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August 2011 Archive for Dairy Talk

RSS By: Jim Dickrell, Dairy Today

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

Organic Dairying Not All Peaches, Cream and Granola

Aug 29, 2011

A new study from the University of Vermont shows that organic dairies face stomach-churning economic pressure, just as their conventional neighbors do.

 
Even with $20+ conventional prices for milk, $30 for organic milk sounds even better. But an analysis of financial records of Vermont organic dairy producers suggests it’s not all peaches, cream and granola.
 
Bob Parsons, an Extension economist with the University of Vermont, has been tracking the economics of Vermont organic dairies since 2004. If there is a test case for organic versus conventional, Vermont is your laboratory. The state currently has 990 dairy farms, a fifth of which are organic.
 
The organic herds tend to be smaller, grass-based and lower producing. In fact, they only produce 4% of the state’s total milk output. Organic herds average just a little over 13,000 lb./milk/cow while their conventional neighbors now approach 20,000 lb.
 
And just like their neighbors, organic dairies have faced stomach-churning economic pressure over these seven years. In fact, despite organic milk prices well above conventional prices, there have been years when conventional dairies out-performed organic.
 
Conversely, organic dairies cash-flowed through the debacle of 2009 while conventional dairies lost money and equity. In 2009, organic dairies reported net farm revenue of $828 per cow—an astounding feat given what was happening in the rest of the industry.
 
But organic producers also got a cold splash of reality when organic milk sales dived in 2008 due to the Great Recession. Instead of seeing 20% annual growth in sales, disappearance shrunk up to 15%, with organic surpluses then dumped onto the conventional market at conventional prices.  
 
Organic processors started pulling back on contracts. H.B. Hood cancelled some of its contracts in neighboring Maine. Horizon gave producers a choice: Accept price cut backs and marketing restrictions or contracts possibly would not be renewed. Organic Valley imposed quota reductions of 7% of a farm’s three-year average. Plus, it instituted hauling charges—which had previously given organic an even greater advantage over conventional.
 
Organic sales have since rebounded—but they are still not on the growth path they were prior to the Great Recession. (Earlier this month, Fonterra, the New-Zealand-based dairy giant, announced it will restructure its organic operations.) And with BST-milk now only a memory in most New England markets, that could give consumers even less incentive to pay 2X for organic milk.
 
Parsons has also calculated return on assets for organic dairies over the past seven years. They’ve ranged from a low of -1% in 2004 to a high of 5.1% in 2006 (organic’s glory year?), and have averaged just 2.2% over the seven years. Similarly sized conventional dairies had return on assets average 0.8% over the seven years, ranging from -2.8% in 2009 to 5% in 2007, according to Farm Credit records.
 
There’s also a wide range of economic performance farm to farm. “There’s as much variation, if not more, in financial performance on organic dairies,” says Parsons. In 2010, for example, seven of the 28 organic farms in the study had a negative return on assets. Another seven has greater than a 6% return on assets (with three of those posting 8% to 10%.)
 
The lessons from this analysis:
 
• As more dairies convert to organic, organic milk has become a commodity. As such, individual dairies have less and less control over their markets.
 
• Organic milk is subject to the same kind of market economics as other commodities, and is as vulnerable to market shocks. The advantage: Contracts stabilize monthly milk prices, and organic producers know what they’ll be receiving for each hundredweight the entire year.
 
• Individual farm management, cost control and production per cow all are key to profitability. A $30 milk price doesn’t ensure profitability in an organic herd any more than a gleaming new, high-tech milking parlor ensures profitability on a conventional dairy.
 
• Many conventional dairies which switched to organic did so for economic and price stability reasons. And organic is a way for many smaller producers to stay in business without expansion and huge investment. But the pressure to contain costs and to be just a little bit better than their neighbors is still the same.
 
• An average family living draw of $35,000 in 2010 suggests some organic farms need a second income if they want to fund health insurance, a college fund for the kids and a retirement for mom and dad. That’s not unlike conventional dairies milking similarly sized herds.

 

Better Dairy Solutions

Aug 15, 2011

Policy set at the national level cannot be nuanced enough to address and protect every regional issue. What it can do is position the U.S. to become a more consistent player in global dairy markets.

 
National Milk’s 12-city roadshow for its Foundation for the Future (FFTF) dairy reform package will wrap up next week in Nashville.
               
While I was only able to attend one of the meetings, reports were that producers were filtering the program through some pretty near-sighted lenses.
               
Most of this criticism misses the bigger picture. Like it or not, any dairy reforms will have to prove their mettle against 2009. With some 11% of U.S. milk solids going off-shore in 2008, a 25% decline in exports meant 2% to 3% more product was left in U.S. warehouses. The consequence: a 30% decline in milk prices. 
               
The criticisms of FFTF, and Rep. Collin Peterson’s (D-Minn.) draft proposal that mirrors it, seem to have little to do with averting another 2009 dairy meltdown.
 
