Despite lower feed and energy costs, dairy farm losses mount

Now that the tax filing season is complete, farm accounting reports are beginning to be compiled and distributed to the dairy world. Those reports only quantify what we already know, 2009's losses were much higher than the previous year.

One of the early reports published was completed by Frazier and Frost, a certified public accounting firm. Their clients in California, Arizona, Idaho, New Mexico, and the Texas Panhandle produce over 4.2 billion pounds of milk with some 231,000 cows . . . that's about 3 percent of the U.S. market.

California's San Joaquin Valley dairy farms were hit the hardest with losses of $962 per cow in 2009. At $585 per head, New Mexico farms lost the least amount of money for those tracked by the accounting firm. Losses for their dairy farm clients went up between $426 in Southern California to $1,284 per head in Idaho, compared to the previous year. The average was $860 for the five states. On a per-hundredweight basis, losses ranged from San Joaquin's $4.43 per 100 pounds of shipped milk to New Mexico's $3.05.

Feed costs actually fell for all regions except the Texas Panhandle where feed costs rose $276 over 2008. Among all regions, feed prices fell $476 in Southern California; $244 in Kern County; $156 in New Mexico; $143 in the San Joaquin Valley; $125 in Arizona; and $41 in Idaho.

As a result of negative cash flows, milk production fell in most regions, compared to a year earlier: 4.9 pounds in Southern California; 1.6 pounds in Idaho; 1 pound in California's Kern County; 0.5 pound in the San Joaquin Valley, and 0.3 pound in New Mexico. Milk production went up 1.3 pounds in Arizona and 1.9 pounds in the Texas Panhandle.

Low pay prices also directly impacted replacement prices. The actual 2009 replacement prices (with the drop from the previous year's price in parenthesis) are: Kern County, $1,505 ($295); Southern California, $1,490 ($860); Texas Panhandle, $1,448 ($377); New Mexico $1,378, ($225); Arizona, $1,377 ($810); San Joaquin Valley, $1,330 ($517); and Idaho, $1,290 ($365).

Reading the milk price/feed cost tea leaves

Two releases in recent days help shed light on the milk price and feed cost scene in the months ahead. USDA's monthly World Agricultural Supply and Demand Estimates and USDA's Crop Production were released earlier this week.

The WASDE report provided USDA's first look at 2011 milk supply, demand, and prices. Milk production for 2011 is forecast to go up as producers respond to improving returns. Cow numbers are expected to be lower than this year, according to the USDA, but the rate of decline is expected to slow. However, this prediction is interesting as cow numbers have been up slightly so far this year. Milk per cow, which has driven up total production this year, is expected to grow by about the same amount next year.

We could see declining stocks of dairy products as we move toward 2011, according to the agency. Both domestic and export demand should rise as economies here and abroad strengthen. However, we also might see a slight growth in imports.

Class III prices are forecast to be higher than 2010. USDA forecasts a Class III midpoint for 2011 of $14.75 with a range of between $14.15 and $15.25. The midpoint forecast for the All-Milk Price in 2011 is $16.20 with a range of between $15.70 and $16.70.

Corn futures rose after USDA released forecasts of inventory levels. Tuesday, corn futures shot up nearly 7 cents a bushel to settle at nearly $3.70. According to the Wall Street Journal, traders at the CBOT were looking at greater corn demand for export as well as for ethanol production. However, the corn crop appears to be off to a great start. Eighty-one percent of the corn is in the ground and 39 percent is emerged. Last year at this time, only 13 percent was emerged and the five-year average is 21 percent emerged.

Making the corn crop wager at the Hoard Farm

Trying to guess the corn market in the months ahead was among the topics when the financial management team for the Hoard's Dairyman Farm met yesterday. The good news was that our cows just finished eating up the $4.69 per bushel corn that we had contracted for over a year ago. When corn was between $6 and $7, booking corn at $4.69 seemed like a good idea. And, of course, it might have been. Now, we are feeding some banked corn which will improve our cash flow picture by about $10,000 per month.

That still leaves us looking ahead beyond this fall to what our corn and other feed needs will be for the next five quarters. In the past few days, corn futures have been on a roller coaster. Corn futures prices for May and July at the CBOT dropped 5 to 6 cents Tuesday following Monday's crop progress report. By April 25, about half of the corn was planted in the 18 states that grow about 92 percent of the corn. The five-year average is 22 percent planted. Never before has so much corn been planted so early.

Just about the time you think it might be good to lock in some corn, the market shifts the other way. Yesterday, China confirmed a rumored corn purchase of 115,000 metric tons, and the market responded accordingly. Corn futures ended up sharply.

We didn't make any decisions on booking corn (energy) needs at our meeting. But we did work on the information we needed to have in place when it comes time to take some action.

