We’re not out of the woods yet

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2010 has not been a good year for Steve Schell, of Altura, Minn.

After nearly 30 years of running the family dairy operation, Schell looked at his financial situation — eroded by low milk prices in 2009 — and knew that something had to give. Among other things, his milking parlor needed to be replaced. With milk prices and input costs being so uncertain, he took the safe route and stopped milking rather than incur the expense of a new parlor. This past summer, he sold his milking herd through the Cooperatives Working Together herd-retirement program. He will, however, continue in the dairy business by raising heifers for other farmers. 

Looking back, Schell will always remember 2010 as the year that he sold the milk cows. 2010 just didn’t provide as much financial relief as he needed.

“I would have ridden out the storm if I had to,” he says. But even if milk prices had gone up considerably, it would have taken two to three years to catch back up again, he adds. And, rising input prices, including $5 corn and $12 soybeans, have made things worse.

“Dairy farmers are going to need to make $20 on their milk to make ends meet on their input costs,” Schell says. 

Others have come to similar conclusions. Current economic conditions are not what people had hoped for following the devastation of 2009. It’s a simple fact: Dairy producers are not out of the woods yet. 

Input costs take off

Yes, milk prices did rebound nicely during 2010. By the first part of November, Class III milk futures (nearby contract) on the Chicago Mercantile Exchange had reached $16.93, compared to approximately $14 the same time a year earlier. The improvement is even more apparent when you consider that the nearby futures traded below $13 for most of March and April 2010.

But falling cheese prices on the Chicago Mercantile Exchange, as of mid-November, portend lower milk prices ahead.

Then, there were higher input costs. The price of corn skyrocketed this fall due to strong exports and a lower-than-predicted corn harvest. By Nov. 5, corn futures (nearby contract) on the Chicago Board of Trade reached $5.87 and were soon flirting with $6. 

Other feed commodities often rise and fall with the corn price.

The surge in feed prices pretty much dashed any hopes for substantial economic recovery. The milk-feed ratio released every month   by the USDA, which offers a rough approximation of dairy profitability by comparing milk prices with feed prices, reached its high-water mark in September — a lackluster 2.38 — and then started to scale back again.

It’s interesting to note that at the joint annual meeting of the National Milk Producers Federation and Dairy Management Inc. in late October, there was a discussion of the margin-protection program proposed by NMPF to protect farmers from the type of catastrophic losses they incurred in 2009. During a question-and-answer session, someone asked if the insurance provisions would kick in under current conditions. In other words, is the margin between the milk price and feed price currently so bad that it would activate an emergency-type response? “Yes” was the simple answer given by Jim Tillison, senior vice president of marketing and economic research at NMPF, who oversees many of the details of the margin-protection proposal.

Rebounding, but not recovery

In early November, Michigan State University Extension Dairy Educator Phil Durst asked a group of young producers the question, “Was 2010 a good year or bad year for dairy producers and the industry as a whole?” The most salient response he got was: “Rebounding, but not recovery.”

Yes, 2010 was better, but the young producers in the room that night didn’t fully get out of the hole that 2009 created, Durst says. “And, at this point in the year, they are looking ahead somewhat nervously at 2011 where corn prices, fuel and fertilizer prices could really narrow the profit margin.”

Gary Sipiorski, who for years was one of the most respected agricultural lenders in the nation, and now serves dairy development director for the Vita Plus Corporation, has this assessment:

  • In the West, 2010 will be characterized by higher milk prices, but also higher feed cost. The higher feed cost eroded profitability and prevented debt repayment. Debt remained high.
  • In the Midwest, the milk price and feed cost allowed producers to tread water. In September, some money was left over after the monthly expenses were paid, allowing some payables to be paid down. The crops were excellent. Dairy producers with extra corn and soybeans sold those crops at a nice profit were able to pay down debt or else make pre-payments for 2011, Sipiorski said. 

And, Wayne Weiland, Midwest regional manager for Standard Dairy Consultants, points out that the fate of dairies in 2010 was very case-specific. In other words, some dairies did OK and others bled or died.

“There was a small percentage of dairies that operated at break-even or positive throughout the entire year,” Weiland points out. “Their debt load was low and they are extraordinary managers. I’ve had several brag that they did not have to borrow any additional money to get the bills covered. Seems strange to brag about just staying even, but that was a huge success in the economy we had.

“Those that were in trouble, financially, before the downturn weren’t around for much of 2010,”  Weiland adds.

With economic fallout from recent years and uncertain times ahead, it does appear that dairy farmers are not “out of the woods” yet.


Exports were a bright spot

When the global economy soured in the fall of 2008, it was a huge “heads up” warning for the dairy industry.

And, U.S. dairy exports did take a hit. In 2009, exports amounted to 9.3 percent of total U.S. production on a milk-solids basis. That was down from 11 percent in 2008.

This year, things are looking up again. Exports will be approximately 12 percent of U.S. production — a record amount, according to Tom Suber, president of the U.S. Dairy Export Council.

Exports have returned to the long-term trend line, he points out. “As bad and prolonged as the downturn (in 2009) was, it was an aberration,” he says. The long-term trend is for increased global demand for dairy products, and the U.S. will be a big part of meeting that demand, he adds.

Basically, exports have returned to their prominent role of assisting dairy producers. “They are back to helping rather than being an anchor,” Suber says.



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