We’re more than halfway through 2023 and we’re already seeing further drops in milk prices.
In such a climate, it can be hard for some dairy farmers to stay positive. (Although, if you have the right business strategies and crop insurance products built into your operation, waiting out the lean times can lead to some incredibly positive financial upsides!)
Still, as many farmers watch their operations lose money (and for milk to go bad— or get dumped), many may wonder about drops in milk prices. And the reality of the dairy business is: prices always change.
But why? The number of cows doesn’t change quickly. Milk production doesn’t shift drastically. Milk consumption only changes gradually. So what causes the extreme jumps and drops in milk prices? Here are the many forces that can cause or influence these volatile changes in the market, and 2 things dairy farmers can do about it to survive the storm.
Shifts in cultural demand
Demand in the dairy market is complex, and it is only one of the many forces that can cause drops in milk prices. If it was the only influence, then “fixing” the volatility of the dairy market would be simple: just speed or slow production to match demand— but even amateur dairy farmers know this is not the case. Because demand is unpredictable.
Recently, culture or generational trends— especially where U.S. milk prices are concerned— have had a hand in the demand for milk (and, thus, supply and price). According to Investigate Midwest, younger generations are drinking less milk (plain, as a beverage) and turning to plant-based alternatives instead.
Does the fading away of the “Got Milk?” culture fully explain the drop in demand and milk prices? It is creating a dent, yes, but it doesn’t cover everything: a large chunk of dairy produced also goes towards cheese, yogurt, or dry milk (for formula, for example) and these are value-added and relatively “stable in-demand” goods.
Milk is more like crude oil now. It goes into refineries and emerges as a globally traded commodity. Once milk and processed dairy hit grocery store shelves, the retail prices for each individual item factor into milk price fluctuations.
Demand is not just based on the U.S. market
That’s right: if people aren’t chugging milk, or even nibbling cheese, on our home turf as much as they used to, there is still demand overseas to think about. The U.S. exports about 18% of its milk and dairy products across borders, most notably to neighbors Mexico and Canada, but also places like China and the Philippines. That still tops 1 billion in dairy revenue for farmers— nothing to scoff at.
About 30 years ago, however, virtually ALL demand was U.S. based. That’s a huge change, and a massive driver for demand— and, thus, milk prices. You’d think this would only create more stability for dairy producers and the industry.
But here’s the rub: markets outside of the U.S. tend to be more unstable. Even with strong international dairy market analysis and projections, U.S. producers and processors cannot pivot, angle, or strategize production to meet the fluctuations of each individual dairy market around the world. This means that prices boom and crash due to political and economic events worldwide.
In the past decade, there have been many such events. China’s reduced purchases, Russia’s ban on Western dairy imports, the EU’s increased milk production, and more, have contributed to the global glut and low prices.
It should also be mentioned: U.S. markets are liable to import a lot of processed dairy from other countries, meaning less reliance on (and income for) the dairy farmers within our borders.
Ergo: you have the wild and unpredictable beast of the dairy market, with milk and dairy prices changing weekly or monthly. All these factors play a role in impacting milk prices for U.S. producers, as well as dairy producers in other countries around the world.
Dairy farmers worldwide are suffering, with some going bankrupt or needing government help. Large producers are less affected, as they operate efficiently at low cost. But in the US at least, dairy farmers can purchase crop insurance products to protect them against losses.
Milk prices are volatile by nature. What can farmers do about it?
Being a dairy farmer isn’t as simple as it used to be. The struggle is real.
Small businesses can learn new strategies to help tighten the belt for that eventual rewarding upswing of milk prices— while others may feel the heat too strongly, facing the possibility of closing doors or selling farms to the growing consolidation of big dairy business.
Still, for so many farmers, sticking it out and working with the dairy business can be a matter of family legacy, equity, and well-earned and well-deserved pride….and it’s possible. So, what options do these farmers have?
Keep production costs perpetually low.
While expanding business is rarely not a smart move— especially paired with plenty of available capital— this is not always provident or frugal when projected dairy income is expected to shutter. Take it from Jed Stockton, per NPR’s The Salt: “We have changed very little,” since the early years of their operation no doubt, and owing to the possibilities of low milk prices. “We are low-cost producers and by continuing our efficiencies we are able to weather the storm.”
This can make it very hard to plan growth and business expansion, according to some other dairy farmers. Though the key to growth may be a feast or famine existence: be locked and loaded for expansion when milk prices recover, and batten down the hatches when they take a tip.
Enroll in a dairy insurance coverage plan.
Many dairy farmers credit dairy insurance— especially a Dairy Margin Coverage (DMC) plan, but also Dairy Revenue Protection (DRP)— for not only helping them survive lean times but also cashing in big when those lean times are over.
Unlike other types of insurance in other industries— auto, home, life— dairy or crop insurance can be viewed more like a business asset that leverages more income in the long run, even for the smallest guys in the business.
Find a dairy insurance expert to help.
We’ve been helping dairy farmers with this stuff for decades.
Give us a call so we can help you build an insurance plan that will allow you to not only survive the lows but also ramp up those profits when milk prices turn around again. They always do!