Through the feed management software we use, we have a running inventory of supplies for our various feeds. Working with our feed man, Matt Kooiman of Vita Plus, we will make sure our inventory numbers feel right. Then we will begin to project what our hay silage and corn silage needs are for the next 15 months. Knowing our corn silage needs will give us an idea of how many of our corn acres will be going for silage and how many acres will be left to combine. Then we will have an idea about how much corn and other energy feeds we will need and can begin to look at locking in some supplies.

We also will be looking at our cost of growing and storing corn silage and hay silage on a per-ton and per-acre basis. Will have seed, fertilizer, herbicide/pesticide, and custom field cost by crop. Without knowing that, we are putting much in the dark on what purchased ingredients are worth to us.

Finally, forage is a big part of the feed supply puzzle, of course. We have an abundance of hay silage in bags because we were not able to enlarge our herd as much as we wanted, and we had a good hay year. In fact, we have been selling hay silage to a couple of dairies in the area. And, while we are behind normal for moisture so far this year, the hay looks good, and first cutting will come early . . . perhaps as soon as May 20 is our guess.

In another month or so, we will blog about what position we have taken on energy and protein feeds . . . if any.

USDA lowers milk price forecast sharply

Lower milk prices and feed costs are forecast, but the lower costs won’t make up for the lower prices.

In yesterday’s World Supply/Demand Estimates, USDA lowered its milk price forecasts sharply from a month earlier. The midpoint projection for 2010 Class III prices was lowered from $15.25 to $14.50. The midpoint of the All-Milk Price projection was lowered from $16.55 to $15.85 or 70 cents per hundred.

The milk production forecast was raised for 2010 with milk production expected to be fractionally above 2009.

Cheese prices were reduced as higher stocks are expected to pressure prices. Butter price forecasts were raised slightly on the strength of current demand although higher milk supplies and weaker cheese prices may encourage higher butter production, pressuring prices later in the year.

The projected 2009/10 marketing-year average farm price for corn was lowered 20 cents on the top end of the range to $3.45 to $3.75 per bushel. World corn production for 2009/10 was raised 5.9 million tons. Global corn ending stocks for 2009/10 were projected to be 6.1 million tons higher with increases in most of the world’s major corn-exporting countries, including the U.S., Argentina, South Africa, and Brazil.

The U.S. season-average soybean price range for 2009/10 was narrowed to $8.95 to $9.95 per bushel. The soybean meal price was projected at $280 to $310 per short ton (2,000 pounds) compared with $270 to $320 previously.

U.S. soybean ending stocks for 2009/10 are projected at 190 million bushels, down 20 million from last month. Soybean production is estimated at 3.359 billion bushels, down 2 million from the January estimate.

Cattle price forecasts were raised for 2010 due to tighter meat supplies. This will provide more cull cow income and encourage culling which will help reduce milk supplies.

Custom TMRs can work, but it must be a two-way street

Custom operators who also serve as feed suppliers was the topic at the January 26 panel discussion of the Wisconsin Custom Operators Symposium held at the Wisconsin Dells. Two panel members who actively sell feed as well as TMR mixes shared their thoughts on the process.

Daryll Woldt of Woldt Harvesting LLC, Brillion, Wis., has been selling TMR for nearly a decade to herds ranging in size from an Amish-dairy with 20 cows all the way up to a 200-cow dairy. At the present time, Woldt has four dairy customers. Woldt believes feed stored in silo bags is key to making the system work. Once feed is in the bag, it is very stable. The feed is stored in 12-foot by 500-foot or 12-foot by 300-foot long bags. Woldt crops some 3,000 acres.

"Once we take the forages out of the bag and haul it to the mixing pad, it is critical that we prevent the feed from getting rained on," says Woldt who mixes multiple TMRs for his clients. "If it doesn't get rained on, we have little issues with heating," he said. "In winter, our TMR mixes can last a week without heating. As we move into spring, TMR mixes last about four days. And on hot, humid summer days, the longest we push a mix is two days," says Woldt who has had one customer 60 miles away and took feed delivery once a week.

In addition to the custom TMR business, Woldt also has a bagging business and rents out 10 bagging machines that are run by tractors. They also have 2 self-propelled machines.

Outside of one customer who went out of business unexpectedly last spring, Woldt says accounts receivable have not been a problem. To get paid in a timely fashion for what can be the biggest expense on the dairy, he works with partnering dairies to either pay for feed on delivery or to get payment as part of a milk assignment.

Chris Hartleben of Hartleben's Custom Cropping, Wittenberg, Wis., sells TMR mixes and direct forages like haylage and corn silage. He said he has some customers who rented their land and let Hartleben handle the cropping operation.

"The customers who rented us ground and purchased back the TMR have done better financially," said Hartleben. "In most of these cases, producers were short on labor and didn't have time to manage inventories," he said. "Customers who kept an equipment line, ran some ground, and only purchased TMR when they needed it didn't fair as well because they kept assets they were not seeing maximum use. "

"When running a business like this, you are becoming a business partner," said Hartleben. "If you are delivering feed, you need a milk check assignment," he said. As for handing the cropping enterprise, “It only works if you are in the general radius of the partnering dairy." Hartleben commented that a 15-mile radius is the best fit for their operation.

