Walking the tightrope

Plourd talks finding balance in volatile marketplace

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WISCONSIN DELLS, Wis. – Finding balance in the volatile marketplace can be challenging. What does the current market look like, what does the future hold, and how do these markets impact a milk check?
“Despite what you may have heard, dairy consumption is in pretty good shape,” Phil Plourd said. “We’ve had a few hiccups over the years, but we’ve been on the comeback trail. And, the reports of dairy demise are not only premature but they are also inaccurate.”
Plourd, president of Blimling and Associates, provided a view on global markets, consumer behaviors and the demand for dairy products at the Vita Plus Midwest Dairy Conference June 15 in Wisconsin Dells. He also spoke of critical items to watch in the months ahead from a market and risk management perspective.
Plourd said that, per capita, cheese consumption has carried the dairy industry in the last few years. Cheese consumption had a little hiccup in 2020 but only because of the coronavirus pandemic. Butter consumption is back from the depths, and yogurt has generally been a good news story for the past 15 years.
“Grocery stores seem to love dairy promotions,” Plourd said. “Dairy brings people to the stores. The major grocery stores use dairy to get people to come in.”
However, the beverage landscape has changed over the last 50 years. In the 1970s, milk, coffee, juice and soft drinks were staples in consumers’ market. Now, there are hundreds of choices that include sports drinks, teas, fusion drinks and more.
“Milk’s best friend got into trouble,” Plourd said. “Cereal sales declined right with fluid milk sales.”
Plourd believes that general farm finance is in an OK place right now. Farm income from sales should be at record high levels in 2022. There is less government support but probably enough to push overall income to new records.
“We do volatility very well,” Plourd said. “When you have less milk, there’s only so much you can do in a hurry.”
Plourd said it takes a long time to add milk when demand is high, and it takes a long time to decrease supply when milk is not needed. The reality of today’s market is that milk is still being taken away from the market with last year’s prices being lower, even though there is a higher demand for milk today.
Plourd explained some critical factors to where markets are today and where they are going. First and foremost, the nation’s milk production has been negative for seven out of the past eight months.
“My rule of thumb is if milk production is growing at less than 1%, we have good potential for upside,” he said. “Once we get milk production to 1.5% to 2%, we are veering into it too much. Last year at times we had too much.”
Farm margins are pretty good, according to Plourd. Class II and IV milk futures average $23-$24 per hundredweight for the next 12 months, and the Dairy Margin Coverage margin for 2022 is projecting to be the second highest level ever as milk futures prices have been outpacing the grain markets.
“We are slaughtering less cows, but replacement numbers are down,” Plourd said.  “We’ve done a pretty good job of right sizing and maybe even over correcting on heifers.”
When looking at the cost of production, Plourd offered a global perspective by pointing out that Ukraine ships upward of 12% of the world’s corn exports.
“We were already kind of skating toward the edge on the balance sheets before the Russian invasion of Ukraine, but then we put the pedal to the metal in some of these markets,” Plourd said. “Not only are we saying things are tight today, but they are going to be tight tomorrow. … We have tight balance sheets, there’s just no avoiding it.”
Weather was a factor when looking at crop markets this year. After a late start to planting season, American farmers planted more than 60% of the corn crop in just three weeks, Plourd said.
Grain farmers are expected to have a good year because Plourd does not see their input costs rising too high, but next year may be a different story. The cost to purchase anhydrous ammonia is up 130% versus year prior levels and four times the 2020 lows, said Plourd.
“The impact is potentially bigger for 2023 than in 2022,” Plourd said. “I just don’t see the road back to cheap corn and cheap soybeans in the next 12-18 months.”
Plourd said this all leads to a fragile economy and consumer environment.
“Consumers don’t like going to the store and seeing empty shelves,” Plourd said. “A negative economic environment is not constructive. It does hurt demand on the margins.”
Inflation is a major concern for everyone right now. Plourd said consumers are dipping into savings and using more credit as opposed to going without certain luxuries.
“We are burning through the COVID-19 money, and you’re starting to see credit numbers go up,” Plourd said. “That doesn’t mean we’re giving anything up. We’re kicking the bill down the road, but we can’t do this for 24 months. At some point, we will tap out the credit and drain the savings.”
Plourd said labor markets remain tight. The number of job openings are leveling off, but in April, the number of vacancies of 11.4 million exceeded the number of unemployed persons by a wide margin. Employers looking to replace labor needs are looking into robotics instead of hiring more people.
Since the pandemic, people started getting used to working from home, and Plourd said that trend is not going away.
Ultimately, Plourd said that dairy demand is on the rise. Despite a tight balance sheet, dairy farming should fare well.  

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