Feb 23, 2012

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Dairy Talk

RSS By: Jim Dickrell, Dairy Today

Jim Dickrell is the editor of Dairy Today and is based in Monticello, Minn.

$5 Corn the New Normal

Feb 13, 2012

Corn growers see good times now, but their markets may be headed to a new equilibrium as their production costs climb. The bad news is that dairy producers will have to live with this new normal.

I had the opportunity to spend a few days at the Top Producer Seminar in Chicago a couple of weeks ago. I have to admit, it was a little weird mingling with 800 corn and soybean growers so happy with their fat balance sheets that they couldn’t stop grinning.

Speaker after speaker after speaker was pretty clear on one thing: $6 corn means most of these row croppers are pulling in net profits of $200 per acre if their yields run anywhere near 180 bu./acre. That ain’t bad if you’re farming 2,000 or 4,000 or more acres of corn on corn, as some of these guys are. And then if the government lets you write off the entire cost of a new tractor or a new combine as they could in 2011, it gets even better. I’d be smiling, too.

But speaker after speaker after speaker also said that the cost to produce a bushel of corn is approaching $5/bu.

• Sterling Liddell, vice president of Food and Agriculture Programs for Rabobank, pegs the cost of production in Midwest cornfields between $4.30 and $4.90/bu.

• Brett Oelke, a University of Minnesota ag business management team leader, pegs the average at $4.82, with a range from $4.50 to $5.00. "The cost of corn production is the same regardless of where you’re at in the country if you’re making full use of your machinery," he says. The reason: On better land, yields might be higher. But those higher yields drive land prices and rents higher, so that the bottom line costs come out pretty much the same as lower yielding, lower priced ground.

• Darren Frye, president and CEO of Water Street Solutions, a Peoria, Ill., farm consulting firm, says the first 250 of his clients to submit completed farm records showed a breakeven projected 2012 corn price of $5.21. "Typically, farms have 50¢ to 60¢ higher cost of production than they think when you include family living and some return to management," he says.

When you average all this up, and assume there will be at least some price inflation for inputs such seed, fuel, lubricants and new equipment (when was the last time this year’s new tractor was cheaper than last year’s new tractor?), you can assume $5/bu. breakevens are the new normal.

Yes, corn prices could fall below this level in the short-term. In fact, if 94 million acres get planted to corn in 2012 and we get good weather across the now expanded corn belt (from North Dakota east to the barrier islands of the Atlantic), the stocks-to-use (STU) ratio could exceed 10%. The current STU is 6.7%. That huge surplus could drive prices below $4, say some analysts.

But it won’t stay there. It can’t. Not if it costs $5/bu. to grow the stuff. Over the long term, commodity markets like corn and soybeans and milk reach equilibrium with their costs of production. That’s the way commodity economics work. Always have. Always will.

The bad news is that dairy producers will have to live with this new normal. They will either have to pay $5/bu. for corn or they’ll have to compete with their corn growing neighbors for land that supports $5/bu. corn. It’s pretty much that simple.

For more from the Top Producer Seminar, click here.

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Immigration Reform 2013: The Lobbying Onus Is on Dairy Producers

Jan 30, 2012

Moving immigration reform forward, even after the election, will require work. It’s paramount that dairy producers talk to friends and neighbors to explain the need for a legal, documented immigrant work force.

The bad news, if it’s even news, is that national, comprehensive immigration reform isn’t going to happen this year.

That was the consensus of a panel of two former congressmen and a former assistant secretary of the Department of Labor speaking at the Colorado Farm Show in Greeley last week. Participating were Bob Beauprez, a rancher and former congressman from Colorado’s 7^th District; John Salazar, Commissioner of Colorado’s Department of Agriculture and former member of Congress; and Leon Sequeira, a former assistant secretary of the Department of Labor in the George W. Bush Administration.

“If you’re pushing for a comprehensive bill, it’s not going to happen this year because it gets wrapped around the axel of endless debate,” says Beauprez.

That’s primarily due to 2012 being an election year. Politicians like nothing better than to have an issue like immigration reform to harangue their opponents and mobilize their base of support. Plus, the current high unemployment rate simply will not allow politicians to pass legislation that might increase the flow of even more workers into the country or make things easier for the 8 or 10 or 12 million undocumented workers who are already here.

