For perhaps the first time since the Great Depression, February milk prices might not even cover the cost of feed to produce that milk.
Mike McCloskey, owner of Fair Oaks Farms at Fair Oaks, Indiana, laid out the numbers at Dairy Forum 2009 in Orlando last week. McCloskey milks about 15,000 cows and also serves as CEO of Select Milk Producers in the Southwest U.S. and Continental Milk Producers in the Midwest.
With feed costs at 10¢/lb of dry matter, McCloskey says it costs about $9.50/cwt of milk produced to feed the cow, her replacement and her share of the dry cows. "Our milk check in the West will be $9/cwt in February,” he says.
"How we used to cull cows was based on fixed cost, and the theory was to always run the dairy full. Now we can't cover our variable costs,” he says.
A cow milking 50 or 60 lb./ day was still milked because she was still contributing to cover fixed costs. "In February, a cow milking 50 or 60 lb/day will actually be losing us money,” he says. "And I think we will see a tremendous amount of culling.”
That prospect, where the milk price will not even cover the variable cost of feed let alone labor, electricity and semen, is one that very few dairy producers alive today have ever faced.
The milk-to-feed price ratio is the worst since, well, just about ever. In 2008, M-F ratio dipped below 2.07 in March and has never recovered. In fact, since 1985, the M-F ratio dipped to 2.07 or less just twice, in May 1996 and May 1997.
The difference, even in those years, was that feed costs were still relatively low with milk prices dragging the ratio down. In 2008 and now in 2009, it's the combination of both high feed prices and low milk prices that are creating a double whammy of red ink.
Albert DeVries, with the University of Florida, has developed some sophisticated culling decision tools. They account for a whole host of factors, from current production level, days in milk, open status and feed costs. For more information on the program, click here.
"There are still going to be some cows that are going to pay for themselves, especially those early in lactation with feed efficiencies at 1.8 or 1.9,” he says. "But there will be more open, late lactation cows which will be candidates to cull faster now.”
These cows, with feed efficiencies of 1.1 or 1.2, will be barely covering feed costs. The dilemma is whether you cull these cows even if you don't have a fresh heifer to replace her, he says.
Even though Milk Income Loss Contract (MILC) payments will resume in February, they'll only offer a partial recovery of costs. For the University of Wisconsin's estimate of MILC payments, go to: http://future.aae.wisc.edu/collection/software/current_MILC_est.xls
The coming rough ride will be a tremendous wake-up call on the importance of risk management. Either producers maintain huge piles of cash and liquidity to weather these kinds of negative cash flow, or they participate in forward pricing to protect their margins. (Follow this link for information on Livestock Gross Margin-Dairy insurance. Each has its costs, but this coming storm has the potential to put highly leveraged producers or those unable to tap equity out of business.
"This is a least-cost business,” says McCloskey. So producers have to maximize efficiency, understand their costs, and use risk management tools when the market presents opportunities.
His advice: Don't panic. Keep your long-term strategic goals for your business front of mind when making any kind of short-term, tactical adjustments. And if you haven't already done so, vow to manage future volatility when the market presents opportunities.
Good advice. Good luck.
--Jim Dickrell is editor of Dairy Today. You can reach him via e-mail at email@example.com.
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