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A Closer Look

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A Closer Look

Battered U.S. Dairies Face Uncertain Future

Dec 27, 2010

By Catherine Merlo, Dairy Today Western and Online Editor

Still reeling from 2009’s financial disaster, U.S. dairies spent 2010 in full survival mode and face more bearish pressure in the coming year.

Milk prices improved in 2010, allowing many dairies to cover their cost of production and pay bills. But the recurring burden of high feed costs – and the depth of 2009’s losses – continued to weigh down many dairies.
 
“2010 has been a sobering year, one of stabilization after the harrowing experience of 2009,” says California dairy producer Tom Barcellos. “I took the equity off my farm to keep my dairy alive. People are still having difficult times financially because banks don’t want to be in the business.”
 
“Nobody went backward in 2010, but nobody righted the ship,” says Robert Matlick, a partner in the accounting firm of Moore Stephens Wurth Frazer and Torbet. The firm has numerous dairy clients across the U.S. “Many dairies are still barely afloat, especially in the West.”
 
According to Matlick, 2010 U.S. milk prices have averaged about $14.80/cwt. for Class III milk, with October and November prices climbing to the $15-$19/cwt. range. That compares to a 2009 Class III price average of about $11.35/cwt., generally some $3/cwt. below the cost of production. In 2010, dairies are looking at a $1/cwt. profit on average.
 
“But most haven’t bounced back from ’09,” he adds. “They’re still climbing out of that hole. We’re projecting a 10- to 11-year payout on the debt that dairies acquired in 2009.”
 
A pick-up in export demand for U.S. dairy products helped boost milk prices this year.  Even so, high feed prices, spurred by ethanol’s growing demand for corn and supportive federal policy, continue to eat into dairy profitability.  After a pull-back earlier this year, prices for corn, soymeal and other livestock commodities are advancing to 2009’s high levels. Corn, a major ingredient in milk cows’ diets, is trading in the $6/bu. range, up from $3/bu. earlier this year.
 
“For 2010, feed prices for dairies are going to approach the cost of $7.50-$8.00/cwt.,” Matlick says.
 
Looking to 2011, producer Brad Crandall says he’ll “prepare for the worst and hope for the best,” on the Michigan dairy where he and his family milk 280 cows. Like other producers, Crandall will continue to control costs, boost efficiencies and get as much milk per cow as possible.
 
Many dairy analysts expect more price volatility ahead. “The global economy makes volatility more likely than ever before,” says Greg Steele, who’s with the Farm Credit bank known as AgStar Financial Services.
 
“The dairy industry must change its business paradigm by focusing on capturing margins and understanding cash-flow break-evens and cost of production,” he says. “Hope is not a strategy. Know a good margin when you see one.”
 
In addition, Steele says, “In the new landscape, there’s no substitute for adequate equity and working capital.”
 
Also in 2011, contentious debate is expected as the dairy industry develops policy recommendations for the 2012 farm bill. A controversial supply management proposal and talk of eliminating long-time price supports and federal orders promise tumultuous discussion and possibly radical change ahead.
 
But for many, all that could be a moot point.
 
“The farm bill discussions will be very intriguing, but those are long-term issues,” says Eric Erba with California Dairies, Inc., the processing cooperative that handles 43% of California’s milk volume. “Dairies first have to survive the next six to 12 months.”
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