Dickrell's Diary: Margin Squeeze

Be proactive and manage key threats to your farm.

Dairy farmers are facing the most uncertain times since the Great Recession of 2009. Uncertainty over markets, immigration reform and the farm bill will etch the coming months into our memories for years to come and ones we already know we’ll want to forget.

I did a little look back to 2009 just to remind myself of how ugly things were back then. Feed costs approached $10. The All-Milk price averaged $12.82 per cwt, though some months in some states fell below $10. I distinctly remember Mike McCloskey, Fair Oaks Farm, speaking at the Dairy Forum in early 2009, projecting milk prices might not even cover his feed costs. That statement sent shudders through the crowd, and even dairy processors were shaken.

If feed costs hold steady this year, they could average maybe $8.50 to $9 per cwt of milk produced this year. Most economists are projecting 2018 to be similar to 2016 in terms of milk prices. That means Class III could average $14.75, for an All-Milk price of $15.25 to $15.75.

So the $3 or $4 milk-feed margins of 2009 likely won’t be revisited. But a $6.50 to $7 margin in 2018 won’t be anything to write home about. Other costs have risen as well. Prime example: The federal minimum wage in 2009 was $7.25 per hour. Today, though the federal minimum wage remains at $7.25, many states have raised their local wages, and many farms are paying $12 per hour or more to keep and attract workers in a stressed out labor market.

On top of that, immigration reform seems as distant as ever. There are a number of immigration reform proposals out there, ranging from a revised H-2A program to state-based visa programs to a new H-2C program.

The H-2C program, which would create a three-year visa with an 18-month extension, seems the most promising. “But in its current form, H-2C is not strict enough for some Republicans, is too strict for some Democrats, and lacks support from some in agriculture,” says John Holevoet, director of government affairs for Edge Cooperative.

If there’s any good news, the current H-2C proposal could be used as a starting point for a compromise package on immigration reform. “[But] if immigration reform doesn’t happen this session, next session will likely be even worse,” he warns.

Then there’s the farm bill. The recently passed budget bill adds $1.2 billion to the dairy baseline for the Dairy Margin Protection Program (MPP). It will lift the Tier I production cap from 4 million pounds of annual production (about 185 cows) to 5 million pounds (225 cows), eliminate premiums for Tier I $4.50 and $5.00 coverage levels and reduce premiums for higher levels.

Left unchanged is the MPP feed formula, so indemnities still won’t be triggered until All-Milk prices fall to about $16. At that point, it doesn’t matter how cheap premiums are—farmers once burned will simply shrug off the program.

So here’s some grim, but prudent advice: If you’re a highly leveraged producer or trying to preserve equity at the end of your career, a visit to your lender sooner rather than later is in order. Try to fully understand your current equity position, what another six or eight or 10 months of negative cash flow will do to it, and then make some informed choices.

Only time and markets will correct the mess we’re in. Can you afford to wait?

 

Note: This story ran in the March 2018 magazine issue of Dairy Herd Management.

 

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