Instead, some in the West say the margin protection portion of the plan doesn’t reflect local (higher) feed prices, and therefore doesn’t protect Western producers to the same degree as areas with lower feed prices.
 
That’s all well and good—but how do you have a national program when one region of the country would trigger margin protection while the rest of the country would not? More importantly, how do you pay for regional margin protection insurance when the program is already struggling to come in under baseline?
 
Some in the Midwest oppose the market stabilization portion of the program because it may limit expansion when the Midwest now has a comparative advantage. But without the stabilization component, costs of the margin protection insurance portion of the program skyrocket out of control.
 
One solution would be to cap the margin protection portion similar to the MILC limits. But that’s déjà vu all over again, pitting small producers against large.
 
Others oppose the proposed Federal Order changes, saying the competitive pay price scheme for determining cheese prices will ultimately lead to higher Class I prices. Those higher prices will lower Class I sales, making Class I milk a surplus, which will, in turn, lower Class III prices. Well, maybe.
 
University of Wisconsin dairy economist Mark Stephenson says a 50¢ increase in Class III prices (from the proposed competitive pay price survey) would result in about a 7¢ increase in the All-Milk price. This would stimulate more milk production but also induce a “modest decline in Class I sales,” he says. “That ultimately lowers cheese prices and Class III prices by at 12¢.
 
“Our previous analyses [of the other components] of the FFTF program was price enhancing for Class III, so these two effects would be somewhat offsetting,” says Stephenson.
 
The message in all of this is that policy set at the national level cannot be nuanced enough to address and protect every regional issue. Dairy producers will have to continue to do their own risk management.
 
What national policy can do is position the U.S. to become a more consistent, reliable player in global dairy markets. Maintaining and growing our ability to export one of every seven or eight pounds of milk solids through thick and thin is critical.
 
That’s what the debate should be about. In the final analysis, all the rest of Foundation for the Future is just details.

Liquidity Is the Elixir for Stomach-Churning Dairy Markets

Aug 01, 2011

The increased volatility of today’s dairy markets, driven now in part by global events, means you need to increase both liquidity and solvency on your balance sheet. 

 
$500 per cow in liquidity? Even $750. Yeah, you betcha, says Ross Anderson, chief credit officer with AgriBank.
 
The increased volatility of today’s dairy markets, driven now in part by global events, means you need to increase both liquidity and solvency on your balance sheet. “It used to be that you needed $200 per cow in liquidity,” says Anderson. “In today’s environment, $500 to $750 per cow is not unwise.”
 
That doesn’t have to be all in cash, of course. Risk management strategies that lock in actual margins, inventoried feed and solid lines of credit all can play a role in reaching adequate levels of liquidity and solvency. The key is to get there, stay there and remain vigilant. Here’s why:
 
“Adverse paper in dairy loans jumped from less than 2.5% in 2007 and 2008 to the low teens in 2009,” says Anderson. Even with extremely good milk prices, that level of adverse paper—dairy loans in trouble because of problems with repayment, equity or collateral—has not substantially improved since. “We haven’t healed the wounds of 2009,” he says.
 
Both he and Terry Barr, a well-respected Farm Credit System economist and now senior director for CoBank’s Knowledge Exchange, are concerned that today’s high prices are the result of strong export demand. That’s all good, they say, as long as it lasts.
 
But it also puts U.S. dairy producers in a vulnerable position should another demand shock or economic crisis scuttle those exports. Recent news out of Washington and Europe are cause for worry. “You need a deeper balance sheet that you have to be hedged against,” says Barr.
 
While dairy exports now sop up 13% of milk solids produced in this country, the U.S. is still seen as a residual supplier in the minds of most international buyers. That’s not a good place to be because residual suppliers are usually last in when demand grows and first out when it shrinks.
 
“Our U.S. industry still has to be much more proactive in global markets,” says Barr. “We need to establish brands and markets that fit these international demands. If you don’t have an established export market, you have to downsize when the residual demand disappears.”
 
Plus, no surprise to anyone, high feed costs here at home are eating away at much of those higher 2011 milk prices. “We’ll be in this situation for at least another year, maybe two,” says Barr. “Hope is not a strategy when it comes to high feed costs.”
 
Yes, there are rumblings that the ethanol credit will go away, maybe even sooner than later, as Congress struggles to find budget savings. But even if the credits disappear, ethanol mandates—which require refiners to blend ethanol into gasoline products—remain.  Those 5 billion gallons of ethanol mandates eat up 30 million corn acres. That part of the market is locked up, says Barr, which will continue to put pressure on feed prices.
 
Plus, the U.S. budget deficit and our inability to solve it don’t bode well for currency values. A weak dollar means our dairy exports may be more attractive overseas, but it also means $6 corn isn’t really $6 in China. That, too, will put pressure on feed exports--especially if there’s a weather scare anywhere in the world.
 
Risk management, liquidity and solvency are the holy trinity of surviving and thriving these next few years. Knowing what to shoot for is the first step.
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