Grain is largest expense
The recession has forced most of us to do some serious belt tightening. Buying frivolous stuff and eating out are somewhere on the top of the list of guilty pleasures these days. Many Vermonters face more serious sacrifices, such as putting off repairs to vehicles or giving up health insurance.
But what if you had hundreds of big hungry mouths to feed, in this economy? The kind that bellow and moo?
There’s no question that dairy farmers are in a bigger pinch than most of us because of record low milk prices, but there’s another factor to consider, too — the escalating costs of production.
Cows eat a lot. High producing milkers eat a lot more. And grain is a dairy farmer’s biggest expense.
Each day, a cow consumes 110-120 pounds of wet feed (silage) or 55-60 pounds of dry matter (hay and grain). More if she’s producing milk, according to the UMass Extension service.
In slightly warmer climes, such Pennsylvania, farmers can grow enough corn, soybeans and hay to feed livestock through the winter. Vermont’s climate constrains the nutritional value of grain crops, and so though dairymen (and women) here do grow corn – largely for silage – they have to buy supplemental corn and soybeans to feed their cows.
This means the “input” costs, or the expenses farmers incur for day-to-day operations, are higher here than they are in other dairy states like Florida or Ohio.
Grain expenses add significantly to the cost of milk production in Vermont and that makes it harder for dairy farmers to ride out the current milk price crash and compete with farmers in other states on the open market, according to Bob Parsons, an agricultural economist with UVM Extension.
Right now, farmers are losing $100 per cow per month, and many have eaten into their equity to survive. (See related story.) As they gear up for winter, one of the biggest challenges they face is significantly lowering the cost of producing milk.
The biggest ticket item on a farmer’s balance sheet is grain, according to data from the 2008 Yankee Farm Credit Northeast Dairy Summary, an analysis of the financial health of 500 New England farms.
Northeast Dairy Summary cost of production table, 2008, from Yankee Farm Credit.
Net Farm Earnings Per CWT, or hundredweight, from the 2008 Northeast Dairy Summary, Yankee Farm Credit
Last year, feed accounted for $6.19 of the cost of production per hundredweight (a unit of measure that translates to 11.6 gallons of milk), double the amount farmers paid out for hired help, and nearly a third of the total cost of production, $18.19 per hundredweight, on the farms included in the analysis. In 2008, the farmers brought in $19.59 per hundredweight.
This year, the average cost of production for farmers statewide is $17-$18 per hundredweight, and the milk price has hovered in the $11-$12 per hundredweight range since February.
Even when milk prices hit new heights in 2007 and 2008 (after a record slump in 2006), farmers saw short-lived profits because of the inflated cost of corn and soybeans.
Demand for ethanol drove up the wholesale price for corn, according to Don Blayney, an agricultural economist at USDA Economic Research Service.
“Feed inputs have gone up for dairy farmers over the last two or three years,” Blayney says, “mainly because of all the ethanol regulations and outside effects of ethanol on corn and soybeans. All that added demand, taking corn away from feed production immediately shot up feed input prices for all farmers. For quite a while, corn was so very, very cheap that people got used to it.”
Blayney says corn prices are expected to moderate slightly and that will blunt the cost of production losses farmers are enduring. It won’t be enough, however, to pull farmers out of the red ink this winter and next spring. Particularly since many farmers, especially those in Addison County will likely have poor yields for silage and hay this year because of the wet summer growing conditions.
Economist Bob Parsons says some farmers are looking at 30 to 40 percent crop yields in certain fields. Many, he says, will be forced to buy more grain than they normally would.
“You’d have to kind of wake up and think that the planets and stars are all lined up against you,” Parsons says. “A poor harvest at the same time you have low milk prices and high feed prices – that combination is like three hits in the gut in a row.”
It’s not just grain that’s gone up. Farmers are also being squeezed by higher prices for fertilizer, dairy supplies and fuel, according to Tom Gates, cooperative relations manager for St. Albans Cooperative Creamery, Inc. All of these expenses are cutting into their profit margins, Gates says.
“If they can’t find a way to reduce their cost of production significantly, that will be a big challenge for dairy farmers,” according to George Putnam, CEO of Yankee Farm Credit, a government-sponsored enterprise that provides loans to farm businesses in New England. “The situation is dire. In 2006, we thought that that was the worst it had ever been in the memory of anybody working. But this is considerably worse than 2006.”
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Dairy economists at the USDA say there is a ‘minimum efficient scale’ and a ‘maximum efficient scale’ between which the unit cost of dairy output is flat, given constant input prices. Unfortunately, the source does not define the size of a dairy operation at these points. It’s a curve that suggests that below the ‘minimum efficient scale,’ unit costs decrease as volume increases. Above the ‘maximum efficient scale’ unit costs begin to rise again because input costs that must be purchased such as labor, manure haulage and disposal, and non-farm produced feed, etc. cause a higher cost of unit production.
In Vermont, it’s likely that most dairy farms are too small to be on the ‘flat’ part of the curve portrayed.
The present economic pain for Vermont dairy farmers results from milk oversupply nationally and internationally and the first level derived products like powdered milk and bulk cheese. There simply are too many efficient cows, which suggests there are too many farms devoted to bulk dairy whose input costs are too high. (Fuel is not the culprit this year as much as it was before the last run-up in milk prices before the recession stimulated the plunge in market demand.)
Some suggest that milk could be marketed to leverage Vermont’s quality ‘brand cachet.’ We have no evidence that ‘cachet’ could deliver higher retail prices for commodity milk. Most consumers are price sensitive for retail bulk milk and would not pay a large difference when brands exist side by side in the store. Vermonters might engage in a ‘buy local’ effort, but most Vermont milk is intermingled with other sources. The cachet associated with ‘certified organic’ milk could not support its higher price and the market retreated dramatically in this recession.
While it’s certainly true that dairy creates a host of other related economic activity and jobs, other types of Vermont agriculture would support similar activity on the same, or perhaps even less, acreage. I am persuaded that Vermont’s bulk milk output to available markets could be met by fewer more efficient operations freeing much of our open agricultural land for other, hopefully more profitable, uses.
Despite the good will and hope, market forces will severely limit the success of bulk milk dairy in it’s present form in Vermont.
And then there’s the massive problem, often downplayed, of Lake Champlain’s phosphorous load, nearly 40% attributed to agricultural runoff, mostly from dairy farms. In Missisquoi Bay, the estimate is 70% or more caused by agricultural runoff.
So, we are on the many horns of a painful dilemma. Vermont continues to lose dairy farms because of price contortions, distortions and market vagaries despite Federal government intervention. No one wants to see dairy farmers and related businesses lose their livelihood, but the present situation is untenable without long term subsidies, something Vermont cannot afford to provide.