Rising feed prices eat into profits

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It's just nuts right now."

That is how dairy producer Pete Tiemersma, of Visalia, Calif., describes the current feed cost situation. In early March, he paid $325 per ton for alfalfa hay — the highest amount he can ever remember the farm having to pay. And, the situation with rolled corn is just about as bleak. He’s been paying $285 to $300 per ton for that.

“It’s out of kilter here,” he said. “Things aren’t right in the neighborhood.”

Tiermersma’s February milk check was in excess of $16 per hundredweight, which, in most situations, would make him profitable. But, with the high feed cost, he says he is still not profitable. He hopes that the situation will change for the better.

Getting back into the black, financially, can’t come soon enough for many producers, following a rough couple of years.

But feed cost creates uncertainty. No one knows exactly how much higher corn and other commodities will go. The only certainty is that feed cost will continue to eat up profits.

Corn price to remain high

Most experts agree that corn prices will remain strong for the foreseeable future.

Phil Plourd, president of Blimling and Associates, a dairy consulting and research firm, says he expects corn prices to remain strong — above $6 per bushel on the nearby futures contracts — through the end of this year.

“The grain markets are not going to suddenly roll over and die,” he told those attending the Western Dairy Management Conference in March.

People are already edgy about this year’s crop, Plourd said. There will be a lot of interest in the weather, and people will be quick to point out if a growing region is too wet or too dry. “We can ill afford any drought in the Midwest this growing season,” he adds.

Look at what happened each time the U.S. Department of Agriculture ratcheted back its estimates of the 2010 corn crop. On a monthly basis, from September to January, the USDA kept lowering its estimate. Each time, the price of corn went up.

“The markets have just gone kind of crazy here lately,” said Marty Foreman, senior economist with Doane Agricultural Services, when contacted in mid-March. He referred to a 90-cent drop in a corn futures contract that had just happened in the past week.

Foreman says he expects corn futures through the July contract will probably trade in the $6.50- to $7.50-per-bushel range this year. 

“That’s likely, barring something unknown with the new crop — a weather phenomenon or something like that,”  he says. (That weather phenomenon may turn out to be the severe earthquake and tsunami that struck Japan on March 11. Corn futures plunged following the incident, since Japan is one of the largest buyers of U.S. agricultural products.) 

Hard to predict

Meanwhile, Tiemersma and other producers are left scrambling.

“You are hunting for things that you can feed that are less expensive,” Tiemersma says. 

E.J. deJong, dairy producer in Hanford, Calif., says he hasn’t cut back on rolled corn in the ration as much as he did when corn got high in price in 2008.

The game plan is different this time around, he says. The milk price is higher now than it was in 2008. Assuming a mailbox price of $18 per hundredweight in the near future, losing a pound of milk production would be 18 cents. It is better to keep that 18 cents than try to save 10 cents on feed.  Yes, he acknowledges, it is “fuzzy math,” but it reflects a common-sense approach when the milk price is high. 

Meanwhile, the price he pays for rolled corn is pushing $295 per ton.

In 2008, the last time the corn price got really high, deJong  and his nutritionist cut the amount of rolled corn in the ration to just 3 pounds per head per day and relied on by-product feeds, such as whey, carrots, potatoes and almond hulls. Currently, they are feeding 6.5 pounds of corn and still relying to a large degree on by-products.

With $18 milk, deJong says he would love to be feeding 10 pounds of rolled corn per head per day to maximize production. Yet, with the current ration, he has been able to keep his herd average at a very respectable level — approximately 77 pounds per cow per day.

If it weren’t for high feed prices, deJong says his overall profitability would be good. In fact, he estimates that it would be in the top 90 percent for the past 10 years. But high feed cost has reduced it from a potentially lofty level to just average, he adds.

It’s yet to be seen if $6-plus corn will become the “new normal.” It depends on a myriad of factors, including economic conditions, government energy policy (as it relates to ethanol), and the weather in grain-growing regions all over the world.

Given the new realities of the global marketplace, the only “normal” may be what deJong is doing — being resourceful and adjusting to changing circumstances.

Could we run out of corn in August?

Some analysts are warning that we could see shortages of corn later this year, as the remainder of last year’s crop runs out. For instance, an article in the Feb. 19 Des Moines Registerquoted commodity trader Sue Martin, of Webster City, Iowa, as telling farmers, “You’re in for a wild ride.”

Martin went on to say, “Corn will lose acres in the South. So in late summer, we won’t get some of that early corn that comes from the harvests in the South. I know the ethanol plants are very scared that we’ll run completely out of corn in August and September, before the Midwest harvest.”

But a government report on March 10 eased some of those concerns.

The U.S. Department of Agriculture predicted that corn and soybean reserves will be higher than initially estimated, forecasting there will be about 123.1 million metric tons of corn left over from the 2010-11 crop.  That’s up from an estimated 122.5 million metric tons in February’s report. There should be about 58.3 million metric tons of soybeans left over, compared with last month’s estimate of 58.2 million.

The government predicts corn reserves this year will be at their lowest level in 15 years.



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