California’s Cost-Cutting Comeback
Dec 06, 2010
If there’s a way to cut costs while still making the same amount of milk, California producers are likely find it. They’ve achieved a greater reduction in feed costs than Midwestern dairies, proving California remains a tenacious competitor.
In 2009, California dairy producers discovered they had not one but two Achilles heels: some of the lowest milk prices in the country (along with Idaho) and high feed prices.
The result was that the state bled red for months on end, with some herds reporting losses of $100/cow/month or more. That meant borrowing hundreds of thousands of dollars, eroding equity to levels that might not be sustainable through another downturn.
Gary Vande Vegte, a CPA with Van Bruggen and Vende Vegte, PC,
based in Orange City, Iowa, shared a financial comparison between large scale, Upper Midwest dairies and their Western competitors at the Minnesota Milk Producers Association annual meeting last week. He pulled data not only from his own firm, which works with large dairies here in the Midwest but also from the large accounting firm Genske, Mulder & Company, LLP
The numbers for 2009 are stark. Yet California producers have made a stunning recovery through the first half of 2010, the latest for which data are available.
In 2009, California dairy producers’ financial sheets (on an accrual basis) showed losses of $682/cow. But no region fared well. In fact, Idaho producers recorded the largest losses, at $818/cow. And even the Midwest, with its $2 higher milk prices in 2009 and lower feed costs, still racked up $532/cow in losses.
In 2009, California’s feed costs were $2,274/cow. Through June 30, feed costs were running about 9% less with no drop-off in milk production. In the Upper Midwest, feed costs were $2,089/cow in 2009 but are running just 5.6% less this year.
In fact, feed costs in the Upper Midwest were running about $7.04/cwt. through June 30 with milk production at 71 lb./cow/day. In California, feed costs were running $7.10. Milk production was 72 lb./cow/day. In fact, feed costs north of Fresno, Calif., were running right at $7/cwt. with milk production at 72 lb./cow/day.
“I called our colleagues in California twice to find out how producers there are cutting feed costs,” says Vande Vegte. “We’re not sure how they’re doing it, but it probably is a number of things: They may have been more proactive on cutting high-cost feed additives, had better weather, or had better negotiated prices.
“Regardless of how they did it, they did it. And they had a greater reduction in feed costs than our guys in the Midwest,” he says.
There is a caveat to the numbers, however. When feeds were homegrown, feeds entering rations are valued at fair market value. That allows for a better apples-to-apples comparison across regions for the dairy enterprise. From an accounting standpoint, that makes sense.
From a competitive standpoint, however, it muddies the water. If Midwest producers can grow feed cheaper than market value (and most should be able to grow corn for less than $5/bu.), they will have a competitive advantage over those herds who must buy corn. Yes, the Midwest producers give up the opportunity value of selling that corn onto the market. But if their primary objective is to grow corn to feed cows, they’ll live to milk another day.
Still, the biggest take-home message from these numbers is that West Coast dairy producers are tenacious competitors. If there’s a way to cut costs while still making the same amount of milk, they’ll likely find it.
But the bottom line still comes down to liquidity, equity position and borrowing capacity. If highly leveraged dairies were unable to rebuild credit lines this fall, their ability to borrow more will be severely limited. The Genske-Mulder data show $65 net income per cow in California through June 30. Even if California producers were to triple that through the end of this year, bleak milk prices in the first quarter of 2011 do not bode well for the highly leveraged.