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Experts Discuss Dairy Farmer Woes

posted on January 28, 2010


Coming up on Market to Market, prior to the global recession, growing foreign demand drives milk prices to record highs and prompts dairy producers to expand their herd, but in 2009 the export market goes dry. Dairy prices fell well below the average cost of production. We'll examine the economic outlook for America's dairy industry on a special edition of Market to Market next.

Funding for Market to Market is provided by Pioneer Hi-bred, working with growers to help put the right product in each field. Pioneer ... science with service, delivering success.

From Madison, Wisconsin, this is a special edition of Market to Market: The Rural Economic Summit.

Pearson: Welcome to the Pyle Center on the campus of the University of Wisconsin. I'm Mark Pearson. We're going to depart from our usual format on Market to Market this week to examine the impact of the recession on rural America. This is the second of four special road editions we'll produce in four Midwestern states over the next few months. And in each economic summit, we'll hear from experts in different sectors of the rural economy. Tonight we're coming to you from the College of Agricultural and Life Sciences Economic Outlook Forum. We've assembled a distinguished panel to answer questions both from our live audience here in Madison and those that were submitted on line. We'll get to our panel in just a moment, but we want you to know why we're devoting an entire episode to an examination of the rural economy. With most media coverage of the recession focused on Wall Street, little attention has been devoted to the downturn's impact on Main Street, and few sectors of the American economy have been affected by the global recession more adversely than the dairy industry. For the last twenty years, dairy producers have ridden an economic roller coaster in price volatility. Just in the past five years, dairy prices have shot to record highs in 2007 before falling dramatically amidst a global recession in 2009. According to Bob Cropp, an emeritus professor at the University of Wisconsin-Madison, overexpansion and falling demand sent the dairy industry into a tailspin.

Cropp: The major factor was a loss in dairy exports. That's relatively new in the dairy industry because they go back four our five years, exports were incidental. Our buyers were the Asian markets, what have you, or Mexico even, our largest customer. Exports all fell off. And it was -- putting another five billion pounds of milk back on the domestic market that we had to clear about a 3-percent increase in supply.

Pearson: Collapsing export markets were the second jab of a one-two punch administered first by rising dairy inputs. Previously cheap feed for dairy cattle gave producers a reliable input price, but uncertainty returned once skyrocketing grain prices ripped through the livestock sector. Looking into his crystal ball, Cropp sees the coming years as an opportunity for an economic rebound in the dairy industry, particularly in the Midwest.

Cropp: But long term I come back and simply say that the economy will recover. Rural exports are picking up. It's a bright industry for the upper Midwest and will come out of these tough times. It will take some management skills at the farm level and some risk management skills, but it's a pretty good industry.

Pearson: Dairy prices have rallied in recent months and currently are up about 50 percent from the 2009 low. Nevertheless, rural America has not entirely escaped the worst economic downturn since the Great Depression. Here to help us assess the impact and prepare for the future are some of the top experts in key sectors of the rural economy. Dave Oppendahl is an economist at the Federal Reserve Bank of Chicago. He directs the Chicago fed survey of agricultural banks on lands values and credit conditions and publishes the results in the ag letter. Bill Bruins is president of the Wisconsin Farm Bureau Federation. He's also the general manager of Homeland Dairy, a family partnership consisting of 600 cows and 1,300 acres of crop land. And Bob Cropp, professor emeritus in the department of agriculture and applied economics here at the University of Wisconsin-Madison. As a dairy marketing and policy specialist, Bob provides a monthly dairy situation and outlook report. Gentlemen, we appreciate all of you joining us here for our second rural economic summit. Let's start, Bob, with you and what you see ahead in this dairy cycle that we're in. Obviously, as you pointed out in the feature just a moment ago, we had a huge export market. I think the dairy export council wrote that China had an increase of 20 percent in dairy imports between 2007 and 2008. That seems like a big number, but you start looking at that one deeper, and that was all that milk produced here in America's dairy land, just that increase. So we had those kinds of opportunities facing us in one year, and then the next year some consumer issues and china and, of course, global destabilization, and it all disappeared. Where does that leave us on the export front? What do you see ahead?

