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October 2012 Archive for Dairy Talk

RSS By: Jim Dickrell, Dairy Today

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

And the Dairy Debate Goes On

Oct 22, 2012

Trying to make sense of the dairy farm bill debate is like trying to sort out the numbers in a presidential debate over health care or federal budget deficits.

Both sides are throwing numbers around so fast and furiously, it’s hard to discern who is right. At the risk of upsetting both sides, I’ll try.
In a press release issued during World Dairy Expo earlier this month, the Wisconsin Dairy Business Association (DBA) produced a chart that showed what monthly milk income would have been in August under the Dairy Security Act in the Senate Bill and under the Goodlatte-Scott amendment still floating around the House of Representatives.

A 500-cow dairy in Wisconsin would have produced about 900,000 lb. of milk, and would have received nearly $183,000 in revenue based on a Wisconsin all-milk price of $20.30. Because the Dairy Security Act would have required the dairy to either curtail milk production 4.7% in August or forfeit that amount of revenue, DBA says farm revenue would have been $174,000.

So the claim is that the Dairy Security Act, because of the market stabilization program, would lower revenues by some $8,500.

The National Milk Producers Federation (NMPF) begs to differ, of course. Jerry Kozak, NMPF CEO, points to an analysis done by the University of Wisconsin that shows milk prices would be lower without market stabilization.

That’s because farmers would still receive insurance indemnity payments under the Goodlatte/Scott amendment if income-over-feed-cost margins reach triggering levels. As a result of those payments, they’ll likely produce more milk with the result being overall lower milk prices.
The Wisconsin analysis, done by dairy economist Mark Stephenson, suggests all-milk prices would be 10¢/cwt. less with 30% participation, 18¢/cwt. with 50% participation and 50¢/cwt. with 80% participation.

If that’s true, then the $8,500 production penalty would have been reduced by $900, $1,500 or $4,500, depending on the level of participation.

But there are other differences as well. For one, the Dairy Security Act covers 90% of a producer’s base milk production. For another, there is no charge for base level coverage. For a third, producers can sign up annually for supplemental insurance. And finally, the base period for the supplemental insurance is based on the previous year’s milk production.

Under Goodlatte/Scott, the coverage level is set at 80% of production, there’s a one-time sign-up, the base is set and only the first 4 million pounds of a producer’s milk base is covered at no charge under the basic program.

All those difference add up, according to Stephenson’s analysis. The net revenue from the Dairy Security Act for a 500-cow herd covered at 25% of production at $6.50 is about $10,600 per year. Under Goodlatte/Scott, it’s $4,600. That’s $12/cow, but over the five-year life of a farm bill, that adds up to a $30,000 difference.

Another point of contention is what government costs would be under the two programs. Secretary of Agriculture Tom Vilsack argues that supply management will be required. “Every time we get good prices, farmers increase production and we create greater stocks on the supply side,” he says.

But the Wisconsin analysis suggests otherwise. Yes, producers will make more milk under Goodlatte because they are assured of slightly better prices and indemnity payments during low periods. “But because low prices are not as low, you don’t have as many producers falling out of business during the trough,” says Stephenson. “As a result, the following highs are not as high because you have more milk production during recovery.”

The Congressional Budget Office, who scored the programs, pretty much agrees. Under current programs (dairy prices supports, Milk Income Loss Contract payments), the CBO budget score is $248 million over five years. CBO scored the Dairy Security Act at $107 million, and Goodlatte at $60 million.

So here’s what it boils down to:
• The Dairy Security Act offers higher milk prices, higher net returns, greater volatility, higher government costs and lower exports.
• Goodlatte offers lower prices and lower returns, lower government costs, higher exports but no intrusive market stabilization program.

The choice is yours.

Dairy Is a Team Sport

Oct 08, 2012

Dairy producers must work together with their consultants and employees to get through the next 12 months.

I’m not sure how many people I talked with last week at World Dairy Expo, but the recurring topics were the drought and escalating feed costs.

Corn yields are ranging from 10 bu. per acre in the hardest-hit pockets of the drought (where they even bothered to run a combine through the field) to yield checks of 250 bu. per acre (even the occasional 300 bu. from yield monitors over short patches) in central Minnesota. Corn silage tonnage was as variable—from a few tons per acre up to 25 tons even with some BMR hybrids.

Feed costs are at record levels. Gary Sutter, who milks about 600 cows with his two sons a half-hour southwest of Madison, figures his feed costs are $8.50/cwt. John Fiscalini, who milks 1,500 cows near Modesto, Calif., says his feed costs are at $12.50/cwt. Neither is slouch when it comes to getting milk out of cows. The Sutters have a 29,000 lb. herd average; Fiscalini, 27,000 lb. with some colored breeds thrown into the mix.

