The Future of Dairying

Published on Wed, 05/26/2010 - 8:40am

What will the dairyman of the next decade need to do to stay profitable? Hedge, according to Bob Cropp.
 
“The last few years, volatility has been the thing,” says Cropp, the University of Wisconsin professor emeritus of dairy marketing and policy. “There’ve been record high prices, and very low prices; and of course, 2009 was probably the worst financial stress they experienced since the Thirties.” To survive, he says, producers will have to take advantage of risk management tools by locking in feed, input and milk prices.
 
Those producers who did use futures and options—and the newly available opportunity to forward contract with processors under the 2008 Farm Bill—did not suffer as much from the price downturn, says Cropp. But he hastens to add that you have to cover yourself on both ends; some producers, who saw corn prices in late 2008 and early 2009 at $4.00-4.50/bl and still rising, locked in those prices. That meant they were paying too much for corn when the price fell—but if they didn’t also sell a milk contract to guarantee a minimum price, they got caught in the squeeze. Farmers, Cropp noted, are sometimes reluctant; the problem with eliminating your downside through selling a futures contract or forward contracting is you’re also eliminating your upside. “Some farmers say, ‘If prices go up, you’ll wish you hadn’t done it’,” Cropp says. “That’s probably true, like we saw in 2007 where prices increased much more than they thought, so they gave up a lot of potential income. But if you’re highly leveraged, how much risk can you bear? These tools help to protect a profit; you can’t go broke making a profit.”
Protecting returns and locking in expenses are just part of the picture. A great deal of research has been done on the optimal ways to maximize production, and the consensus opinion centers on taking care of the cow. More and more new and rebuilt operations are moving to freestalls, which contribute to the cow’s comfort by ensuring her freedom of movement and a dry, comfortable place to rest. Modern ventilations systems, including innovations like tunnel ventilation, remove moisture, heat and odors.   “Those types of things have helped efficiency,” says Cropp, “and cow comfort has improved milk per cow…A lot of farmers building a new facility, freestalls coming out of the stall barn, they’ll see production jump 1,000-2,000 lbs/cow.”
 
Although genetics are continually improving, Cropp doesn’t believe that’s the biggest contributor to the gradual rise in production per cow. “You get one herd that’s 18,000 lbs of milk per cow, and another one’s 25,000,” he says. “When you look at it, the genetics may not carry that much; it may be in the management of those herds.” To further boost output, some farmers switch from two milkings a day to three.
But the Number One way to profitability, says Cropp, is simply to take care of that cow and not to cheat her. “Some farmers make the wrong decisions when prices go down,” he says. “They cut back on feed—of course, some of them have difficulty buying feed under stress…Good business decisions and good herd management is the key.”
 
But another key to profitability may be out of the farmer’s hands. The 2009 meltdown prompted Agriculture Secretary Tom Vilsack to convene a blue ribbon panel on future farm policy; at the same time, the House Agriculture Committee is already holding field hearings on the 2012 Farm Bill. Committee chairman Collin Peterson (D, Minn.) is seeking input from producers, and Cropp says it’s falling into two camps. He says, “There’s those who would like to have some kind of supply-management program, to try to maintain a better level of milk price to reduce volatility; the other camp says, ‘That’s going to be difficult to do. Supply-management interferes with my ability to modernize; we just need to better manage risk.’ There’s a lot of talk about some better risk management tools; margin insurance types of things, where you can protect returns over feed costs.”   He believes such new programs may be part of the next Farm Bill, but that’s still more than two years away.
 
The direction of federal dairy policy may dictate the regional flow of operations. The low grain prices of the last generation encouraged operators to build large dairies a long way from the Corn Belt, places like the West Coast and Southwest; that offset the cost of railing in grain and enabled operators to take advantage of the dry climate, a benefit to waste management, and the proximity to booming populations in those regions. It backfired on them when biofuels incentives pushed corn and soybeans, and by extension other feeds, to record high prices.
 
Their loss has been the Upper Midwest’s gain; the competitive advantage has shifted to producers who grow some or all of their own forage and grain. Indeed, some farmers are turning to less-intense systems that reduce their milk output but cut their costs even more; producers in the southern Corn Belt in particular are turning to grazing. Cropp notes, “We’ve got some large dairy operations in the Upper Midwest that buy a lot of their feed from area farmers, but they can purchase that feed at a lower cost than the West; they don’t have to transfer it across the country. So there is a feed advantage in the Upper Midwest that has enabled them to weather the storm a little better, and there’s a little stronger milk price in the Midwest, where a good share of the milk is made into cheese and not so much into powder.”
 
But Cropp says ultimately, the most important aspect of successful dairying is taking care of the herd so they’ll maximize output, and he laughs when he thinks about how the industry has come full circle. “I was raised on a farm many years ago,” he says. “We had to chase our cows out in the pasture in the morning after milking; they stayed out all day, and we’d bring them back in the night. Not a lot of access to water; you can wonder why we had production of 10,000-12,000 lbs/cow. There’s variation in genetics, but really you find the difference in production per cow from one herd to the next in cow comfort, feeding and herd health, rather than genetics.”

Tags: