2020 financials: A need for cautious optimism
By now, you are closing the books on 2019 and looking forward to the opportunities and challenges ahead in 2020. Looking back on the milk prices of 2019, we saw a swing of $6.49 from our low in January to our high in November. The 2019 average Class III price finished at $16.49. Class III futures for 2020 are currently averaging $17.63, or about $1.14 improvement on the 2019 average price. With improved milk prices for 2020, recovery of the balance sheet will be very important to prepare for the next downturn (and there will be a next downturn).
National and global factors
Expansion of the milk supply should be slowed due to the stress of the last three to five years, which affected most dairies. This will be compounded by the challenges of the current stored feed inventory. Watch the size of the national dairy herd; rebuilding of cow numbers will result in additional pressure of dairy product usage. The fourth quarter is a high-usage period, which drove prices higher at the end of 2019. It may be unwise to assume that trend can continue for the entire year 2020. Plus, there is always the issue of China. We expect some product sales to be headed that way, but we can’t be sure of what and how much. Keep in mind some of that news may already be built into the market.
Local milk prices
Closer to home, where you have more control over the effects of the coming year, remember that most of us sell milk in component-based markets. Keeping your components high with good pounds and low somatic cell count milk means you can capture the higher end of your milk plant’s pay scale. Some will argue that’s not possible, but it is and plenty of producers are getting it done.
Cull cow and calf markets
The articles I have read are mentioning that beef prices may be somewhat recovering in 2020. I would expect that would possibly translate into slightly better cull cow prices. Make sure you are selling the cull cow that the market wants to buy when possible. Hopefully the markets for dairy bull calves and crossbred bull and heifer calves also recover somewhat, but these breeding decisions have already been made for at least the first nine months of 2020. Based on the market cues we are receiving, it appears that the end users are not willing to pay a premium for these calves anymore, which directly affects our bottom line. Again, sell the market what it wants to buy and maximize the pay scale however possible.
Balance sheet recovery
As we receive improved milk prices for the year ahead, we should see some recovery to our profitability, which will, in turn, lead to recovery of the balance sheet. Reflecting on my 20 years of finance experience, I seldom see bad decisions made in the worst years; they always seem to happen in the best years.
For the coming year, get your payables under control. Vendor interest and the loss of discounts drive up your cost of production. It may not seem like a lot and you may have been in a situation that offered no other options, but, as prices get better, stay diligent and work those payables back down. Make repairs that have been postponed and only consider replacement when it makes financial sense to do so.
Some of the things that affect profitability are out of your control. Concentrate on the things that are and limit the things that are not. Know your numbers and be prepared to make decisions based on that information.
About the author: Steve Maier is a financial consultant with Agri-Business Consultants LLC (ABC), a Vita Plus company. He grew up on his family’s dairy farm in Chippewa Falls, Wisconsin. Maier earned his bachelor’s degree from the University of Wisconsin-River Falls. He previously worked as a nutritionist and agricultural lender, and also owned and operated his own dairy farm. At ABC, Maier works with clients on a variety of projects, including quarterly and annual financial management monitoring, feasibility studies, and business succession planning.
Business and economics
Milk production and components