What's your dairy mood?
By Dave Natzke
After traveling good economic roads paved with strong prices and production in 2011, U.S. dairy producers’ management GPS units were “recalculating” as 2012 ended its first quarter.
In late February, as part of a special editorial project for AgriMarketing magazine, I asked DairyBusiness editorial team members Kayla Jentz and Ron Goble to reflect on the moods of dairy producers they had encountered throughout the busy winter meeting season. We surveyed many dairy producers and industry representatives. It seemed everyone was eager to respond, and those responses illustrated a wide and changing range of emotions.
Optimism was visible, widespread and strong, but mixed with apprehension and caution. Attention to nutrition and genetics – combined with a mild winter – boosted milk production. We heard comments like “my cows never milked so well.” Mild weather helped get cows bred and stretched feed supplies. Exceptional beef prices allowed aggressive culling of less-productive cows – and the ability to buy replacements if they didn’t grow their own. Talk of expansion was mentioned in some regions – primarily the Midwest and Pacific Northwest.
“Our cows are doing fantastic, and that gives us a lot of optimism,” said LuAnn Troxel, a dairy producer and president of the Indiana Professional Dairy Producers. “Even so, we are nervous about milk prices. We have done some forward contracting in the past, and not been particularly successful. When we really should have locked some higher prices in, we didn’t. So we are vulnerable. We also have a fairly high feed cost locked in.”
Thanks to 2011’s record-high average milk price, bankers reported many producer clients prepaid some 2012 operating expenses. Lower interest rates helped: Equipment upgrades and “new paint” are evident on many dairies; some purchased available land.
“The overall mood of people I deal with is positive,” said Rob Seymour, dairy producer and western regional manager for LIC USA, Tillamock, Ore. “The information of likely softening milk price along with rising feed inputs is accepted as probable, but folks are still committed to continue in the industry. At the same time, they are somewhat nervous with input costs, and greater volatility in milk pricing. The only option is focus on the cost side of the equation, with grazed grass being the lowest-cost feed input.”
“Minnesota milk producers remain relatively positive about the future of dairy in the state, and are optimistic about their own future,” said Bob Lefebvre, executive director of the Minnesota Milk Producers Association. “Unfortunately, we continue to see a decline in milk prices, in part due to the wild expansion in the Southwest and West. At the same time, there is little, if any, feed price relief. As a result, margins are extremely tight, and we are beginning to hear much more concern about the short term.
“Since the vast majority of Minnesota dairy producers grow a good share of their feed, the dry winter has added some stress as we move closer to planting season,” he continued. “Their hopes are for a good crop season, resulting in an abundance of good quality feed to help offset short-term milk price declines.”
Moods are changing as producers watch the recent slide in the milk/feed price relationship. By late February, 2012 average Class III futures prices had fallen about $1.25/cwt. from pre-Christmas levels, and about $2.50/cwt. from the 2011 average.
Last year’s high gross milk income wasn’t all “banked,” with more of the milk check used to cover higher costs. For some, it’s not a matter of “if,” but “when” the economic hammer drops: $14-$15/cwt. milk doesn’t cover current cost projections. 2009 is in the rear-view mirror, but still visible.
“While the overall mood of dairymen has been upbeat for the past 18 months, (the recent) decrease in milk prices has created a great deal of concern,” said John Ellsworth, Success Strategies, Modesto, Calif.
Rising input costs, especially fuel, other supplies and environmental costs, add to the concern. Resulting cash flow difficulties could get some producers in financial problems with vendors and lenders, and increase the “burn rate” of business equity. Lender reaction could limit loan availability, and there’s the unknown for the future of interest rates in an inflationary environment, Ellsworth noted.
Many factors are making producers nervous, tenuous and even fearful. That mood seems prominent – but not limited to the Southwest.
“We’re all pretty discouraged with the falling milk prices and the high feed prices,” said J.L. “Joe” Gonzalez, Gonzalez Family Dairy LLC, Mesquite, N.M. He predicts a downturn will take a toll. “Several hundred dairymen will exit the industry for good, and there will be 300,000 to 500,000 less milk cows in U.S. herds by October 2012.”
Frank Boyce, Shamrock Dairy, Stanfield, Ariz., said Arizona producers are bracing for a long 2012. Raising herd replacements is costly, he said, because inputs exceed the value of the springing heifer. Most producers are looking at a $17/cwt. break-even level, which will rise to $18/cwt. or more as temperatures rise. Sought-after feed bargains are nonexistent, with all commodities higher priced than 2011.
Rob Fletcher, Fletcher Dairy, Tulare, Calif, said many producers are living on hope, although high feed and fuel prices and inadequate water supplies are making that more difficult.
