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.”

VTDigger

Patrick Kane
Eric Clifford's herd in Starksboro.

Lenders see large increase in borrowing for expenses

State officials and lenders say Vermont dairy farmers have been losing $100 per cow a month. That means the average farm with 120 cows has lost about $84,000 since milk prices plummeted to historic lows in February. Large farms of 700 to 1,000 cows have lost $490,000 to $700,000 in the last seven months.

Those heavy losses are forcing many farmers to go deeper into debt.

Statewide demand for emergency loans through the USDA Farm Service Agency is up 60 percent this year, and more than 100 farmers borrowed low-interest loans of $58,000 on average from a pool of $8 million in emergency funds offered through the Vermont Agriculture Credit Corporation, according  Jo Bradley, executive director of the Vermont Economic Development Authority, which operates VACC.

Dale Thompson, loan specialist for the state FSA program, says his agency normally lends about $23 million to Vermont farmers. This year, he says “we’ll be in the $40 million range before it’s all said and done.” Eighty percent of the 900 direct loans and bank loan guarantees FSA offers are for dairy farms, he says.

“We were providing, especially this spring, a lot of loan assistance for farmers that were strapped for cash to put crops in the ground,” Thompson says. “That was a priority.”

The outstanding loan volume at Yankee Farm Credit increased 19 percent, from $171 million to $204 million from June 2008 to June 2009.

“Normally growth for us with some variation would be about 4 percent per year,” said George Putnam, president and CEO of Yankee Farm Credit, a government sponsored enterprise, which serves 1,200 customers in New England.

Figures for this quarter are not yet available, but Putnam says he expects to lend more money in the coming months to farmers who need to buy feed and pay for other operating expenses. On average, the 500 New England farm customers listed in Yankee Farm Credit’s blue book are carrying $3,000 of debt per cow, Putnam says.

“We did a number of credit actions with farmers where we lent them an additional $500 per cow back in the spring with the expectation that would last them through 6 months and now the 6 months is about at an end and now we’re seeing farmers come back in to do that again,” he says.

Cow devaluations affect balance sheets

In the meantime, farm assets have declined as cow values have dropped from a high of about $1,800-$2,000 last year to roughly $1,000-$1,200 this summer. Though lenders say they will likely devalue cows in the coming months, the downgrade won’t be as dramatic as it could have been because lenders say they didn’t inflate cattle prices. Yankee Farm Credit increased values by about $100 per cow last year and may have to drop them that amount this year, Putnam says.

Even what appears to be a small a shift in cow values can depress a farm’s assets by tens of thousands of dollars.

Lenders offer short-term deferments

Many lenders are restructuring and refinancing loans. They are also allowing farmers to make interest-only payments on loans.

At FSA, Dale Thompson expects to restructure 130-150 loans before the end of the year. The agency is giving farmers the best rates available, which are currently running at 3 percent, and extending terms for operating loans up to 15 years, he says. Currently, farmers are paying only the interest on their FSA loans through the end of the year.

“The lenders are either stopping the payments or they’ve made agreements with the farmers that they’re going to continue to pay the interest only and not cover the full principle,” says Thompson. “Everybody’s kind of pushing everything back so that’s been going on pretty much since the first of the year. It was in hopes that milk prices by fall would rebound. We’re not seeing that great of a rebound yet.”

The question is, if milk prices stay low and farmers don’t break even until next summer, as projected by long-term USDA predictions, how long can banks and government lenders defer principle payments on loans?

Thompson says there are no easy answers. “It’s a really bad issue,” he says. “That’s why everybody’s trying to get Washington, the USDA, to change the milk price formula and raise supports or kick in more money in the Milk Income Loss Contract program.”

Copyright, Vtdigger.org

VTDigger