Soon you will receive your first Dairy Market Loss Payment in the mail. And since the program is retroactive back to December 2001, for those who marketed 200,000 pounds of milk each month from December through September, the payment will add up to about $22,000.
But you have to remember that's not extra money. This market loss payment helps offset low milk prices. And this past year, milk prices have been rather low.
So, before you spend the money, you need to examine your situation. Use these four criteria to help you decide how best to invest these market loss payments.
1. Assess your current situation.
With the low prices seen this year, cash flow has probably gotten tight. That means you need to assess your current situation before you spend a dime, says Ken Bailey, extension dairy economist at Penn State University.
At least for this first year of payments, you'd be smart to use it to pay off some bills, such as the feed bill or vet bill. Or, the other option is to use it to help secure a line of operating credit at the bank to ride out the low prices and keep your cows in good condition.
"When cash flow gets tight, don't make the mistake of cutting back on what you feed the cows," says Bailey. Sure, cutting back on the ration may save you a few dollars today, but that will lower milk production, which lowers your income and that, in turn, makes it even harder for the business to cash flow.
In addition, if you cut back on feeding the cows they will undoubtedly lose body condition. Then, when the market does turn around you'll have thin cows that aren't able to produce up to their potential. That means you'll miss out on getting as much from the marketplace as possible when higher prices do arrive. Cash flow remains tight, and this often starts the downhill spiral that leads to exiting the business.
2. Determine how long you want to stay in the business.
Give careful consideration to the question of how long you plan to stay in the dairy business. Because if you've been thinking about retiring in the next few years, then how you invest the dairy payments will be different from someone who wants to position the business to be competitive into the future.
For example, a 60-year-old thinking about retiring fairly soon, could - over the three-year life of the program - set aside part of the money for retirement, says Bob Cropp, extension dairy economist at the University of Wisconsin. A 55-year-old producer, who has 10 years left in the business and milks in a tie-stall barn, could use the money to invest in a low-cost parlor. Doing so could reduce his labor cost and reduce the strain on his knees. And for a producer who has just expanded and may be highly leveraged, paying down debt may be the best option for how to use the government payments over the next three years.
The point is, you have to know your goals for the business before you can make smart spending decisions.
3. Position your business for the future.
Now you need to start asking some tough questions. For example, how competitive is your business? That's a question you really need to ask. If you plan to stay in the dairy industry, then your business must be able to compete. It must be able to weather the highs and lows of the marketplace. And you need to develop a solid equity position so that one low year of prices doesn't wipe you out.
Milk production per cow is one barometer of profitability and competitiveness of your business, says Bailey. If your cows don't produce 20,000 pounds of milk each year, then you need to make some investments to help them get there. Better quality forage, cow comfort, and cow cooling are all good investments to help your cows reach that goal.
When you look at milk per cow per state, and look at where growth in the dairy industry occurs and where it doesn't, you see an obvious pattern. The states where the cows still only produce 16,000 pounds of milk per year are losing dairies at the fastest rate. "In order to be competitive five years down the road, you need to hit 20,000 pounds of milk per cow per year," says Bailey.
When investing money into your dairy, you must invest in something that will yield a return and put you in a better position for the future. So, as part of that decision-making process, you must consider these three things, says Cropp.
- Will the investment improve efficiency?
- Does it lower your cost of production?
- Does it increase milk production and yield a return that is greater than the cost of the change?
For example, are your facilities fully utilized? Is your barn full? Is your parlor maxed out? If you answer "no" to these questions, then investing in more cows should be high on your list of things to consider. Remember, as you add cows, it spreads out your fixed cost over more cows.
4. Determine what the cows need.
In order to produce up to their potential, cows need consistency and comfort. Cows don't need a fancy parlor to make milk. If you can afford it, and it cash flows, great. But right now you need to focus on the basics. What will help your cows hit that minimum 20,0000-pound mark? Or, for those of you who have already reached that mark, what will help your cows reach your next production target?
Ask yourself, do the cows need better-quality forage? Have you invested in a TMR? Are the cows comfortable? Do they rest comfortably in their stalls? What about rubber belting to walk on? Have you invested in cow cooling sprinklers, fans, shades? Do you have enough labor to keep the stalls and waterers clean and get cows fed on time?
Consider having someone else help evaluate your operation. After all, you see the cows and facilities every day, and you may not notice that the bunk is sometimes empty. Use your veterinarian, nutritionist or even a neighboring producer as a second set of eyes to help find the tweaks you need.
Remember, comfortable cows are more productive cows.
Give careful consideration to how you spend the first lump sum payment and subsequent monthly payments. For some producers, a new truck or manure spreader may be a good investment for the business. For others, it may be wise to invest in management of the cows. Use foresight to judge what the business needs instead of making a hasty decision that you may live to regret.
For more information about the program, sign up and how to calculate your payments, please see page 100 markets.
Pay rate by month
Signup for the Milk Income Loss Contract program - the official name for the dairy market loss payments now - began Aug. 13. If you haven't signed up yet, be sure to do so soon as the first checks are scheduled to be mailed in October. Payments are retroactive back to December 2001.
The following chart shows how the payment rate stacks up for each month through August. In addition, Bob Cropp, extension dairy economist at the University of Wisconsin, gives his projection on monthly payment rates for the rest of the year.
December 2001 – $0.77/hundredweight
January 2002 – $0.78
February – $0.78
March – $0.93
April – $1.00
May – $1.09
June – $1.20
July – $1.38
August – $1.44
September – $1.45
October – $1.00+ /hundredweight
November – $1.00+
December – $1.00+