The Sutters normally fill their bunker with 250 acres of corn silage. This year required 700 acres. Fiscalini is able to grow most of his corn silage on 400 acres in California’s Central Valley. But he has to buy every other mouthful of feed, with dairy quality hay in the $250 to up $300/ton range.

These feed shortages and high prices are forcing producers to make some difficult choices, say consultants. A lot of times producers are pulling out higher-cost feed additives, thinking little about long-term consequences or return-on-investment of these products. Some producers are buying the cheapest forage or by-product commodities they can find simply to keep cows’ bellies full.

But they then expect their nutritionist to work these feeds into their rations and maintain milk production, body condition and repro rates. A lot of times, it just isn’t possible.

And they’re often unwilling to change feeding routines or grouping strategies, even though a one or two TMR approach means transition cows are being underfed and mid- to late-lactation cows are getting far too many calories.

One repro consultant told me that cow grouping discipline is lax on too many farms. He’s finding open cows in mid- and late-lactation pens. One herd even had a clean-up bull in a pen with cows open 250 days. Break-even production levels are now at 55 or 60 lb. of milk/cow/day on many farms. Trying to get these tail-enders bred and then housing them for another 280 days until they freshen doesn’t make much economic sense.

The bottom line is that dairy producers must work with their consultants to make all of this work. Yes, some tough choice must be made on feed and additive purchasing. But they must be done with intelligence where everyone—producers, consultants, employees—work together to get through the next 12 months.

Dairy is a team sport. Going it alone never makes much sense. This year, it’s a one-way path to the poor house.

Manage Risk in a Volatile World

Oct 07, 2012

It comes as little surprise that price swings and volatility are increasing for dairy producers. But the degree of that increase over the past two decades is stunning.

Chris Wolf, a dairy farm management specialist with Michigan State University, presented some recent analysis of those changes at an Education Seminar at World Dairy Expo on Friday.

In the 1990s, the coefficient of variation—which economists use to measure volatility—stood at 0.10 for all-milk price, 0.24 for corn, 0.15 for soybeans and 0.21 for hay. Fast forward a decade, and those coefficients double: 0.20 for milk prices, 0.47 for corn, 0.38 for soybeans and 0.35 for hay.

And with greater variation and volatility comes greater risk, as virtually every dairy producer found out this summer and fall as prices sky-rocketed. "The volatility in both milk and feed prices means that changes in the working capital on farms is also volatile," says Wolf.

Wolf recommends producers perform solvency stress testing on their finances to determine how prepared they are to withstand these price swings and the resulting pressure on cash flow and liquidity. He recommends that you look back and calculate cash flows for the past three to five years to get a sense of cash flow needs for your operation. Then do a forward looking cash flow with the most likely milk and feed prices, and also examine "worst-case" scenarios. That should give you some sense of how large potential losses could be.

Once you have those numbers, you can better assess what type of risk management you need to do, whether it’s self-insurance through reliance on savings and equity, forward pricing or hedging milk and feed.

Most economists say you need a debt-to-asset ratio less than 0.60. Liquidity—current assets divided by current liabilities—should be at least 2:1. "Higher is better. The question now is whether 2:1 is high enough," says Wolf. 

Fluid Milk on the Skids

Oct 05, 2012

Fluid milk sales dropped 1.7% in 2011. Even worse, because population grew, per capita sales of milk fell 2.8% to just 20.6 gallons per person.

"When price increases peaked in November 2011 at a national average of $4.11 per gallon (a 12.6% increase over the previous year), volume declined 5%, or about 11 million gallons at retail that month," says Tom Gallagher, CEO of Dairy Management, Inc. "The problem is that each time this cycle occurs, we see more and more consumers leave the category or buy less milk than they did previously due to price pressures. 

"But some consumers don’t resume purchasing when the price drops back down," says Gallagher. "Over time, we essentially teach consumers that they can live without milk.  In recent months as the prices of milk has gone down slightly, and retail prices have also decreased (+2% in March versus prior year to $3.89 per gallon), volume sales have not yet responded.  Sales are still down more than 13 million gallons for the month versus last year."

Grocery stores seem to be taking the biggest hit in sales losses, with a decrease in sales of nearly 200 million gallons. The tepid economy and slow recovery is also partly to blame, says Doug Adams, with Prime Consulting.

