Growing dairy profit margins on the heels of strong export demand are giving producers more opportunities to improve and repair farm equipment and facilities, said Mike Schutz, Purdue Extension dairy specialist.
While Mexico continues to be the largest buyer of dairy products exported from the U.S., growing demand in Southeast Asia for powdered milk and whey has helped boost on-farm profits. That, coupled with lower feed prices, has put dairy farmers into better financial positions than what they've faced in recent years.
"These improved margins really provide an opportunity for producers to keep up on the things they've had to delay," Schutz said. "That could mean doing facility or equipment repairs or even installing new and improved milking equipment that could ultimately lead to higher milk quality premiums - anything you can do to save on labor costs and improve operation efficiency."
Dairy producers since 2009 have faced a lot of volatility in milk prices. Between 2004 and 2008, record profits encouraged dairy farmers to expand the national herd at a rapid rate. But when global recession struck, the bottom fell out of the U.S. dairy markets, leaving producers with an abundance of cattle and more dairy products than they could sell. That resulted in a nearly 50% decrease in dairy prices almost overnight.
Prices have rebounded since then. According to Schutz, milk prices in 2013 were the most stable they've been since 2000. But feed prices remained high for much of the year because of short supplies from the drought of 2012. It wasn't until late 2013 that feed prices started to come down as new grain and forage crops were harvested.
"While dairy producers certainly welcomed the reasonably stable milk and dairy product prices last year, high feed costs still resulted in tight margins," Schutz said. "A large 2013 corn crop in the eastern Corn Belt, along with moderating demand for ethanol production, has driven down feed prices."
Another facet to the complex reasons why U.S. dairy margins are improving is that producers in Australia and New Zealand, both major dairy production countries, aren't able to expand quickly enough to meet the demands of Southeast Asian markets.
"U.S. exports to Southeast Asia, especially China, are growing because the Asian demand exceeds the expansion rates in Australia and New Zealand," Schutz said.
But even though this is good news for U.S. producers, Schutz pointed out that they still need to be cautious.
"Nothing right now leads us to believe the bottom will fall out of the dairy market in the near future unless something changes internationally," he said. "But at this point, we also can't forecast whether herd expansion would be a safe investment."