Sep 17, 2014
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Dairy Talk

RSS By: Jim Dickrell, Dairy Today

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

Dairy Margin Premiums and Payouts

Sep 08, 2014

As you contemplate enrolling in the dairy Margin Protection Program, it will be tempting to look at least-cost alternatives. But selecting those cheap premiums might not offer you the kind of protection you really need.

Mary Ledman, a dairy economist with the Daily Dairy Report, says your milk and feed basis—the difference between your actual farmgate prices and national averages—will be a huge factor in what margins you should actually insure. In a piece we posted last week, "Basis Critical to Getting the MPP Right,"  Ledman points out that to get an actual $4 margin in California, for example, producers there might have to insure for a $6.50 national margin.

The reason is that California milk prices typically trail U.S. all-milk prices by $1.50/cwt or more. At the same time, feed prices are typically higher. For example, since 2010 California alfalfa prices have been $21/ton higher than the national average.

I suspect Florida might be in a similar situation. Though its milk prices typically lead the nation, feed prices can be higher because of transportation costs. Doing some real cost analysis makes sense before signing up—and paying for—MPP insurance.

To help you do that, the National Milk Producers Federation (NMPF) has developed a MPP calculator that allows you to enter in your own prices. You can download the calculator here.

Last week, NMPF hosted a webinar that looked at premium costs and possible returns. Interestingly, based on current Chicago Mercantile Exchange futures prices, there would be no payouts through 2015. In fact, margins appear extraordinarily strong, never falling below $9.30/cwt. (The average milk-feed margin since 2004 has been $8.50, ranging from less than $3 in 2009 and 2012 to $14 in 2007 and 2014.)

Nevertheless, farmers know markets can change on a dime. Even an early frost this fall could threaten more than a billion bushels of corn, says Brian Doherty, a senior market analyst with Stewart-Peterson, Inc. And who knows what global dairy prices will do if Vladimir Putin continues his adventures in Ukraine.

At the very least, consider signing up for the $4, catastrophic coverage this year and next. All it costs is the $100 administrative fee. Plus, doing so qualifies you for future increases to your farm’s production history.

Note: Your production history will be the highest milk production you had in 2011, 2012 or 2013. USDA will increase your production history by the amount that national milk production increases. After this year, if you don’t register for the program, you won’t be eligible for that increase until the year following sign-up.

NMPF has also calculated annual premiums at various herd size and margin levels. For example, for 90% coverage with a $6.50 margin, a 100-cow herd producing just under 20,000 lb. of milk per cow would have an annual premium of $1,204.

For that same coverage, a 1,000-cow herd, producing 24,600 lb. of milk per cow would have a $55,433 annual premium. That’s considerably more per cow than the small herd. But that’s because the larger herd is insuring more milk per cow and the premium is 29¢/cwt for production above 4 million pounds compared to 6.8¢/cwt for production below 4 million pounds.

Economists at NMPF then went back to 2012 to see what kind of payouts would have occurred. Remember, 2012 had very low margins the middle part of the year. The 100-cow herd would have had net MPP payments of $23,660. The 1,000-cow herd would have had net payments totaling $259,984.

Robotic Rotary Parlor is True Capital for Labor Trade

Aug 25, 2014

These parlors will have to be priced to cash-flow, and or they simply won’t sell.

As you head south on curving State Hwy. 27 from Sparta to Cashton in western Wisconsin, you can’t help but be struck by the beauty of the landscape left untouched by glaciers 10,000 years ago. The deep green of fourth-crop alfalfa, tasseled corn and lush, canopied soybeans on bottom land are set against hardwood-covered ridges for 15 glorious, winding miles.

Interspersed in this late summer bounty are dairy farms of all stripes: Conventional tie stall barns, freestall barns, organic grazing dairies—and deeper into the coulees, Amish hillside bank barns, goat dairies and maybe even a sheep dairy or two. This corner of Wisconsin is perhaps the most diverse dairy area in the nation. And come March 2015, the area will be home to the largest, most automated milking parlor in the world.

GEA pic of rotary
The DairyProQ parlor from GEA, the first of its type in North America, has a robotic arm at each stall, which will disinfect and prep teats, attach units, milk, post dip and sanitize the units after each milking.