Food Banks, food assistance and WIC-only stores now distribute some 28 million gallons of milk annually to needy families. Analysts believe this is milk that would normally be purchased in grocery stores could families in need afford it.

Dairy Management, Inc., through its Innovation Center for U.S. Dairy, launched a $14 million effort earlier this year to get its arms around the problem. The key is that everyone in the industry—producers and processors—are involved in the effort. "We all need to own this problem," says Barb O’Brien, president of the Innovation Center. 

The Center is looking for both short- and moderate-term answers. "It’s not a simple solution; it’s not a quick fix," says Steve Maddox, National Dairy Board chairman and a Riverdale, Calif. dairy producer. The decline in fluid sales is 40 years in the making, and if the solution were easy, the industry would have already implemented it, he says.

Simply increasing generic milk advertising won’t help. When the National Dairy Board moved away from generic advertising 10 years ago, fluid sale remained flat. And even though the widely acclaimed and popular ‘got milk?’ ads continued in California, fluid milk sales actually declined.

What is the solution? In the short term, the Innovation Center is looking to shore-up school milk, work with quick-serve restaurants such as McDonald’s and Domino’s Pizza and ramp up efforts on lactose-free milk (25% of the population has or perceives it is lactose intolerant).

Longer-term, the whole concept of fluid milk needs to be rethought. Package innovation and less reliance on the gallon jug is just a start. New types of products—such as drinkable yogurts, different flavoring, different delivery methods—all need to be on the table. Some of this will require changes to Federal Orders because many of these new products are a cross-over between Class I and Class II. Some would violate current standards of identity for dairy products.

But these sacred cows must be scrutinized. In fact, many believe they can be sacred no more.

You can view my video clip on the fluid crisis here.

Lame Duck Farm Bill

Oct 04, 2012

"We’re going to get it done."

The "it" is the Farm Bill, and "it’s" going to get done in the Lame Duck session following the election November 6. So predicts Jerry Kozak, CEO and President of the National Milk Producers Federation (NMPF).

I had the opportunity to sit down with Kozak yesterday here at World Dairy Expo. He believes rational minds will prevail on the Farm Bill debate beginning Nov. 7. The reason is that Congress  and the country is facing the so-called "fiscal cliff" next year, and waiting on a Farm Bill makes things that much worse.

The debate over the Farm Bill has little to do with actual farm programs. It’s really a debate about how many dollars come out of the Supplemental Nutrition Assistance Program (SNAP)—more commonly known as food stamps. John Boehner (R.—Ohio and Speaker of the House) and the Tea Party wing of the Republican Party want even deeper cuts to SNAP ($164 billion vs. $23 billion in the Senate and $34 billion in the House Ag Committee). Democrats want no cuts to the program.

But after January 1, both sides could lose as (if) sequestration kicks. Tea Partiers would lose on some of their hallowed programs (Defense, for one) while Democrats could see even deeper cuts to Food Stamps and other social programs. So the incentive is to get a deal done now in the Lame Duck session.

For the first time in memory, says Kozak, the Farm Bill does NOT hinge on dairy policy. The Dairy Security Act, he insists, is a done deal.  "We already won in the Senate. The House Ag Committee voted down the Goodlatte amendment (which would have stripped out the market stabilization/supply management component) by a vote of 29-17. And the full committee passed the entire Farm Bill 35-11," he says.

Kozak also maintains NMPF has already done its compromising. The original DSA contained mandatory participation in the stabilization program at the $4/margin level. Only the supplemental portion of the program was voluntary. Now, the entire program is voluntary—but if producers sign in, they also agree to the dairy stabilization program.

So I asked Kozak point blank that if the Farm Bill eventually does get hung up on dairy policy—and yes, it still could happen—whether National Milk would accept the Goodlatte amendment or no Farm bill. "Probably no Farm Bill, because the Goodlatte amendment would be worse," he says.

Under Goodlatte, farms get $4/cwt margin protection insurance but no restriction on production. That could cause surpluses to grow unchecked, depress milk prices for longer periods and cause government expenditures to rise.

In the end, of course, Kozak could still be posturing. He believes he has the votes to pass the Dairy Security Act as it currently stands. And when you’re in that position, why compromise?


Vilsack Favors Dairy Supply Management

Oct 03, 2012

United States Secretary of Agriculture Tom Vilsack feels your pain. He’s as frustrated with the lack of progress on the 2012 Farm Bill as any dairy producer in the country, placing the blame (not surprisingly) squarely on the shoulders of House Republican leadership.

In a town hall meeting here at World Dairy Expo yesterday, Vilsack spent nearly two hours dissecting the Farm Bill, a petition to increase Federal Order prices and a host of other topics.

