combination of factors, Bozic said.

China produced less milk beginning in mid-2013, partly because it is restructuring its dairy industry from small family operations to larger, modern dairies. Milk is exported mostly as milk powders, whey, cheese and butter, Bozic said, and China bought huge amounts of what was available on the world market, and may have built up its inventories.

China reduced its buying substantially last May when it imposed new safety regulations for dairy imports and new registration requirements for suppliers. Russia further reduced global demand in August by banning U.S. and European dairy and other food products in retaliation for the sanctions it faces over the Ukraine crisis.

China and Russia are probably two of the top three buyers of dairy products in the world, said Tom Wegner, director of economics and dairy policy for Land O'Lakes, headquartered in Arden Hills.

Another factor is the growing strength of the U.S. dollar, which makes exports more expensive.

As demand has dropped, supplies have burgeoned. Producers around the world ramped up their milk output to take advantage of high prices and lower animal feed costs, but now don't have the customers to buy it.

Wegner said that milk production in 2014 increased by nearly 5 percent in the European Union, 12 percent in New Zealand, 4.5 percent in Australia, and about 2 percent in the U.S.

The glut of milk has caused prices to plummet, and is the reason that Bozic and other economists see low prices ahead, at least for the first half of 2015. The United States is more closely tied to the global system, he said, since dairy exports have grown from 4 percent of milk production in 2005 to almost 15 percent in 2014.

"The toothpaste is out of the tube," said Wegner. "We're affected by the world market."

Wegner said he expects some reduction in consumer prices for dairy products in 2015, but he doesn't know when or how much shoppers might save.

Pat Lunemann, president of the Minnesota Milk Producers Association and a dairy farmer near Clarissa in Todd County, said the cost of milk production ranges from $15 to $20 per hundred pounds, depending on the size, age and health of the herd, the cost of feed, and other factors.

He's seen the up-and-down cycle of prices many times before, and said farmers make investments and improve their balance sheets when they have profitable years like 2014.

"What we've done is to try and replace equipment that was getting tired out," Lunemann said, referring to the 700-cow operation that he owns in central Minnesota.

"You hope that you get all your bills paid and maybe your debt paid down somewhat, because you know that these times come."

Bob Lefebvre, executive director of the Minnesota Milk Producers Association, said dairy farmers in Minnesota will face significant challenges in 2015, based on futures prices for milk.

One bright spot, he said, is that beef prices are high, and one portion of income for dairy farmers can be the beef market because older cows end up going to slaughterhouses.

But Lefebvre expects the markets to adjust and for prices to settle down.

"Dairy farmers are in it for the long haul, and I'm confident we can ride out next year," he said. "When times are tough, you need to double down. You can't start skimping on the cows' diet, because that's not good for the cow."

Tom Meersman • 612-673-7388