Last week, Nick Mlsna and his family had the official groundbreaking for their new, 72-stall, fully robotic rotary milking parlor. The DairyProQ parlor from GEA, the first of its type in North America, will have a robotic arm at each stall, which will disinfect and prep teats, attach units, milk, post dip and sanitize the units after each milking.

The Mlsnas currently milk 900 cows, and will go to 2,000 when the new parlor and cross-ventilated freestall facility is completed next year. The Mlsna’s currently employ 21 employees, milking 3X with a three-person crew working each eight-hour shift. The Mlsna’s hope to retain all 21 employees after the expansion, but will need only one person per shift in the robotic parlor to monitor cow flow, unit attachments and milk out.

This is true capital for labor replacement. Milking labor savings will have to pay for the new technology for it to become widely adapted. With milking labor now costing upwards of $13 to $15 to even $18 per hour, those saving should be substantial. If three fewer milkers are needed per hour in a 72-stall rotary and labor and benefits are $15/hour, the simple math says savings could approach $400,000 per year.

Milking should also be more consistent with far less procedural drift that often occurs with humans working long, eight- to 10-hour shifts, says Matt Daley, CEO of GEA. That should result in better milk let-down, faster milk-outs and possibly a pound or two more milk.

But it’s unlikely the rotaries will be able to rely on a 15% jump in milk production that the box robots on smaller dairies often see. On those smaller dairies, cows are usually coming from 2X milking to being milked 3X. In these larger parlor herds, most are already being milked 3X.

Partial budgets done by the University of Minnesota show that labor saving alone aren’t enough to cash flow the box robots. That’s because they usually only replace one person or maybe two, and those folks are still employed on the farm doing other things. So to cash-flow, the robots must harvest more milk per cow. Plus, milk price plays a huge role. The robots typically are profitable at $20 milk, but budgets bleed deep red if prices drop to $15.

GEA officials weren’t willing to say what the rotary robotics will cost. That’s somewhat understandable, and yet surprising, given this is the first-ever North American installation and the eyes of the continent will be on this facility. All they’d share is the rotary robots will be substantially less than the boxed units.

European experience with smaller, 40- to 60-stall robot rotaries shows they milk effectively and efficiently. Now, dairy farmers here will want to know if they profitably cash flow. Many will drive south down Hwy. 27 over the next few years for the answer. They won’t be doing it for the scenery.

Dairy’s Biogas Roadmap to Where?

Aug 11, 2014

The goals are laudable, but the reality on the ground is more sobering.

On August 1, the White House released its Biogas Opportunities Roadmap designed to promote biogas production on dairy farms that also incorporates mountains of institutional and consumer food waste that now is landfilled.

The dream is to tie country and city together to generate energy, reduce methane emissions, lessen the burden on landfills, save costs and create revenue along the way.

The "Roadmap" has the support of both the National Milk Producers Federation and the Innovation Center for U.S. Dairy. The goals are laudable: To help reduce the dairy industry’s contribution of greenhouse gas emissions by 25% by 2020.

Last year, the Innovation Center released a study that suggests what’s good for the environment also could be good for farmer’s pocket books. The study suggests there is $2.9 billion in on-farm revenue potential for anaerobic digesters that co-digest cow manure and food waste.

But the reality on the ground is more sobering. Even Tom Gallagher, CEO of The Innovation Center and Dairy Management, Inc., acknowledges "the landscape is littered with [biogas] failures." Over the past 20 years, farmers have been sold equipment that was not easy, if not impossible, to sustainably operate. Then there were the failed business arrangements and the often temporary, subsidized utility "green" programs that soon disappeared along with economic viability.

"Like other new technologies, there were a lot of failures," Gallagher says. But he also points to Europe where biogas production is no longer viewed as experimental or risky. "There are 7,000 digesters in Germany," he says.

The White House initiative is meant to jump start all that here. According to the Aug. 1 press release, the Biogas Roadmap will:

• Foster investment in biogas systems: USDA will lead efforts to better understand and track the performance of anaerobic digesters, seek opportunities to broaden financing options, and review Federal procurement guidelines.