Cropp: Well, it's actually picking up a fair amount the last couple of months, all the commodities, skim milk powder, cheese, dry whey, whey products, and butter all had increase -- substantial increases partly due to the better economy worldwide. China's economy is improving some, the Asian market, others. They're back and buying. And China and the Asian market was about the fourth largest customer. Mexico, our largest, they're coming back some and purchasing -- substantial increase in purchasing powdered milk this past month. And all world market prices are coming up as a result of that. The supply of milk in the world market, Australia is not coming back like we thought. They're going to be down in production. New Zealand not up as much. They account for about 35 percent of the exports. European Union situation has changed. Their production is down. They stop export subsidies. So world market price is improving. Demand is picking up a little bit, so we look for maybe -- we export probably about 7 percent of our milk supply in 2009, get back to maybe 9. We were up to almost 11 in 2008. So it's going to be a substantial factor in improving milk prices to farmers, the return in exports.

Pearson: A lot of the focus has been on reduction of supply here in the U.S. we had the cooperatives working together buying at a quarter million dairy cows. It certainly has an impact on supply, but numbers in the Midwest actually went up. Wisconsin production actually was up in '09.

Cropp: Yeah, Wisconsin actually since 2005 has been in an economic recovery in the dairy. We were declining from about 1980 down. We came back this last year almost 3 percent of production. There's been a lot of modernization expansion. But the fact is that we raise a good share of our feed and I buy it and we got higher milk prices than the west. So the areas that bought their feed at lower prices had more financial stress than the upper Midwest -- feed and stronger milk prices.

Pearson: All right. I want to come back to volatility and those issues in the dairy sector with you coming up in just a moment. Let's talk about the health of Midwest dairy producers right now. Dave Oppendahl, with the Federal Reserve Bank, you track what lenders are saying out there. What are they saying these days about not just the dairy sector but the general farm sector in the upper Midwest in your states?

Oppendahl: The survey of agricultural bankers that we do and publish an ag letter come out last in the third quarter for 2009, so I don't have anything covering through the end of the year. But certainly there was a deterioration in credit conditions in the first three quarters of 2009 and more loans were starting to have to be refinanced and repayment rates were down a little bit. So definitely some additional stress based on the low prices for dairy and hogs as well. There was a little bit better situation for corn and soybean producers. But the cost of the feed then being lower helped dairy producers, so it's kind of interdependent there. But definitely it's harder to get a loan if you're struggling obviously, but there were still funds available according to the bankers.

Pearson: All right. A lot of liquidity out there, then, as far as credit concerns for producers who do need to expand?

Oppendahl: I think that those that are in a good position and, as was mentioned, are good at managing their operations, those are the ones that would be better at getting loans. And the issue, I guess, isn't so much the available of credit, the rural banks, because they faired a lot better than the large national banks during the financial crisis.

Pearson: Good point. All right, well, let's visit now with the dairyman himself, Bill Bruins. He's president of the Wisconsin Farm Bureau Federation, and he manages a good sized dairy operation himself, a family operation. Bill, tell us about the last twelve months. What have they been like on homeland dairy's operation?

Bruins: Well, there was a good stretch of time in 2009 that I became really close with my banker, and I had to call him and check to see if I still had a pulse. But we saw some tough times coming in 2008, and we actually had most of our milk priced before the calendar turned.

Pearson: And did you price it? Did you use the board? Class III milk futures? Did you forward cash contract? What do you do?

Bruins: We hire a broker for 8 or 9 cents a hundred weight, and we go to bed and sleep at night.

Pearson: That's about as simple advice as you can get. Input costs were soaring, though. Corn prices were higher. You have a lot of your own production.

Bruins: We do. We grow most what we need to feed our cattle and, as Bob said, that's where Wisconsin and the Midwest have come out with a leg up in this current dairy crisis.

Pearson: All right. Bill, you're a family operation. Do you have someone coming in that will replace you at some point to keep homeland dairy going?

Bruins: Well, we have a partnership and our two sons are fully vested in the partnership. They still give me the title of general manager. They still let me talk but they don't listen too much anymore.

Pearson: Sure. I understand. You're, kind of, of counsel then in the whole operation.

Bruins: That's right.

Pearson: All right. Well, we're glad to have time to make available here. Now put your other hat on. Put on your hat as president of the Wisconsin Farm Bureau Federation and tell us from that grass-roots organization what your outlook has been and how you think we reacted in 2009, the government, the CWT, to the whole -- you know, we were looking at $9 mailbox milk price here this year.

