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Should I Quit Dairying Because of the Drought?

September 4, 2012
 
 

By Mike Schutz

Department of Animal Sciences, Purdue University 

The decision to leave the dairy industry is never an easy choice. Certainly, drought conditions and feed shortages cause dairy farmers to wonder about continuing. There are many factors that make the decision especially difficult. For many families, dairying has been part of the family heritage for many generations. Also, the dairy farm may be the only job an aging farmer has ever known. Make no mistake, these are gut-wrenching decisions.

Yet the decision often must be looked at purely from a business point of view. The worst case is when the family continues to operate the dairy farm at a loss and erodes equity that has been built up over a lifetime. If carefully examined, the decision to exit sooner may preserve assets and wealth earned by the operators.

Unfortunately, only the individual dairy farmer – hopefully after much discussion with their spouse and other family members, with input from lenders and other key advisors – can make the decision to exit. But that decision should be made while carefully examining options. Even with low feed supplies and high feed prices, some farms are making a profit – especially farms that have retired most debt and are operating with low input costs.

Typically, widespread droughts are accompanied by at least some gains in milk prices, though this might not occur when drought conditions cover only a local area. Profitability must never be assumed. Consider your farm-specific costs of production or seek help in calculating them. Such help can come from dairy industry consultants and county Extension offices.

There are many reasons why dairy farms make the decision to exit the dairy industry:

• Retirement. Many farms go out of business when the father retires or slows down and no family member chooses, or is able, to continue the dairy enterprise.

• Lifestyle. When labor is scarce some dairy farmers choose to alter their lifestyle so they no longer must feel "married" to the farm.

• Excess debt. Especially in times of low milk prices and/or high feed costs, farms may not be able to generate enough income to repay loans, and so are forced out of business.

• Health problems. Sometimes even minor injuries or illnesses can force operators out of business, especially in the case of small farms where there may be too few cows to allow employment of non-family labor.

• Urban pressures. These can force dairy farm exits either through pressures from encroaching residential neighborhood, or through land price offers that are too good to turn down.
• Poor profitability. If any business is not profitable, it ultimately will fail. Many dairy enterprises continue to operate at the expense of other, more profitable, enterprises on the farm.

• Lack of infrastructure. If there are few dairies nearby, milk hauling costs and prices paid for supplies might rise to the point that the dairy enterprise is no longer profitable.

• Lack of proper estate planning. Though wills are in place, the death of a dairy farm owner/manager may force the sale of the unit to generate the price of inheritance taxes. Further, farm assets may be split equally among all siblings in probate court if no will is present.

• Expensive or inadequate feed. Feeds, especially forages, may be in short supply and expensive for long periods of time. As in 2002 and 2003, if forage supplies are scarce and expensive and milk prices are low, it might not be possible to access loans to purchase additional feed inventories to keep dairy cows in production.

• Lack of access to capital. When access to capital to purchase additional inputs (for example, feed) is limited, oftentimes a hard look at the present financial state of the farm and of the industry is warranted, to determine if seeking alternative sources of capital is a wise business decision.

If the costs of production are higher than milk revenue, margins are small even when feed supply is adequate, price increases are not imminent and equity is not able to withstand operational losses for an extended time, perhaps it is time to exit. Even if equity is able to withstand anticipated short-term losses, the question of whether operating at a loss is the best option for the family and business, even in the short term, must be considered.

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