He offered no real surprises, but the roomful of mostly ag media was able to ferret out a few answers that we, at least, had not heard before.

Example 1: I asked the Secretary whether the Obama Administration would accept the dairy portion of the Farm Bill if it contained the Goodlatte amendment. The amendment would reduce that amount of milk that would be covered by margin insurance (80% versus 90%). In return, the amendment would not require producers to cut back their production or forfeit a portion of their milk checks if milk/feed margins fell below $4/cwt.)

"There is not as much support of that amendment as there might appear," Vilsack responded. "Collin Peterson (Dem., Minn., ranking minority member of the House agriculture committee and chief advocate of the Dairy Security Act) would not look favorably on that amendment."

Left unsaid was whether Vilsack’s belief that there was less support for the Goodlatte amendment was in Congress or in the dairy industry. The National Milk Producers Federation is clearly opposed. But the processors, through the International Dairy Foods Association, have been lobbying hard for Goodlatte. The Wisconsin Dairy Business Association (made up of mostly large commercial dairies) and the Minnesota Milk Producers Association (many of whose members are Collin Peterson constituents) have long argued long for the Goodlatte amendment or a reasonable facsimile. 

But Vilsack also argued that without some market stabilization component to the dairy program, government costs could escalate out of control. So he went on to speak in favor of some type of supply management. "Every time we get good prices, we see increased production. And that just creates greater stocks of dairy products on the supply side," he says.

The take-away I took from the discussion is that Goodlatte supporters need to continue to press their representatives in both the House and the Senate on its merits. House Speaker John Boehner (Rep., Ohio) has drawn a line in the sand that supply management will not be part of the House Farm Bill. So either he—or President Obama—will eventually have to bend on the issue.

You can read more on the Goodlatte amendment here.

Example 2. Vilsack also responded to his dismissal of a petition to increase Federal Order prices. Some 1,000 dairy producers had signed the petition over the last month or two. Vilsack says USDA must follow a highly technical process when granted a request for a Federal Order hearing. The petitioners must state what the problem is and then offer specific suggestions within Federal Order language on how to fix it. "The petitions don’t rise to the technical level that is needed for me to act," Vilsack says.

You can view more on AgDay’s coverage of Vilsack’s town meeting here

See You at Expo!

Oct 02, 2012

Good morning--from World Dairy Expo!

The 2012 show kicks off this morning with Ayrshires and the International Junior Holsteins in the show ring, an educational seminar on dairy employee team building at 1 this afternoon and a virtual farm tour of VanEss Dairy LLC at 2.

Even more important, Secretary of Agriculture Tom Vilsack is scheduled to make an appearance here this morning. The Farm Bill, dairy policy—and maybe even the upcoming election—will likely be topics.

Western editor Cathy Merlo, contributing editor Rick Mooney, AgDay anchor Clinton Griffiths and I will all be on hand this week to report breaking news, show results and other tidbits from here in Madison.

This eReport will be in your in-box each morning by 10 a.m. with a wrap-up report on all things Expo next Monday.

We’ll have coverage of the Vilsack press conference later today on our website, and in the eReport and on AgDay tomorrow morning.  

World Dairy Expo always seems to be the highlight of each year. And 2012 has been a doozy.

Even though milk prices are rising, feed availability will be a challenge for producers across much of the Midwest as far east as Pennsylvania. Feed prices will be a challenge for everyone.

The Farm Bill remains unresolved, and it likely will remain so at least through the election. In meetings this week, we’ll try to get at least some sense of what the prognosis for progress is.

I have a one-on-one meeting with Jerry Kozak, National Milk Producer’s Federation president and CWO, tomorrow morning. The meeting is too late for Wednesday’s eReport, but be sure to watch Thursday’s edition for my report.

We also have meetings with the folks from the U.S. Dairy Export Council and Dairy Management, Inc. (DMI). So we’ll have updates on U.S. exports for this year and into next. Our DMI meeting will focus on fluid milk—and what can and should be done to turn around declining sales.

Plus we’ll be covering the virtual farm tours and educational seminars all week. Sustainability, mating decisions, expansion and unique business arrangements with processors will be highlights of the virtual farm tours. And everything from nutrition to genetics to milk quality will be covered in the educational seminars.

If you’re coming to Expo this week, stop by the Dairy Today booth in the main hallway leading up to the commercial exhibit hall in the Alliant Energy Center. If you’re not, check your e-mail each day this week for our updates.

It’s going to be a great week. Talk to you soon!

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