The Symposium is held jointly each year with the Midwest Forage Association and the Professional Nutrient Applicators Association of Wisconsin.

2008's high feed costs eroded any profit in California

Near record mailbox prices for milk were not enough to prevent many California dairyman from losing money last year. Keep in mind these losses occurred prior to the current downward trend in milk prices.

In recently tabulated financial data by the accounting firm Moore, Stephens, Wurth, Frazer, and Torbet, they reported that dairy farms in Southern California were hit the hardest with feed costs rising $467 over the previous year to reach a total of $2,178 per head. That resulted in a net loss of $333 per head or $1.64 for every 100 pounds of milk (cwt.)

Feed costs ran equally as strong in Kern County at $2,114 per head, up $550 compared to 2007. However, financial losses were not near as bad, reaching $45 per head or 20 cents per cwt.

In the San Joaquin Valley, the heart of California's dairy industry, feed costs were only up $350 compared to the previous year's $1,700. However, the losses were higher than those in Kern County, reaching $152 per head or 65 cents per cwt.

Feed costs were up between $231 and $367 in other states where the accounting firm does business. However, dairies in Arizona, Idaho, New Mexico, and the Texas Panhandle had profits ranging from Arizona's $86 to Idaho's $351 per head.

USDA provides first forecasts for 2010

Early looks at what’s ahead on both the income and expense sides of the business were provided by yesterday’s USDA publication, World Agricultural Supply and Demand Estimates-WASDE-470. It’s a 40-pager, but the first five pages have enough meat and potatoes for most of us.

Milk production is expected to decline in 2010 because of the problems our industry is experiencing this year. Cow numbers will go down with only slight gains in milk per cow. The All-Milk price forecast is $14.70 to $15.70 per hundredweight, compared to an expected $11.85 to $12.35 this year.

Cattle prices are expected to be higher in 2010 due to tighter supplies and improved demand both here and abroad.

USDA projects feed grain and oilseed prices will remain relatively high in the year ahead. The agency estimates the price of this year’s corn crop will be around $4.10 a bushel, plus or minus about 40 cents. That’s a far cry from the $7.50 corn we saw last year, but it still is well above traditional corn prices.

Soybean prices, USDA projects, could be in the $9.45-a-bushel area, plus or minus $1. Soybean meal prices are expected to be around $290 a ton, plus or minus $30.

Corn planting has been slow. As of last Friday, 48 percent of corn had been planted, compared to a five-year average of 71. Beans were only 14 percent in, compared to typical 25 percent on that date. Corn planting is behind the most in the eastern Corn Belt. Continued wet weather could shift more acres to soybeans as happened last year, further tightening supplies of corn.

January milk:feed ratio was worst ever

It’s the yardstick that perhaps illustrates most clearly of all just how steep the uphill battle is to make a profit with dairy cows these days – the milk:feed price ratio.

It’s a measurement of milk producer profitability that USDA began using in 1985, representing the number of pounds of 16-percent protein mixed dairy feed that could be bought with the value of one pound of whole milk. Rising milk prices tend to push the ratio higher; rising feed prices tend to pull it lower.

In all the years of roller-coaster ups and downs since then, the milk:feed ratio had never gone as low as it did in January 2009 – just 1.69. To put that figure into context, a ratio of 3.0 is considered to be the level at which buying feed and producing milk becomes profitable.

Sadly, it’s a record that seems destined to last for only one month. February’s announced Class III price of $9.31 was sharply lower than the January price of $10.78. On top of that, the prices of feed grains continued to rise. That’s the “perfect storm” scenario for more bad news for dairy producers, who are long overdue for a financial forecast that contains some sunshine.

Feed prices taking their toll

As milk prices remain in the cellar, the high cost of feed is placing further strain on producers nationwide. For farms west of the Mississippi the strain may be the greatest in California. In a just-released report from Moore, Stephens, Wurth, Frazier, and Torbet — a California-based accounting firm, net incomes for herds throughout the state were ranging from negative $138 per cow in Southern California to $188 in the heart of cow country, California's San Joaquin Valley. On a per-hundredweight basis that's a range from negative 90 cents to $1.13. Farm profits were higher for farms in Arizona, Idaho, and the Texas Panhandle. The only region in the accounting firm's report with lower profits was for farms in New Mexico.

While those numbers may seem livable, keep in mind that was during a time when California mailbox prices were near $16.25 for the state. Now, mailbox prices may drop by $4 to $5 or more, bringing severe financial hardship to farmers.

Feed prices remain robust. In January, 14,444 tons of Supreme alfalfa hay was sold with prices ranging from $170 to $268 per ton. Rolled corn was selling for $187.50 to $196.60 per ton; soybean meal at $359 to $361; and whole cottonseed at $317.25 to $319.25.