Dairy producers are under severe financial pressure, noted Bruce Jones, professor and Extension farm management specialist with the Department of Agricultural and Applied Economics at the University of Wisconsin-Madison. Market conditions are making it impossible for most dairy producers to show a positive cash flow, let alone turn a profit. If these unfavorable conditions persist, many dairy farmers will likely be forced out of business, Jones said.
Analyzing cash returns and costs data for the two largest dairy states, Jones recently published a paper, “Cash Flow Positions of Wisconsin and California Dairy Operations.” Jones compared information from USDA’s Economic Research Service (costs of production) and the National Agricultural Statistics Service (all-milk prices and average milk production per cow) to determine per cow net operating cash flows of dairies changed for the January 2007-May 2009 period.
Throughout 2007, net operating cash flows (milk returns less variable production costs) for both California and Wisconsin dairies were positive because milk returns were relatively high – thanks to strong milk prices and variable production costs (feed, other operating costs, and hired labor) were generally low.
In mid 2008, things changed for California dairies. Their cash flows went negative and steadily declined the remainder of 2008. As of January 2009, monthly cash losses were about $100/head and they held at that level through May 2009.
Operating cash flows of Wisconsin dairies also declined in the second half of 2008, but not as dramatically as those of California dairies. Monthly cash flows ranged from about $20-$60/cow in the last half of 2008 for Wisconsin dairy farms and then they went negative throug/cowhout January 2009-May 2009 period. Cash losses were generally around $15/cow per month, but they were about $40/head in February.
The ability of California and Wisconsin dairy producers, and those in other states, to cope with the cash flow problems that are currently plaguing them largely depends on the amount of cash reserves these dairies possess. Dairies that have saved cash surpluses and accumulated cash reserves potentially have the cash resources needed to cover cash deficits in times like the present.
Cash reserves of both California and Wisconsin dairy farms, as reflected by cumulative operating cash flows, increased during the January 2007-January 2008 period to about $1,400/cow. Thus, California and Wisconsin dairies had about the same level of cash reserves going into 2008.
But the cash reserve positions of California and Wisconsin diverged in 2008. The cumulative cash flows of California dairies steadily dropped as cash reserves had to be tapped to cover monthly cash deficits throughout 2008. The cash reserves of Wisconsin dairies continued to rise to about $2,000/cow. This increase of roughly $600/cow in the cash reserves of Wisconsin dairies occurred because these dairies continued to generate positive cash flows in 2008.
The cash reserves of Wisconsin and California dairies both fell in 2009. But declines in the cash reserves of Wisconsin dairy producers were not as great as the decreases in the cash reserves of California dairy producers. Cash reserves of Wisconsin dairies dropped about $100/cow during the January 2009-May 2009 period. Over the same period cash reserves of California dairies dropped about $500/cow.
Over the last year and a half, California dairy producers’ cash flow problems have been much more severe than those of Wisconsin dairy producers. Lower pay prices for milk and higher feed costs are the primary sources of the cash flow problems of California dairies.
Wisconsin dairy producers have also had cash flow problems. but not at the same magnitude those experienced by California dairies, Jones’ analysis showed.
The contrasting cash flow positions of Wisconsin and California dairies explain why cow numbers in California and Wisconsin have been moving in opposite directions this year. In California, where cash flows have been negative and cash reserves have been steadily eroded, cows have been removed from dairy herds. In contrast Wisconsin cow numbers have been on the rise primarily because Wisconsin dairy producers have had ample cash reserves to this point.
Barring a rebound in milk prices in the near term, Wisconsin dairy producers are also going to have to use their cash reserves to cover monthly cash flow deficits. Fortunately for Wisconsin dairy producers, they appear to have a substantial amount of cash reserves to get through these trying economic times for the dairy industry.
It is important to note that neither California or Wisconsin dairy producers actually have all the cash reserves reported. In practice dairy producers use these cash resources to pay interest and principal on outstanding loans, purchase capital assets, and cover family living expenses. So the spending levels of dairy producers determine how much cash is actually available to them to cover cash flow deficits.
The fact that the estimated cash reserves for Wisconsin dairy producers is well above those for California producers strongly suggests that Wisconsin producers are in a much better position to cope with the currently trying times in the dairy industry. The only way that this would not be the case is that Wisconsin producers have been spending their cash resources at much greater rates that California dairy producers. This is a possibility but it is highly unlikely. As such it probably safe to assume that Wisconsin producers do indeed have more cash resources at their disposal currently than California dairy producers.
To view the full report, visit http://dairyteam.uwex.edu/enclosures/Wisconsin_California%20DairyV3.pdf.