Down Market Pressuring Dairy Farmers

Apr 19, 2018  | 6 min  | Ep4335

America’s dairy farmers have been subject to up-and-down markets over the past nine decades. There have been various federally approved pricing plans designed to even out those volatile swings; two of the most notable being premiums based on your distance from Eau Claire, Wisconsin and the now extinct Northeast Dairy Compact.

The unintended consequence of these programs has been an increase in production that has put more pressure on the industry.

Two hundred head of dairy cows await their turn to be milked at DD Farms in Chippewa County, Wisconsin. The afternoon milking proceeds on schedule. 
Owners Tom Short and Tony Pecha know what each cycle of milking costs them in cash. Every pound of milk harvested loses money, which is slowly eating at the farm’s value.
Tony Pecha, Dairy Farmer: “Basically when we went from a milk price in the low twenties to a milk price in the high or even middle teens, we basically just ate into our equity. We burnt up a lot of equity the last few years, and farmers our age, in their middle 50’s, you know we don’t have time to recoup that equity.” 
 
Pecha and Short have been business partners since 1991. By breeding their own replacement stock one head at a time, they have grown their herd from 18 to 200 milking cows. But the current stretch of low dairy prices has put a strain on the partnership’s finances.
Tom Short, Dairy Farmer: “This is the roughest 3-year stretch we’ve had since we started farming. When we first started we didn’t struggle this bad. Actually haven’t made money the last 3 years. We made money every year up to 2009 up to that point.”  
 
Every hundred pounds is valued utilizing the CME’s Class III milk price. In Wisconsin, Class III prices have risen from a low of $12.75 in January 2018, but continue to linger below the cost of production for many operators. Global overproduction of dairy products has depressed prices. Many see the only solution to the drop in prices is a drop in production. 
The financial situation is only slightly better at the Ellsworth Cooperative Creamery, which buys the fluid milk production from 360 dairy producers like Pecha and Short. The plant is running at full capacity making cheese, yet is only squeaking out a narrow profit, a victim of the same global overproduction. 
  500 pound barrels and 40 pound blocks of cheese are the primary output of cheese plants. In 2017, a drop in the cheese market sent barrel cheese 8 cents below the price of block cheese, which pulled 48 cents per hundredweight out of dairy producers milk checks. 
For the Ellsworth Creamery, block and barrel cheese is sold to cheese manufacturers for further processing and packaging.  Currently, blocks lose a few cents per pound and make up more than half of their annual sales. But a growing percentage of the profit is now coming from from value-added products, primarily multiple varieties of cheese curds.
Paul Bauer, CEO Ellsworth Cooperative Creamery: “Last year we were able to get about 31 percent of our product in the value added market. That allowed us to give out a reasonable return to our producers relative to the handicap that we face in the barrel cheese market.”
 
In addition to the curds, specialty cheeses manufactured at a plant in Comstock, Wisconsin broaden the product line and add to the profitable part of the cooperative’s cheese menu. American consumers are exploring cheese flavors and textures beyond the traditional cheddar, and their curiosity creates a profitable premium for cheesemakers. 
But growth in specialty cheese demand isn’t enough to raise milk prices nationally, or globally.  
Tony Pecha, Dairy farmer: “There’s no easy solution in it- right now the only way things get better for us is on the backs of another farmer. When there’s a drought or disaster or something in another part of the country or another part of the world, that will affect everything and we will do better. But on a world economy, its going to be very difficult to try and develop something that will work for all of us, yet still compete worldwide.” 
 
A federal plan designed to assist dairy farmers and stabilize the $100 Billion dollar dairy market. is the Margin Protection Program. Farmers pay for the insurance protection as a hedge against low prices. Critics charge MPP only factors in feed costs for its margin calculations, ignoring the variable costs a dairy operation incurs on a daily basis. With feed cost falling at the same time as Class III milk prices, few dairies qualify for MPP payments. 
Recent adjustments to the Margin Protection Program may get dollars into the hands of more operators, but will not lift the industry out of its cash crunch.
Mark Stephenson, University of Wisconsin: “They didn’t change anything with the changes in the Margin Protection Program that happened as a part of the budget bill that was passed just a couple of months ago. However, what they did do was to make premiums for coverage levels much much lower for the first 5 million pounds of milk production that would be covered. So it’s making it more attractive, and we are at a point in time when we know that farms are going to get payments now, and for the next several months.”
 
Long term, the dairy business has a challenging outlook. Consolidation has reduced the number of dairies in the United States by nearly half since 2000 - while the dairy herd has expanded by 2.5 percent to 9.4 million head. Milk production per cow increased 20 percent over the same period.
Those still milking agree, prices will need to rise to a profitable level or more operations will be forced out business, accelerating consolidation of the industry - a condition some find hard to swallow.
Tony Pecha, Dairy farmer: “A decent cost of living and a little profit is all most of us are asking for.”
 
For Market to Market, I’m Peter Tubbs
 

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