But there are rays of hope for 2013. “If President Obama wins re-election, he will push for comprehensive reform. And if a Republican wins, whoever that might be, there will be a push for some reform in an attempt to rebuild the Hispanic voter base,” says Sequeira.

“The attitudes of Congress and their staffs have evolved, and in a good way,” adds Beauprez. “The possibility of change is increasing.”

Colorado Commissioner of Agriculture John Salazar says one way forward is the Utah Compact, signed by Utah Governor Gary Herbert in 2010, and endorsed by all 50 state departments of agriculture. It holds five principles:

• Federal solutions, not state by state.

• Local law enforcement should focus on criminal activities, with civil violations of federal code left to federal agencies.

• Intact families, opposing policies that cause unnecessary separations.

• Free market economies, best served by immigration policy that reaffirm a global reputation for being welcoming and business friendly.

• A free society that integrates immigrants into communities.

“And really, who can argue with this,” Salazar says. Immigration reforms, he says, should require strong borders and no path to citizenship for persons here illegally. But if they are here, Salazar believes they should be allowed to apply for a two-year visa if they pass a background check, pay any back taxes due and pay a small, reasonable fine for coming here illegally.

Moving immigration reform forward, even after the election, will require work. Beauprez believes agriculture must first be united in its commitment to immigration reform. It must begin now, in 2012, to form broader coalitions of industries—construction, home builders, service providers such as hotels and restaurants, golf courses, landscapers—any industry which has come to rely on immigrant labor.

Next, farmers must talk with their local bankers, merchants, friends, neighbors and fellow parishioners about the need for reform. “Rural areas poll anti-immigration most strongly,” says Sequeira, who has also served as legal counsel for Sen. Mitch McConnell (R-Ky., and current Senate minority leader). “Any time immigration reform would come up, we’d get calls 100 to 1 against reform.”

So it’s paramount, he says, that dairy producers talk to friends and neighbors to explain the need for a legal, documented immigrant work force. The economies of many rural communities depend on these folks to do the hard, monotonous work of agriculture.

Small dairy producers are often the harshest critics of immigration reform. They think that if these workers go away, large farms that rely on them will go away as well. That’s incredibly short-sighted.

Farms with more than 200 cows now produce 75% of all milk in this country. If they go away, yes, milk prices might increase in the short term. But soon, processing capacity and supporting infrastructure will wither away. Dairy producers of all sizes must understand that they’re all in this together.

Once they do, dairy producers must lobby their legislators hard for reform. You can’t rely on farm organizations or co-ops or the National Milk Producers Federation to do it. You have to do it. You have to make the call.

Comments (6)

Dairy’s ‘Go It Alone’ Animal ID

Jan 16, 2012

The National Milk Producers Federation (NMPF) has had it with the beef industry’s infighting over national animal identification.

Last month, NMPF sent a letter to USDA Secretary Tom Vilsack, urging USDA to move forward with a national program, even if it means enacting dairy specific requirements. Reading between the lines, the letter seethes with frustration.

Last week, I asked Jamie Jonker, NMPF V.P. of scientific and regulatory affairs, about that sense of futility. "National Milk and our member producers have a desire to move animal ID forward, and right now we’re lumped together with the beef side," he says. "Dairy and beef have different production systems, and USDA needs to consider rules that are not necessarily the same for both. That’s a long way of saying that, yes, we are frustrated."

But could a dual-track system work? Jonker believes it would be better than what the country has now. "Dairy would be much better prepared having one than not having one," he says. "There is an advantage to having all bovines (beef and dairy) in one system, but that’s not likely to happen in the near future."

The problem, of course, is that foot and mouth disease (FMD) doesn’t discriminate between a dairy milk cow and beef mama cow. Once it strikes, commerce will shut down. Sale barns will be quarantined, cattle movements will be cease, even milk trucks will be taken off the roads while USDA tries to track the disease.

If you think this can’t happen, simply look to England. When it had its FMD crisis, some dairy producers were quarantined to their farms for months as animal health officials tried to sort out the mess. It was ugly. Opponents to national ID are clueless to the carnage that will ensue.

