Dairy Talk: Farming Last Year's Crop

Though the calendar has rolled over, 2012 will be a year with a long shadow.

For producers directly affected by the drought, it was a nightmarish scramble to simply find enough forage. For producers in the West, high feed prices ate up margins faster than rising milk prices could shore up gushing outflows of cash. For producers in the Upper Midwest who grow their own feed and escaped the drought, 2012 will be counted as one of the most profitable years of this new century.

For everyone, there are lessons to be learned. Three articles in this issue are must-reads:

• "Liquidity is a Lifesaver." Chris Wolf, a dairy farm management specialist at Michigan State University, documents what everyone senses: Volatility has doubled in the past two decades. "The volatility in both milk and feed prices means that changes in the required working capital on farms are also volatile," he says.
  
  Wolf recommends that you look back and calculate cash flows for the past three to five years to get a sense of cash-flow needs for your operation. Then do a forward-looking cash flow with the most likely milk and feed prices, and also examine "worst-case" scenarios.
  
  Once you have those numbers, you can better assess what type of risk management you need to do, whether it’s self-insurance through reliance on savings and equity, forward pricing, or hedging milk and feed.
   
• "Controlling Our Risk." Jon Pesko and Ed Jasurda, who together milk 1,800 cows in Wisconsin 60 miles south of Lake Superior, added 1,200 cows, a rotary parlor and a cross-ventilated barn just a year after the 2009 milk price debacle.
  
  It was actually a good time to expand, because building contractors were begging for work and cows were cheap. But to get their lender on board, Pesko and Jasurda had to do a full-court press on milk and feed risk management. The foundation of their strategy is to ensure that their $17.50 cost of production is covered.
  
  "If we settle on a price of $20 per cwt., we know that shelters us from loss and ensures a profit," Pesko says. "It’s not as high as some people might get, but it keeps us moving forward."
   
• "Land Rent Ceilings." Michigan State’s Chris Wolf also says most producers assume land rents of $250 or $300 per acre are ludicrous. I thought so too.
  
  But they’re not as nuts as you might think if the alternative is paying $6 or $7 per bushel for corn. The maximum rent you can afford to pay is a fairly straightforward formula:
  
  (Yield × feed cost in dollars per bushel) – non-land feed costs in dollars per acre = maximum rent.
  
  Even when you plug in the cost of raising corn at $520 per acre, the maximum land rent you can pay gets pretty high with yields of 180 to 200 bu. per acre. And if you have the machinery, storage and labor, renting more land is a way to more fully utilize those assets and actually reduce feed costs.

No one can predict what 2013 will bring. But let’s not forget recent history and the lessons it offers.