Hope Is Not a Strategy for Struggling Dairy Producers
May 10, 2012
Dairymen need to hold their co-op boards of directors’ feet to the fire and insist that we cut and keep production in line with demand.
By John Nye
Mountain View Dairy, Delta, Utah
We have been in the dairy business for more than 30 years. Half of that time was spent on a typical New England freestall operation, the remaining time on a large Western, purchased-feed, dry lot type of dairy. Financially, 2009 was the worst year ever in the dairy business. The pundits all spouted that it could never happen again, that it was a once-in-a-lifetime occurrence. Well, here we are three years later, zero change in dairy policy or production management, and history is repeating itself quite quickly.
Where is the dairymen’s outrage? 2012 was supposed to be $18 milk. Now it is $14, except in Utah where it is $1-1.50 less because of inter-market haul and balancing-plant costs due to an exceptionally mild winter and buyers not taking all the milk they had committed to. Take out the $1.30 for normal co-op costs and suddenly you have $12 milk to pay for $18 production costs.
The current milk-price feed ratio is 1:45. That is worse than any month in 2009 and worse than any month we could find all the way back to 1985.
The only ones being hurt by this scenario are dairymen. Cooperatives pay all of their expenses and give us some of what's left over whether it's profitable for us or not. They cannot lose with this arrangement. Milk haulers are very happy as they are hauling more milk farther than ever, getting paid for every hour and mile they go. Proprietary plants and co-op customers are ecstatic, buying all the cheap milk they want at a discount for the foreseeable future. We as dairymen don't seem to be cohesive enough to do anything about it.
There is no incentive for our milk buyers to control supply. In fact, they appear to be more afraid of a shortage rather than being long. They sit back and watch us burn up our equity, and we are proving time and time again that we are willing and able to continuously produce milk way below cost. It is a given that when one of us goes broke, somebody will put cows on our dairy and keep on producing cheap milk.
We as dairymen need to control supply to become and stay profitable. Our boards of directors seem to be unwilling to step on management's toes and turn this overproduction around. In the case of DFA’s Mountain Area Council, we have seen this price decline coming since January. Why did it take until May to do anything at all about it? On a side note, they have instituted a growth management plan which may not be perfect, but it is a good start. My opinion is they need to do more cutting, at least on a temporary basis, immediately.
Dairymen need to hold their co-op boards of directors’ feet to the fire and insist that we cut and keep production in line with demand. A 2 or 3 percent oversupply of milk slashes our price by 30% or more.
Until recently, the West has had cheap feed. Our production costs were less, and we got paid about a dollar less per cwt. than the East. Through participation in the Cornell Dairy Profit Monitor, we generated a comparison report of 30 farms with more than 700 cows, generally located in the East, for the 12 months of 2011. This showed an average price of $3.38 higher than our dairies’ average net milk price over the same time period. As China and other countries have moved in to compete with us for forages, our cost of production has risen to be comparable to the East. We have not had a corresponding price increase to remain competitive.
Processors continue to view the West as a source for cheap ample milk supply. Farmers, grain mills and other suppliers are tiring of dairymen not being able to pay their bills. They are more than happy to have other outlets for feed that can pay them a high price in a timely fashion. Our price must come up to be competitive with the rest of the country or we must go out of business. But with this necessary price increase, we must have a growth management in place or the race to the bottom will continue.
In the past, growth of our dairy business -- usually measured in cow numbers and milk production -- has been a given, according to ourselves and our bankers. Now, vertical integration, not growth, may become the new norm. We must NOT produce milk that has no market. This is usually where the experts step in and say we have to get more efficient. We as dairymen have latched on to cost-effective efficiencies and are always working on that. We are at about the point as an industry where cost-cutting simply to stay in business will result in compromising the high milk quality that is expected by the consumer.
Dairymen in the rest of the country are not happy with the current downturn in prices, yet they remain profitable. There is no reason for them to cut back -- yet. It is a bigger problem for the West right today, but it will soon be trouble for our Eastern counterparts. It’s important to remember that we have more similarities as an industry than differences.
Until we cut production and cow numbers and raise the plateau of milk prices, we will continue to be unprofitable or just barely break even. We are not making forward progress or even keeping our businesses viable for the future generation of family owners.
Investment in development of new dairy technology is slowing in this country because dairymen aren't buying what the companies have to sell in this economic climate. China is adding lots of cows, using our technology and ideas. Those cows have to get fed and they are not going away as competition for our feed. Co-ops and manufacturers of milk products have to understand that for the long term viability of the Western milk supply, prices have to come up to reflect the increased cost of production in the West for us to become healthy again as an industry.
We as dairymen have to get a backbone, work together to insist that these changes be made and keep a tight rein on supply. Making the needed milk has NEVER been a problem. Just pay us a fair, sustainable price for the high quality milk we produce and the rest will take care of itself. We don't need low interest loans or more banks -- just a fair price.
As I visit with neighbors and other dairymen, they all hope it will get better soon. Hop
e is not a strategy. Unless we, as an industry, get proactive in the very near future, you can bet that the bleeding will go on for a very long time, just the same or worse than 2009. The only people who have incentive or are going to fix this are dairymen. NOBODY is going to do this for us.