NMPF is also on record calling for a national data base and registry, where health officials can go to a single source to expedite traceback. This is, of course, opposed by some, citing data privacy concerns. Again, that opposition is terribly short-sighted.

The current USDA proposal calls for each state, territory and tribal nation to set up a database within its own border. At best, this will be cumbersome as USDA officials try to trace animal movements across multiple state borders. At worst, it might require dairy producers with farms in several states to have multiple animal ID systems. This only adds cost and confusion to the system.

At the very least, state systems must be uniform and compatible. But NMPF is right in its call for a national, centralized database. "NMPF recommends that USDA exercise Federal Preemption to a provide a far more beneficial national system with all State, Tribal and Territorial governments utilizing a central system," Jonker wrote to Vilsack. I agree.

Finally, when I posted a story on NMPF’s letter to USDA, one reader asked: "What’s the ROI for producers?" The easy answer is that a national animal ID program ups the chances that you’ll be able to remain in business should an FMD incident occur. Make no mistake. If one should occur, the short and long term consequences will be severe.

Not only will commerce cease for days, perhaps weeks, in the short term, export markets will also close. The dairy industry in now exporting 13% of its production overseas. An instant closure of those markets will make 2009 look like a mild recession. And it will take years to recover from such a blow.

National animal ID is a collective insurance policy for the industry, says Jonker. "It’s like fire insurance that provides overall protection for a catastrophic disease outbreak," he says.

RFID tags are pretty reasonably priced, from $1.80 to $2.20/tag. "Over the five-year lifetime of the average dairy cow, that’s just 35¢ to 40¢ per animal per year. That’s a pretty low insurance cost," he says.

In fact, it’s pretty much a no-brainer. If opponents to national ID would exert just 10% of the effort they’ve put into opposing such a system into figuring out what can work for the beef industry, we would have had such a system five years ago. Instead, USDA is still trying to wind its way through the politics. How frustrating.

Read responses by readers to these comments.

Comments (3)

The 400,000 Cell Count Mess

Jan 02, 2012

The clock has officially started ticking on the European Union 400,000 somatic cell count export certification requirement.

If you haven’t heard by now, the marketing requirement went into effect this past Sunday, Jan. 1, though dairy farms will have until May 1 to comply.

The new standard has been under discussion since June 2009. In fact, on Jan. 20, 2010, USDA had announced the industry would have to meet the new standard by Feb. 1 of that year. The announcement caused such an uproar that the agency retracted the requirement and spent the next 22 months crafting the new requirements.

Prior to this ruling, processors who exported dairy products to Europe merely had to certify that their silos and co-mingled tanker loads of milk from multiple farms met the 400,000 SCC limit. Now, like in Europe, individual farms must meet the standard.

“The 400,000 E.U. certification requirement is not a U.S. regulation, but simply meets a marketing requirement,” says Ken Vorgert, chief of USDA’s Dairy Grading Branch.

The standard for Grade A and Grade B milk within the United States remains at 750,000 cells/ml. “Dairy farmers with milk above 400,000 SCC can still sell milk within the United States as long as it meets the 750,000 SCC,” he says.

In effect, however, the 400,000 SCC level will become the new national standard. That’s because milk is processed into ingredients which then go into various dairy and other food products. Once it does, there’s no telling which ingredient was made from milk with more or less than 400,000 somatic cells.

The Europeans allow their farmers exemptions to this rule. So, in the spirit of equivalency, USDA will as well. U.S. farms will be able to apply for one of two temporary exemptions, called “derogations.”

An annual derogation can be applied for if the farm is not meeting the 400,000 SCC average but is making progress toward that standard, says Vorgert. “If the farm is at 750,000 SCC six months of the year, we’re probably not going to grant derogation,” he says.

“And there have to be reasons, other than hygiene or sanitation, why the farm is out of compliance.”

As long as the farm is making progress, USDA will likely renew the derogation for a second year.

The second type of derogation will be for seasonal problems. Here, farms must be in compliance for nine months of the year and have a consistent history of problems due to seasonality the other three. Seasonal derogations will have to be renewed every three years.