Bruins: We're a general commodity farm organization, and so we do -- we have more members than just dairy farmers, but dairy is still king in our organization. And we pulled our dairy community together early on in the year to talk about what we can do for our producers short term to help them all survive. So we work hard at that and I think -- I think our members came through in really good shape for the most part. Balance sheets took a hit, obviously, but the mood at our state annual meeting was great, optimistic. As most of us are as farmers, hope springs eternal.

Pearson: Absolutely. Well, certainly dairy prices soared to record highs back in 2007. But as the recession deepened in rural America, producer prices fell off the cliff in 2009, as bill alluded to. Dairy producers responded to weak demand by cutting their herds nationwide. But according to the USDA, dairy cow numbers declined 2.6 percent nationally from November of 2008, but not here in the Midwest. There researchers found more cows were being milked than the year before, and here in Wisconsin, for instance, milk production actually rose 4.5 percent in 2009. An operation reflecting the growing trend is the crave brothers dairy near Waterloo, Wisconsin. As producer Art Hackett discovered, low prices haven't made life easier but years of improvements at least made $9 milk survivable.

Hackett: When the four Crave brothers began a major expansion of their farm about seven years ago, the goal was building a better dairy farm.

Crave: We thought this is an opportune time in our career to take the equity we've had and capitalize on that equity to develop a farmstead that is better than anything we've had in the past.

Hackett: One of the first things the Crave brothers built was an on-farm cheese factory producing specialty European style cheese such as les frere and soft mozzarella. Then came bigger barns with room for larger framed cows. They partnered with an electrical contracting firm to build a digester to generate power from the methane bubbling from composting manure.

Hackett: Now, that was a time when milk prices were pretty darn good.

Crave: Yeah, that's right. We knew they wouldn't be good forever. Nobody anticipated they'd fall right off the table like they did the last year, though. We bled for a while, not as bad as some folks. Yeah, it's been a really tough last year, year and a half.

Hackett: But Charles Crave, who handles the business end of the farm operation, says the improvements have been paying off during the downturn.

Crave: Half or more of our milk is used in our cheese production, so being seasonal cheese, during the fresh mozzarella season, more of our milk is used.

Hackett: And remember, the craves -- that's Charles' brother George scooping curd out of the vat -- own the cheese factory, getting the added value of a finished product rather than selling milk as a bulk commodity. And the varieties of cheese the Craves produce compete with European imports, which are at a disadvantage because of a weak dollar. Then there are efficiencies built into the process.

Crave: We can take our milk stored in this milk silo out of the spigot and directly hook it to a pump which pumps that milk directly underground to our cheese factory 100 yards away.

Hackett: Another pipeline returns whey from the cheese plant to the farm. It's mixed into the feed for the cows. The material and the profits stay on the farm and in the family.

Crave: And I told a lot of folks if you make an investment eight, nine, ten years ago, you'd like to see it starting to pay off after that length of time. And fortunately for us, the cheese factory has helped us through this last year.

Hackett: The manure digesters are another project which adds value to the farm. They pull the methane from composting manure and use it to power a turbine which generates electricity. Crave says he's not in it for the electricity. He's interested in what's left over, a composted residue from the process is used for bedding for the cows.

Crave: We have cows that have longer lives than a lot of herds, and a lot of it has to do with how comfortable they are. It's very warm in the winter. You know, today if you were laying on sand for bedding, that wouldn't be so cozy. But the cows laying in here, they're nice and comfy.

Hackett: University researchers like to point to the Crave brothers' farms as an example of what can be done to make a farm more energy and economically efficient. But crave says it takes a certain type of operation for the system to work.

Crave: One of the things we have is we have four partners. I've got a sister-in-law with twenty years experience in the milk marketing business. So to have those resources in house is a tremendous asset. There's probably been as many of these ventures which have failed as which have succeeded in the last decade.

