Hardin: 2022 to feature high milk and cull prices

PAOLI – As the year 2022 begins, Pete Hardin, editor and publisher of The Milkweed, a national dairy monthly published in Wisconsin, offered his predictions for the industry he has been observing and writing about for over 40 years. And they look pretty good for dairy farmers.

Speaking recently at an organized gathering of dairy farmers in Paoli, he predicted high milk prices and high cull cow prices in the coming year as well as high feed grain and forage prices. (Farmers from Dane and Green counties have been organizing their own winter meetings for years, getting together to network and gain new insights, calling it Paoli University or PU.)

Hardin told farmers to expect very high fertilizer prices and the possibility that they may not be able to get enough fertilizer to grow their crops in 2022. The reality of high fertilizer prices highlights the benefits of crop production to those farmers who have access to livestock manure as a crop fertilizer.

For dairy farmers, who have struggled with barely breakeven prices for several years, the prospect of higher per-hundredweight prices is a breath of fresh air. Hardin noted that globally there are three major dairy exporting regions and all have experienced production-limiting weather events.

On New Zealand’s dairy farms, where herds are pasture-based and where the bulk of production is exported, farmers have experienced either way too much or way too little precipitation and it has hampered milk production. New Zealand’s dairy industry has fallen behind its marketing commitments, he said.

In another of the world’s dairy export regions, Western Europe, farmers saw one of the coldest springs in recorded history in 2021, he said, and that knocked back production gains in dairy. In the United States, western dairy producers suffered through drought and excessive heat as well as high grain costs and shortages of forages – all conditions that reduce milk production.

These Mother Nature-induced production limitations and tight global dairy supplies will bring much better prices to farmers’ mailboxes in the coming year -- $22-$24 per hundredweight, he said. “Demand is good. The world is a hungry place. And people have come back to dairy.”

In the leading U.S. dairy-producing states, production continued to lag behind year-earlier levels for several months in the last quarter of 2021 and that trend offers a pricing signal that Hardin believes will be welcomed by dairy farmers as the new year gets rolling.

The dairy industry cannot meet all the demands that are out there, he maintains. Some of those shortfalls come from labor, materials and supply chain problems. Some are from reduced levels of milk production. “We have a lot of unmet demand. Some store shelves are empty,” he said.

However, he noted that “$18 is the new $9 per hundredweight”. Remember when $9 was considered a rock-bottom price, signaling huge losses for dairy farmers and a predictable exodus from the industry? Today, with prices for everything escalating on the farm – feed, fertilizer, parts, labor – farmers’ cost of production continues to rise. “Without sustained, significantly better farm milk prices many dairy farmers will continue on the low-yielding cash-flow treadmill,” he said. “That grind has become tiresome and dispiriting.”

Hardin also sees signals that cull dairy prices will begin climbing by mid- to late January with high-quality cull dairy cows reaching 95 cents a pound and higher. The commercial beef herd in the United States suffers from the problem of declining replacements as severe drought overlaps production areas in many Western states. He sees that as an opportunity for dairy farmers to capitalize on the “second career” of their dairy cows with better prices for those cull cows.

In the early part of 2022, Hardin said the “house cleaning of drought-stressed cattle” will be done. Placements are down in beef feedlots and he sees that as a signal that prices for dairy steers and cull cows will inevitably rise.

Hardin said there are predictions from climate scientists that the coming year will feature less precipitation in Western states and because of warmer temperatures, more of it will be in the form of rain, rather than snow. Snow is preferred since it will melt slowly and fill reservoirs and in that way help with future irrigation needs. Those climate predictions mean less water for crops and forages which will lead to lower dairy production there and fewer beef animals on the land in Western states.

Milk pricing problems

“We’re bowing down to the wrong shrine,” says Hardin, referring to the fluid milk market and its effect on milk pricing overall. The dairy industry’s pricing system and the federal milk marketing order system “bow down” to pricing signals for Class I milk destined to be bottled and consumed as a beverage.

But consumer demand in that segment of the dairy market has been shrinking for decades. Hardin notes that the federal milk market order system was designed in the Great Depression and was established to bring order to an industry supplying fluid milk markets.

There is understandably great distrust among dairy producers in the seven regional federal milk orders that use multiple-component pricing as the basis for valuing farm milk.  Dairy producers in those regional milk orders – which include Wisconsin -- saw their milk checks drained by “depooling” of Class III (cheese) milk in the second half of 2020, as well as during several periods in 2021.

Depooling occurs when Class III prices exceed Class I (fluid milk) prices during a given month.  That imbalance creates the incentive for raw milk marketers to remove their Class III milk from the monthly regional federal milk marketing order “pool”. The money was in the marketplace for that milk, but handlers didn’t pass it on to the farmers who produced it.

He noted that American Farm Bureau economists estimated that dairy farmers were shorted $2.694 billion by the combination of depooling and negative producer price differentials or PPDs – and both problems trace back to the federal milk order system.

Seven of the eleven federal milk orders use multiple-component pricing and those were the orders where the depooling and negative PPDs became an issue, he explained.

The federal government announced last year that there would be a program to pay farmers some of what they lost due to the weird combination of PPDs and depooling. Hardin said that money – which is to be distributed to farmers through milk handlers like farmer cooperatives and proprietary plants, rather than through the Farm Service Agency – is set to go out to handlers by the end of January.

Called the Pandemic Market Volatility Assistance Program (PMVAP) the estimated $350 million program is designed to compensate farmers for those losses from July through December 2020 that were created when the fluid milk formula backfired on farmers. It caused an estimated $700 to $750 million in lost milk revenue to farmers during that time – so this program is not intended to cover all of those losses.

Hardin estimated that producers might only see a total of around $130-$140 million and said that payments per hundredweight will vary dramatically throughout the regional federal milk orders, based on the volume of Class I milk marketed in the various regions.

In regions with relatively high Class I utilization, those checks could be substantial and he noted, that income will be considered taxable.

He expected to see legal challenges to the PMVAP based on payments being limited to the first 5 million pounds of production. Farmers with larger herds are angry that their payments are hemmed in by that payment limitation and Hardin said they may sue.

 Farmers who sell their milk Grade B will not be eligible for payments, he noted, and neither will those who farm in states with state milk orders – Idaho and Vermont among them.

Hardin said that the fluid milk formula, which was changed in the last farm bill, is the culprit here and a simple solution would be for Congress to mandate a return to the old formula that was in place prior to that change.

“The best thing they could do is to go back to the old system instead of this other formula they used, until some longer-term solution could be found,” he said. “Congress could correct it.”