Market forces disrupted our industry a few years ago – and they’ll do it again despite weather or government programs.
By Eric W. Lang, Iowa dairy producer
"These are the best of times, these are the worst of times," would aptly describe Iowa dairy farming in June of 2008. The rain had begun on June 8 and just hadn’t stopped. Farmers weren’t able to bale hay and often couldn’t haul manure for days at a time. Fields flooded and some farmsteads were literally under water. Meanwhile, our city cousins had some trouble of their own.
Ten square miles in Cedar Rapids flooded. In Iowa City the University of Iowa and surrounding area had extensive flood damage. Dairy country around Decorah in northeastern Iowa had six inches of rain in 48 hours and parts of that city flooded as well. Back on the farm, the skies continued their assault but the news from Chicago had never been better.
Class Three Milk Futures on the CME were in record territory for the next two years. Two years, that’s 24 months or 48 milk checks, every one promising profit from every cow.
June 12, 2008, milk futures stood at $20.10 followed by at July $19.97. Then it just got better with two months over $21 and the rest of the year over $20. But it didn’t stop there. All of 2009 milk futures averaged $20.22 on that day. Only a few kooks and nuts saw anything but high prices and good times for milk producers. The kooks and nuts proved their wisdom in this instance.
July 2008 actual Class III milk came in at $18.24 which was about ten percent off the June high point. August got worse, settling at $17.32 with more weakness for the rest of the year. Weakness we could live with. The torrential rains were over, August was dry and milking cows was easier, just less profitable.
Milk price continued its decline during 2008 with December settling at $15.28 - about 25% off the June high. Now began the slaughter.
January 2009 closed at $10.78 and February closed at $9.31, fifty cents under the support price. Three more months closed under $10.00 and prices didn’t break $14.00 until November. The year ended with an average Class III milk price of $11.36 – 56% of the future prices offered 18 months earlier. Cows were slaughtered, farmsteads were financially under water, dairies closed and vocations changed.
Fallout from high milk prices transitioning to low milk prices took months where the damage from heavy rains and flooding of a year earlier had been immediate. Market forces washed away dairies large and small from California to Maine just as levees and dams breached washed away neighborhoods.
Commentary on the Time
We tend to look back on this time not as a missed opportunity to forward contract milk and lock in some prosperity, but we remember it as a time when so many hung up the milkers for the last time. A few people got into the dairy business when prices were low and there was only one way to go, that being up. This was an opportunity for them.
September 2008 took me to a Registered Dairy Sale where I rendered pedigree announcements. "What a hot sale," I thought, "There is no way these cows can pay for themselves." My public pronouncements indicated otherwise.
June 2009 found me in the box at the Grand National Ayrshire Sale not only encouraging bidders to "take advantage of the good value and great cattle in today’s offering," but purchasing 14 head and being contender on an additional 24. What a hot sale for me. Opportunities like this come along just two or three times in a lifetime, though at an enormous cost to our dairy.
I remember the phone calls from young milk producers who apparently thought I had some inside knowledge of when milk prices would improve, and what they could do to hold on until that happened.
Most received a pep talk and some encouragement. A couple got the "It’s not dishonorable to try and fail at dairy farming. At least you were In the Arena and those who point fingers are the ones who never tried." One friend got a referral to a bankruptcy attorney who could help him out.
I’ll not encourage you one way or another what to do with your milk marketing efforts now that milk price has started to decline. There are a host of milk marketing prophets and professionals on whom you can call, should you choose.
Do, however, remember that the waves of creative destruction are always at work. Rainfall and market forces disrupted our industry a few years ago. Market forces will do it again regardless of the weather, government programs, promises or efforts of our elected officials.
Lang is president of Yarrabee Farms, Inc., near Brooklyn, Iowa.