For Market to Market, I'm Art Hackett. [ applause ]

Pearson: All right. We appreciate that and are happy to say Art Hackett is with us here at the University of Wisconsin in the Pyle Center today. Appreciate that report from Art. We're producing this week's show, of course, on Wednesday in conjunction with the University of Wisconsin's economic outlook forum. And so far during this very short week, grain prices continue to be under pressure from record crops last week's USDA annual production summary. And as of Wednesday's close, March wheat was down more than 12 cents while the nearby corn contract moved nearly a nickel lower. The agriculture department also pegged 2009 soybean production in record territory. And the large crop in South America all but assured prices retreated again this week. As of Wednesday's close, March soybeans finished nearly 25 cents lower while the nearby meal contract was down $5.50 per ton. Of course, producers and representatives here in the dairy sector are keenly aware of the sustained rally occurring in their commodity, and this week was no exception, as nearby class III milk futures rose 10 cents while the deferred contract was up 15. Of course, a break in feed cost is a welcome development in the livestock sector where February cattle futures -- let's talk about cattle futures first. They were down 25 cents. Feeders were up $1.23. Good news for those bull calves. The February lean-hog contract was up 48 cents. Last week's USDA production summary caught a lot of the trade off guard, but it was a welcome reprieve in the livestock, poultry, and dairy producer community. Bob Cropp, to what extent -- as you look at the dairy industry right now, we talked about class III milk futures and their move. It seems like for much of my lifetime, we had -- milk prices were simple. We had the federal milk marketing orders. We had ground zero in Eau Claire, Wisconsin. And now literally in the last -- since 1990 it's been feast or famine in the dairy sector price wise.

Cropp: Well, the big thing of that is the change in the dairy price support program that kicked in, in 1950 and supported the price at a percent of parity. And in fact, in the '70s we practically doubled the support price. It resulted in expanded production and surpluses and in 1981 made a major change in dairy policy. Went off of that where Congress set the support price based on government expenditures and cost. Put it this way: support price was $13.10 in 1981; today it's about $9.30. So really market forces drive prices today. There's problem with -- no question about it. But that volatility and change we've seen is greatly due to a price support program that really has no impact anymore as far as I'm concerned. In fact, it may actually hinder some things that are going on.

Pearson: You don't expect the volatility to change?

Cropp: I don't see that change. Dairy is a very sensitive market. I mean it's a perishable product. There's a fine line between too much and too little. It depends upon domestic demand, international markets. It doesn't take big changes to make big change in prices. The Secretary of Agriculture, Vilsack, has got a committee that's supposed to look at volatility, et cetera. Maybe they'll come up with something. The 2012 farm bill may introduce some things, but really it's pretty difficult unless we have a drastic change in policy, which I don't think we're going to go that route, something like a Canadian program or something. So it's going to be there. So dairy farmers need to learn how to manage the price risk, and there's tools to do it. And so there's a lot of talk about maybe that's the way we need to move is make the price risk management tools more user friendly and have farmers to manage some of this price risk, because it's not all bad. As Bill point the out --

Pearson: Absolutely.

Cropp: -- we fared fairly well, you know, with -- there's opportunities for better prices too. So I think they might look more at some of that. Come back to -- orders, I think everybody is pretty unhappy with some things. We may see some pricing structures that may change things a little bit, but I think price risk management is pretty important.

Pearson: As you look at this thing, Bob, going forward, we mentioned the quarter of-a-million-head buyout, the CWT buyout for 2009. It's going to have a little bit of an impact on the beef market. Hamburger demand has been phenomenal, so really not a whole lot. Do you see another buyout as we go into 2010, or do you think we're in balance?

Cropp: Well, they might. I don't know. -- elevating that whole program. The good part about that is that cow slaughter last year was up something like 12 percent but beef slaughter was down. So the total amount was not a big impact. They're evaluating their whole CWT program. They're trying to make it more effective. You've only got about 65 percent of the milk participating, you know, financing that program. So whether they have another one or not, I don't know. But I think you're going to see cow numbers continue to climb with our without that this year with some exiting in the financial stress a little bit in 2010.

Pearson: And still be more regionalized, maybe more production being put on here in the Midwest particularly in areas of Wisconsin?

Cropp: Yeah. We do not see a major exiting here. It might be, you know, some increase in that. But there's the financial stress and greatly all the westerns. Every one of them is down. Even Texas now was growing. We see cow numbers drop about 4 percent there. And it's going take a while before, with that equity loss, before you see any major expansion. There will be some. California will probably increase production this year but not come back where they were.

Pearson: All right. Well, it will be interesting to see what happens. Dave, overall from your standpoint looking at what the Federal Reserve is thinking -- and I read your ag letter. You were talking about maybe some increased liquidations and so forth. Your feel for the dairy sector going forward for 2010?

