Be careful labeling this a ‘recovery’

Dairy Financial Times

By Matt Peterson

The time has come for a mid-year check-up. Our freshly released cost study covering the first six months of the year shows vast improvement over last year’s pain, but that, as many of you know, isn’t saying much. The existence of a positive bottom-line – something that many of us haven’t seen for more than a year – may cause an industry outsider to decide the shape of the dairy industry is back to normal. However, for producers, even with the year-to-date improvement, it is not back to life as it was prior to the damage of 2009.

A quick glance at out cost study indicates a majority of the gains made through the end of June stem from an increased milk price.  The $2.52 per cwt improvement represents an increase of about 20% over last year’s annualized price.  Another positive factor driving the rebound is the $0.95 per cwt reduction in total feed expenses.  Overall, the dairies used in our study have been able to drive down their average break-even point from $16.10 per cwt in 2009 to $14.80 per cwt.  Couple that with the average milk price of $14.92 per cwt and you might think the industry has experienced the much anticipated recovery.  Unfortunately, some market forecasts have projected elevated feed and fuel costs as we progress through the remaining months of 2010.  This places the gains experienced through cost reductions in peril of being washed away by year’s end.

One major item to remember in analyzing the cost study’s numbers is to remember what the net income on a profit and loss statement represents.  In short, that is the money made from operations that the producer uses to pay back debt and feed mouths, primarily their own.  A majority of our producers are not on salary and must rely on withdrawals from the business to pay for basic living expenses including self-employment and income taxes.  We generally estimate principal payments and living expenses of the typical producer to range from $1.00 to $1.50 per cwt.  After 2009, it is safe to use the high side of the estimate as producers are being pressured to use all available cash to decrease their elevated debt load.  In light of this, the $0.55 per cwt bottom-line on the cost study still leaves a shortfall.  A continual shortfall will force many to consider a voluntary exit strategy or be shutdown through foreclosure and bankruptcy.

In order to fully understand the impact of 2009 and see how feeble the current environment remains, it may be helpful to look at the first six months of 2010 through the lens of 2009.  Last year, our producers on average lost $641 per cow over the entire year.  On a monthly basis, that equates to $53 dollars per month.  Looking at the current year, only $58 per cow has been realized through six months.  So what took one month in 2009 to lose has taken almost a full six months in 2010 to recoup.  Put another way, at the current rate of progress, it will take about five and a half years to regain the entire $641 per cow that was lost in 2009.

Yes, we are seeing improvements and we are all thankful for the much needed relief.  Hope glimmers, but be cautious at labeling the improvements experienced thus far as a full-fledged recovery. At the current rate of progress, it will still take years to heal from the devastation of 2009.

FYI

Matt Peterson, CPA in Ontario, Calif., with Genske, Mulder & Co., LLP, a certified public accounting firm representing clients who produce 12% of the nation’s milk in 29 states. Matt can be reached at 909-483-2100 or e-mail him at matt@genskemulder.com

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