Anna, Ted and T3 shift gears to 2018, forecasting the impact on the industry in a time of oversupply. Ted and T3 predict milk production will have to drop off before prices recover and farmers start making money again. They also discuss what would happen if make allowances in the classified pricing system were increased or decreased.

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Episode transcript

Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Company, where we share market insights and analysis with dairy farmers in mind. In this episode, we're going to focus on looking forward through 2018. To start with, you guys just got back from Dairy Forum, what were the main takeaways?

T3: I just came from the IDFA Dairy Forum, and the best way that I would describe the tone at that meeting was most people were generally bearish, but I think most people also had a general attitude that the low prices are in. In other words, we are already low. I didn't spend a lot of time talking to people about prices going a lot lower than they are now. Now, that's not a pretty picture. Let's face it, what we're talking about is something around $13, somewhere between $13 and $13.50 in terms of a Class III price, which with the premiums that in the basis, I guess, if you will to use a grain term, that we've lost on the mailbox price for the dairy farmer.

You know $13 dollar milk today is the equivalent of almost $10 dollar milk five years ago. And so, we're at very low prices at this point, but I'm beginning to believe that we're somewhere right around the bottom where we are. Going forward though, to me it's a cart before the horse issue. Prices can improve but only after we start to see milk production go negative. And I mean milk production go negative both here and in Europe. And one of the issues that we have in the US right now, we've had four or five years in a row of consistently increasing milk production, and that has put in a position where we have a surplus of milk right now.

At the same time, you know the latest figures out of Europe that in November, Europe was up over 6% over the previous year. And Europe is a milk shed that is almost two times the size of the US milk shed. And so if Europe's 6% in the largest milk shed in the world, that's going to be a problem for dairy farmers, not just in Europe but worldwide. And so I think that we're going to need to see not just start to see a shrinking milk production in the US which at these prices I think we will, but we're also going to probably have to start to see something similar in Europe. And they're probably farther away from getting negative on their milk production. In fact, most of what we're hearing is that they probably won't start seeing smaller milk checks or milk checks that will cause contraction until March or April. Well, the rule of thumb is usually it takes about six months after you get milk checks that are at the contraction level before you really start seeing a contraction in the milk supply.

Ted: Another factor that has an impact on the price to the dairyman is the inflation in hauling costs. The hauling costs have been going up at least 50% in the last year and a half to two years. You actually could argue with fuel surges and fuel adjustments and so on that it has gone up even more than that. And regardless of whether the dairyman is paying the hauling out of his milk check or whether his customer is paying the hauling, it still comes out of the dairyman's milk check, directly or indirectly. And so if the hauling right now, the hauling two years ago was 50 cents, the hauling today is probably 75 to 80 cents, regardless of who is paying it. So you're looking at 5% to 10% reduction in the dairyman's milk check just by hauling alone.

T3: And I wish I could give you better news on the end product front,