  • Strengthen markets for biogas systems and system products: Example-- dairy farms of all sizes could enhance their revenues through nitrogen and phosphorus recovery.
  • Improve communication and coordination: USDA will establish a Biogas Opportunities Roadmap Working Group, with a goal to identify and prioritize policies and technology opportunities by August 2015.
  • Promote biogas use through existing agency programs: Leveraging existing programs will provide a way to enhance the use of biogas systems in the U.S., and leveraging research funding, and strengthening programs that support the use of biogas for clean energy, transportation fuel, and other bio-based products.

Gallaher adds that having the White House behind this initiative will put methane digestion on equal footing with other green technology such as wind and solar. That support is critical with the investor community. With the Federal government now behind biogas, private investors are more likely to invest in biogas research, development and infrastructure as they have with wind and solar, he says.

Let’s hope Gallagher is right. Most dairy farmers I talk with are highly skeptical that methane digestion will ever be a viable option. There simply has been too many equipment and energy agreement failures for them to think otherwise.

For this to work, USDA, the Department of Energy or somebody will have to demonstrate biogas is a viable, long term solution. I’m willing to go anywhere, any time to report on biogas success stories. Too often, though, these promising leads turn into failure and disappointment.

Why Can’t the Midwest Keep Up Its Dairy Share?

Jul 28, 2014

The results of a new study confirm what most farmers and processors know – along with a few surprises.

Editor’s note: Dairy Today is conducting our own expansion survey. We’d like to know your attitudes toward expansion, whether you plan to grow or not. And if you don’t, the reasons why. Take the 10 minute survey by clicking here

Anyone and everyone who has traveled the back roads of the western Corn Belt know instinctively that this is a great place to milk cows. Productive land, open space, cow-friendly climate and agricultural infrastructure not only dominate the landscape, it is its very fabric.

And yet, milk production in Iowa, Minnesota, Nebraska and North and South Dakota as a share of national production is just half of what it was 40 years. This five-state area is producing just 8% of the nation’s milk, down from 16% in 1970. Though production has rebounded somewhat in the last decade, the region is still a shadow of the dairy powerhouse it once was.

There are signs of life and rejuvenation along Interstate 29, which runs down the eastern edge of the Dakotas and the western border of Iowa. Both cows and processing have migrated to this "I-29" corridor, proving that commercial dairy production and manufacturing can survive and thrive in the region. But why hasn’t dairy taken off in other areas of the region?

The Midwest Dairy Association (MDA), the regional checkoff program for these western Corn Belt states plus Arkansas, Illinois, Kansas, Missouri and eastern Oklahoma, decided to find out. MDA commissioned Blimling and Associates and to conduct a comprehensive, competitive market analysis.

The idea stemmed from now-famous Bain Study, which showed that the United States is best positioned to fill growing world demand for dairy products, says Mike Kruger, MDA’s CEO. "So we asked the questions: What is the Midwest’s share of that growth, and what’s the dairy checkoff’s role in that market opportunity?"

The result is a 217-page report, "A Path Forward," that looks at both dairy farm and processing competitiveness compared to other growing dairy regions. The results confirm what most farmers and processors know. But it also has a few surprises, and some sobering spreadsheets on what an investment in a dairy operation requires.

For example, we know that the western Corn Belt enjoys strong milk price premiums, often beating comparable manufacturing areas by 50¢ to $1/cwt. But that’s a double edge sword—making dairy products manufactured here less competitive in national and global markets.

We also know that the western Corn Belt enjoys cheaper feed, last year’s massive winter-kill of alfalfa notwithstanding. South Dakota’s five-year ration cost average (2008-2012) was a hair over $6.50/cwt. of milk produced. That’s 25¢ better than Wisconsin and $1.25 better than Idaho.

The real shock came in dairy facility building and land costs, which have doubled in the last decade. A 3,000-cow, cross-ventilated facility with 100 acres for the site and 500 acres of cropland in South Dakota now costs upwards of $25 million. A comparable facility in Wisconsin or Michigan is $22 million. The difference is more expensive land farther west: $12,000/acre in South Dakota versus $6,000 in Wisconsin and Michigan.

In all these areas, only a select few dairy producers have the financial leverage to build facilities of this scale. So it’s going to be up to everyone else to decide if they’re willing to grow incrementally, from 80 cows to 150, from 150 to 300, and so on.

MDA’s "Path Forward" is just the first step. Western Corn Belt states must decide if dairy is their future. Dairy farmers are at the core of this decision, because only they can make the financial investments on the ground to make it happen.