USDA will bill processors $136 per application. Processors, in turn, will likely pass that cost plus their own administrative costs on to farms. So farms could be looking at a total cost of $200 to $300 per derogation application.

At this point, no one knows how many U.S. farms won’t meet the 400,000 3-month rolling average. But it could be thousands.

All of this could have been avoided if delegates to the National Conference on Interstate Milk Shipments had done their job last spring, and rolled the Pasteurized Milk Ordinance requirement back down to 400,000 cells/ml. But that tally failed by one cowardly vote.

Now co-op fieldmen will have to babysit high-count herds, submit derogation applications, make up reasons high cell counts aren’t due to hygiene or sanitation, and track progress in case they have to re-submit the applications in a year or three.

It’s all pretty much a waste of time when, for the good of cow health, dairy profitability and consumer confidence, a 400,000 SCC national standard makes so much more sense.

Comments (4)

Would Dairy Reform Pay on Your Farm?

Dec 16, 2011

A new spreadsheet allows users to plug in their own herd sizes, production levels and expansion intentions to decide whether they’d participate in the Dairy Security Act and at what levels.

It’s fine to talk about the philosophy behind proposed dairy reforms. But the bottom-line impact to milk checks, cash flow and black (or red) ink is really what matters.

Bill Lazarus, an Extension economist with the University of Minnesota, is a master at creating spreadsheets. He put his talents to good use to develop a user-friendly tool based on the economic analysis of the Dairy Security Act (DSA) of 2011 done by Mark Stephenson with the University of Wisconsin and Chuck Nicholson with Cal Poly.

The spreadsheet allows users to pop in in their own herd sizes, production levels and expansion intentions. Then, users can plug in whether they’d participate in DSA and at what levels. The spreadsheet then instantly calculates gains and losses with each option.

As a refresher, DSA would eliminate milk price supports and the Dairy Export Incentive Program, and replace milk income loss contract (MILC) payments with a voluntary Dairy Producer Margin Protection Program.

Those who choose to participate would get free base-level coverage of a $4 margin between milk prices and feed costs on 80% of their base milk production. Producers could purchase supplemental coverage of up to an $8 margin on 90% of their base milk production.

Those choosing to participate in the Margin Protection Plan would also agree to participate in the Dairy Market Stabilization Program (DMSP). When margins are low and the DMSP is triggered, participating farms would not be paid for a small portion of their milk that is above their individual production base.

The Stephenson/Nicholson analysis shows the program will markedly reduce milk price volatility. Under current policy, the analysis suggests prices would range from a low $13/cwt. in 2015 to a high of $21 in 2017.

With low producer participation (10% or less) in the DSA program, volatility would be reduced from a low of $13 in 2015 to a high of $19 in 2017. If there was high participation (50%), volatility would be substantially reduced, with a low $14 in 2015 and a high of $16 in 2017.

But that reduced volatility comes at a price. Under the low participation scenario, milk prices would average 53¢/cwt. less. Under high participation, it would average 92¢/cwt. less.

The Lazarus spreadsheet builds on these assumptions. Because DSA would lower the milk price, the spreadsheet calculation shows losses compared to current policy. For example, a 100-cow herd producing 20,000 lb. of milk per cow would lose an average of $32,750 per year with no supplemental coverage over the seven years between 2012 and 2018 if there was high national participation in the program.

Those losses decline to $8,600 per year if supplemental insurance is purchased at the $8 margin level. Losses fall to $3,000 per year if national participation is low and supplemental insurance is purchased at the $8 margin level.

Stephenson and Nicholson assumed no demand or supply shocks to pricing between 2012 and 2018. But if you look back to 2009, Lazarus’ spreadsheet suggests our 100-cow herd would net nearly $25,000 if it had purchased $8 margin insurance on 90% of its base.

One horrific year, then, would make up for some of the losses incurred during normal-cycle years. In essence, that’s what DSA is designed to do: Reduce volatility and protect against catastrophic loss. It’s up to producers to decide if it’s worth the risk.

To analyze what the program could do on your farm, go to Lazarus’s spreadsheet here.

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