Feed and moisture situations have a lot of producers on edge in California, according to Loren Lopes, Turlock, Calif. dairy producer and new member of the Pro-Ag executive committee. “They’re pretty scared,” he said. “Feed costs are at about $13/cwt., with other costs adding another $5/cwt. The Class 4b (cheese milk) price could be below $14/cwt. in February.”
Lopes said his hay is currently coming from 500 miles away, adding $70/ton hauling costs, and bringing the total to about $340/ton. With dry conditions, winter crops don’t look good.
In addition to feed, state policy issues are also affecting producers’ moods, Lopes said. The disparity between California and federal order milk prices – in part related to the whey factor in California’s Class 4b milk pricing formula – even has some producers there interested in joining the federal order system. Government officials, industry representatives and producers are meeting throughout spring to address the state’s dairy future.
For Stan Brown, BECO Dairy Automation Inc., Hanford, Calif., producer moods are falling into two camps.
“There are those that are doing well and have done basically well throughout the past few years,” he said. “They have very little debt and have a good handle on input costs. Because of their good financial position, they are taking advantage of the times and are growing by buying bankrupt dairies at bargain prices. This group seems to be more diversified, owning farmland to either grow their feed or subsidize their income with more lucrative crops. I see this group owning more and more of the cows at an accelerated pace.
“A second group continues to struggle, and you see exhaustion in a lot of this group,” he continued. “They’re tired of the cycles, and a lot of them would get out of the business if they could. Unfortunately, many are simply being forced out.”
Feed supply uncertainty and cost is being buffered by a growing yogurt industry in the Northeast, boosting spirits and demand for milk. Sherry Bunting, a freelance agricultural writer covering dairy issues for Farmshine newspaper and correspondence secretary for the Dairy Policy Action Coalition, said producers in the Northeast seem to be in a holding pattern – or holding the collective breathes. The long-term outlook is better than the short-term mood. Producers are willing to improve management skills and adapt to change.
The most profound impact on Northeast producers’ moods is related to forage supplies – both quantity and quality – impacted by last year’s hurricanes. Many producers face the prospects of running out of corn silage by May 1. That may mean buying high-priced feed, something they haven’t had to do before. Credit access is a question.
And, while the growth of the yogurt industry adds hope, it seems to have actually resulted in a drop in the mailbox price relative to the national average, she said.
“The mood is tenuous,” said Wisconsin dairy producer Bill Averbeck “Even though the economy is slowly improving, and 14% of the U.S. milk production is currently exported, the potential for a negative impact could be devastating to the markets. Volatility and the duration of any low milk prices have to be on the minds of many producers. Risk management is going to be essential.”
“There is fear and uncertainty looming in the industry,” said Liz Doornink, responsible for business development at Stewart-Peterson, Inc., based in Wisconsin. “The more established producers see this as another challenge to face, and although they are concerned, they still feel positive.”
In addition to milk prices and input costs, Dorrnink said, “there are issues of permitting, activists, governmental regulations and consumer perception.”
Those off-farm factors are creating frustration. Producers feel powerless as environmental regulations encroach on their businesses. Will the Food & Drug Administration show up for a drug residue violation due to an employee’s mistake? Lack of immigration reform and proposed rules restricting young workers add labor concerns.
Adding anger is the social impact of getting slapped in the face by animal rightsists and retail outlets (the Chipotle ad), who want a bigger say in how animals are managed and food is produced. There’s a growing impression “the public” believes we can feed and save the world with backyard gardens and small organic producers.
Creating uncertainty is whether the export market will hold.
“Producers are concerned that while strong exports have kept prices strong, it could cost us if exports begin to dwindle or trade agreements are not set in place,” said Matthew Lange, who owns Lange Dairy Development, LLC, Albany, Wis. “A farmer said to me, ‘It is kind of like a basketball team living and dying by the three-pointer.’ ”
Closer to home, it’s federal dairy policy reform and the 2012 Farm Bill. There’s little confidence in Congress. Producers are split over the Dairy Security Act – it either goes too far or doesn’t go far enough. Supply management is an emotional hot button.
“We do have a lot of concerns about dairy policy,” Troxel said. “We have little confidence our legislators will improve the situation.”
There is hopefulness. New dairy product innovation is adding excitement. Planting season is always a period of renewal. Many are eager to learn about risk management tools, and looking for empathetic suppliers who will stand with them as partners.
Producers are watching all signals coming into their management GPS units, recalculating for the short-term, but also looking further down the road.
“Our future could easily include one or two sons coming back to the farm, and that will almost certainly include some type of expansion,” Troxel said. “The specter of 2009 still gives us fear. We’ll watch, read and listen – and we’ll still get up and milk cows every morning.”
■ Dave Natzke is national editorial director, DairyBusiness Communications. Contact him via e-mail: dnatzke@ dairybusiness.com.
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