Oppendahl: It's certainly going to be better than it was last year. There's, you know, with milk prices higher, that's going to get better cash flow, and the operations are going to be able to maybe recapitalize a little bit. I guess in our surveys, you know, the stress on dairy can be seen in higher numbers of loans that are in trouble and there may be some liquidations out of that. But as we've already heard, it seems the worst has passed and it's more a manner of managing through the implication of the loans that are there and those that have higher debt-to-cow ratios are going to have more challenging time ahead of them than those that stay lower in that area.

Pearson: Of course, that's always critical for an operation of -- in the livestock sector anywhere in agriculture, where we've had to look at traditionally narrow margins. But farmland values have been phenomenal. They've shot up dramatically. We saw a pullback in 2009. What are your lenders telling you about farmland values?

Oppendahl: The values have been down last year, and USDA's numbers have shown that as well. And it looks like, based on what the lenders were saying, that there's kind of a mixed market in the last part of this year. There were, you know, down quarters for the first part of the year, and then the third quarter was up a little bit from the prior quarter but still below a year ago. So there's hot spots out there where high quality land is still bringing pretty high value. But at the same time there's other ground that's not maintaining its value, and so it's really very mixed, especially when you think about in Wisconsin the recreational land has been soft because of the overall economy as well. So there are a number of things that are going to hold land values from rising very much.

Pearson: Bill Bruins, bring it home. As a producer, your operation, tell us what kind of an impact -- are you looking for land to buy? Is there much land movement in your area?

Bruins: There are pockets in Wisconsin where land values have really gone up a lot, and rent rates have followed suit. So dairy farmers need a land base to get rid of their nutrients from the cattle. So if you have that land base secure, you're in pretty good shape. So that's going to be somewhat of a limiting factor. But I think for the most part, the dairy industry in Wisconsin is in pretty good shape with the land base.

Pearson: All right. So you don't see much expansion there. And as far as you utilizing tools, you mentioned you hire a broker, 8 to 10 cents. What a deal. It's a great way to control risk and take advantage of volatility.

Bruins: Well, I oversimplified a little bit. You know, we try really hard to maximize our efficiency on the farm, to increase production per cow. And even though our cows we're told are worth $700 less today than they were a year ago, we still treat them the same. We still try to feed them as good as we can, to get as much milk as we can. Even though the land values have declined somewhat, we're still going to massage everything we can out of that acre of ground.

Pearson: Absolutely. On the input side -- on the crop input side, costs are coming down a little bit there, so we've got a break on the corn price and hopefully a break on the inputs.

Bruins: On fertilizer costs, we're seeing quite a substantial break from a year ago. Fuel prices are going to be maybe up slightly from a year ago. But overall our cost of doing business is going to be improving this year.

Pearson: All right. We've got one minute. Bob Cropp, kind of wrap things up for us. 2009 a tough year with some severe lows, as you noted. A 50-percent improvement by year end. Look for better times ahead for 2010?

Cropp: Continuous strengthening. You even mentioned the futures where it was. If you take the average of that, you've got a base price of about 1545. We were 1307 last year. I'm about in the same ballpark. By the end of the year start out with maybe high 14s on the base price and 15 something on milk price. End of the year, high 16s and get up to the 17, 18. But like I said here, it's going to take a couple years of good prices to build back some of the lost equity. You're not going to do it in one year.

Pearson: Absolutely. We've had great managers in the state of Wisconsin, great support from the University of Wisconsin. I want to thank you, Bob, very much. And, Dave, appreciate it. Bill, appreciate your insights as a producer. That's going to wrap up our special rural economic summit. Again, I want to say a big thanks to our panel. And let's give a big thanks to our live audience here at the Pyle Center at the University of Wisconsin-Madison. We want to remind you that we'll produce two more of these special road editions of Market to Market in the months ahead. Future programs tentatively slated at Nebraska and Kansas. Of course, you're invited to join the discussion by submitting your questions at the Market to Market web site. We'll also be posting new material on the Market to Market blog. Of course, you're invited to share your insight there as well. Be sure to join us again next week when we'll return to our regular format. So until then, thanks for watching. I'm Mark Pearson. Drink more milk and have a great week.

Market to Market is a production of Iowa Public Television, which is solely responsible for its content. Funding for Market to Market is provided by Pioneer Hi-bred, working with growers to help put the right product in each field. Pioneer -- science with service, delivering success. This program was made possible by the Corporation for Public Broadcasting and by contributions to your PBS station from viewers like you. Thank you.

 


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