Western Corn Belt farmers have faced this question for the past four decades. Often, they have said "no." But the time is fast approaching for a collective "yes." In another decade, it will be too late.

Is a German Monk Impacting Your Dairy’s Bottom Line?

Jul 14, 2014

Environmental effects may be behind the wide difference in the performance of your first-calf heifers, but don’t discount genetics.

If you’ve ever taken the time to chart the performance of your first-calf heifers, you’ll see a wide difference in performance. Even in the best managed herds with 30,000 lb. herd averages, one heifer will produce 36,000 lb. of mature equivalent milk while a heifer lying in the next freestall is producing 20,000.

Roughly 70% of the variance is due to environmental effects: A health event early in the calf’s life—pneumonia, scours, whatever—can affect how she performs in the parlor later in life.

But don’t discount genetics, says Pat Hoffman. Hoffman was a heifer specialist with the University of Wisconsin for years, and is now a Dairy Technical Specialist with Vita Plus Corporation.

Hoffman explains the other sources of performance variation are both genetic: parent average and Mendelian sampling effect. (Each contributes about half of the genetic variance.) Parent average is the average genetic value of the sire and cow. The better the parents, the better the average.

The Mendelian sampling effect is where that German priest comes in. Father Gregor Mendel, through experiments with pea plants in the mid-1800s, discovered how genes sort themselves at fertilization. When a sperm fertilizes an egg, the genes of each are recombined. On average, that recombination will be the average of the parents’ genetics. But any one individual can get any combination. Over a population, the recombination occurs on a bell curve with most getting the average and just a few on each tail of the curve getting the best or poorest combinations of genes. (Note: A.I. bull studs rely on Mendelian sampling to find the best next generation of sires. And that’s how and why they only bring back one in 10 bulls to active, proven line-ups.)

In practical terms, roughly 20% of calves get the best combination of genes and another 20% get the poorer combination of genes. It might seem counterintuitive, but as herd averages rise, the Mendelian effect takes on greater value, says Hoffman.

When herd averages were just 10,000 lb./cow, a 20% variance was +/- 2,000 of milk. At a 20,000 lb./cow average, the variance is 4,000 lb. And at a 30,000 lb./cow average, the variance is 6,000 lb. So the 24,000 lb./cow versus 36,000 lb./cow difference is actually to be expected, says Hoffman.

"There are numerous genetic research papers on the Mendelian effects on milk production and estimates are different within each research paper. But random genetic effects account for more than 5,000 lb. of milk in first lactation," he says. "At $20 milk, this variance is of high economic value."

"In fact, this Mendelian sampling effect has more value than ever before. And it may be growing [as we improve a herd’s genetic level] and not shrinking."

What you do about this is another matter:

Scenario 1. If you need every heifer as a replacement, your only decision is what you breed your heifers to. Low genetic value heifers merit cheap semen or beef semen (to produce dairy beef).

Scenario 2. If you don’t need all the heifers for replacement, the decision gets trickier because it now costs $2,000 (give or take) to raise a heifer to freshening.

The key is knowing which are the genetically poor heifers. If you have good records, parent average is probably good enough for Scenario 1. If you’re actually going to cull animals, parent average may or may not be.

Hoffman points out that parent average is dependent on the accuracy of records—knowing who the sire and dam are. Plus the reliability of Parent Average for production traits in a commercial herd is roughly 20 to 25%, says geneticists. Hoffman prefers genomic testing because it has higher reliability (65 to 70%) and will correctly identify parents.

But geneticists point out that a tripling of reliability does not equate to a tripling in accuracy. To get to the issue of accuracy, you have to take the square root of the reliability. So the accuracy of Parent Average for production is about .5. The accuracy of genomics is .84. Consequently, genomics is more accurate, but not 3X more accurate.

And then there’s the issue of cost. Genomic 6K or 9K chips cost in the range of $50. But to find the bottom 20% without using parent average, you have to test everybody. So the $50 test becomes $250. Perhaps that makes sense in Scenario 2 if you’re trying to save $2,000/head in rearing costs. It probably doesn’t in Scenario 1—unless you’re a registered breeder also trying to find the very top-end heifers for flushing and sexed semen treatment.

You can read Hoffman’s entire presentation on heifer performance variation here.

For more on genomic testing:

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