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Veteran Advisor

From the parlor pit 9-02

Haven't had much time lately to be on here. 

 

Lots of interesting things going on for sure.  Dairy is sucking wind real bad right now. All over I am hearing some real horror stories. 

 

THe week of Aug. 18th for the first time ever Dairy cow slaughter outpaced beef cow slaughter.

 

How big a deal is this?  Well 60,968 dairy cows were slaughtered while 60, 578 beefers were sent to the packer.  Now consider that the beef herd is 4 times the size of the dairy herd and you get some real mismatched culling rates.

 

TO you corn farmers this means demand destruction.  This is also interesting in light of these huge cull numbers beef hamburger is still historically high priced.  Butter last month was often featured for 1.50 a pound. That is now a distant memory, as it hits toward the 2 dollar mark.  Cheese prices have risen steadily for the last 6 weeks both on the CME and in the grocery stores.  The thing is that consumption has alsobegun to slow. As that happens even tho we have historically low supplies many grocers are very concerned about taking the hit on having left over inventory.  

 

And just when you think you have had every curve ball thrown at ya you could think of Iowa is now testing all out of state milk trucks for allfatoxins in the milk. Apparently one tested above the legal limit that came from an area with very high allfatoxin reports.  And remeber that when damaged corn goes into an E plant the ddg's come out with an even higher concentration.  So DDG's are becoming very highly suspect according to one source I talked to.

 

Finally a very good article from brand X.

 

 

Nowhere to Turn for Dairies

August 30, 2012
By: Catherine Merlo, Dairy Today Western and Online Editor

The dairy industry is broken, says John Traweek, here beside one of the pens that used to hold hundreds of milking cows at his Texas dairy. (Photo: Richard Rodriguez)  

Drought, soaring feed costs, shrinking credit lines and red ink box in dairies.

 
Every day of the past year, Texas dairy producer John Traweek has asked himself the same question: “Will my family and our Jam-Dot Dairy be the next to go under?”
 
Like many U.S. dairy families, the Traweeks and their 500-cow operation near Stephenville have been battered by an army of obstacles: volatile milk prices, soaring feed and fuel costs, shrinking credit lines, increasing animal health costs, stringent environmental regulations and farm labor concerns.
 
Add to those the Lone Star State’s 2011 punishing drought, which forced Texas dairies to reach as far as North Dakota for their feed, eating up the profits that last year’s strong milk prices might otherwise have delivered.
 
The latest of Traweek’s troubles has been 2012’s record drought, which has gripped much of the nation, shrinking crops and sending corn prices through the roof at $8 per bushel. The outlook is dire for Traweek’s declining dairy, which only last year was home to 1,500 cows.
 
Traweek has plenty of company in worrying about his family dairy’s survival. In many parts of dairy country, stories of record feed costs, drought-damaged crops, red ink, special-asset lending status, bankruptcies and dairy liquidations underscore 2012’s financial stress. While declining milk production recently helped lift dairy prices, many industry observers still expect this year’s dairy farm troubles to approach the severity of 2009’s crash-and-burn ordeal.
 
With livestock producers, ethanol plants, food
 
 
manufacturers and exporters all vying to get their share of the smallest corn crop since 1996, prices have soared. Other commodities have followed suit. That’s put U.S. dairies in a bind, since nearly all rely on purchased feed to some extent.
 
“I don’t know of anyone who can grow all his own feed,” says Florida dairy producer Joe Wright, who switched his operation to modified grazing to reduce feed costs after 2009’s dairy recession.
 
“Getting feed is one thing, affording it is another,” says Jay Gordon, executive director of the Washington State Dairy Federation.
 
California dairies, for example, are paying $350 per ton for rolled corn, $310 per ton for premium alfalfa hay and $418 per ton for cottonseed. Texas producers are paying $335 per ton for delivered ground corn and $300 per ton for alfalfa hay. In the Midwest, dairies are dealing with $600 per-ton soybean meal. All prices are well above average—some have doubled.
 
Across the nation, those expenses are taking a big chunk out of dairy margins. Midwest dairies are in serious financial trouble, says Robert Tigner, a University of Nebraska Extension dairy specialist.
 
“July’s lowest break-even price was $23.41 per cwt.,” Tigner says. July’s mailbox milk price was $16.48.
 
“Many Minnesota dairies are barely making cash flow,” says Bob Lefebvre, executive director of the Minnesota Milk Producers Association.
 
Texas dairy losses total $2 to $3 per cow per day, almost as severe as in the 2009 downturn, says Mitchell Harris, CEO of AgTexas Farm Credit Services.
 
In New Mexico, where margins have dropped $2 per cwt. below break-even, dairy producers saw equity levels erode about $200 per cow between January and June, according to Greg Carrasco, a vice president of lending with Farm Credit of New Mexico.
 
For those fortunate dairies that have received adequate rain and are producing good feed crops, conditions are bright. Dan Siemers is one of the lucky ones. His Newton, Wis., dairy farm received good rains this summer and his cows are milking well.
 
“This year, it’s all about the crops,” Siemers says. “If you have a good crop or good crop insurance to get over the hump, you will be looking golden once everything straightens out.”
 
But for many other producers, the situation remains grim despite $20-plus milk prices. Many California dairy producers can’t acquire feed unless they pay in advance or on delivery or agree to sign over a second deed of trust on their property to the feed supplier, according to Western United Dairymen, a California-based trade organization.
 
In the state’s Central Valley—the nation’s No. 1 milk shed—at least a third of dairies reportedly have been moved to lenders’ “special assets” departments, are in bankruptcy, close to liquidation or have shut down.
 
“No one is lending to California’s dairies right now, based on our experience with clients,” says Doug Tucker, a partner in the law firm of Moss Tucker in Fresno, Calif.
 
 
 
He and Amanda Hebesha, another partner in the firm, are working with at least 10 Central California dairies, some with multiple sites. The dairies all share the same lender and special-asset status. (That’s where a bank transfers a loan to its “workout” department for closer scrutiny, which sometimes leads to pulling the loan or liquidating collateral.) The precariously positioned dairies have sought legal counsel to work with lenders and buy more time to stay in business.
 
“The rules of the game have changed,” Hebesha says. “Instead of a banking relationship where people work together and loans will be renewed, it now appears the bank is interested in maximizing its collection.”
 
In Idaho, dairies representing more than 50% of the state’s milk production are in special-asset status with lenders, says Rick Naerebout of the Idaho Dairymen’s Association.
 
Is there a way out? One solution is more financing options for dairies, says Darren Turley, executive director of the Texas Association of Dairymen.
 
“Too many don’t have access to capital,” he says. “There are hard feelings toward lenders.”
 
Some say ending or modifying government support for corn-based ethanol would be a big step in aiding livestock producers. Others believe that getting Congress to approve a new farm bill would also help dairies, bringing stability and disaster relief. Still others stress that producers must play a greater role in their own price protection. Financial experts have been urging dairies to use futures contracts to hedge milk and feed prices.
 
As another step, dairy producers must improve their financial savvy, says Bob Matlick, a partner with the accounting firm of Frazer LLP, which has dairy clients nationwide. “Many of them need to upgrade their internal accounting departments to plan and forecast,” he says.
 
For some dairies, though, any help will come too late. In Texas, Traweek and his family reached the end of the line in August, selling off their entire top-rated herd after more than 50 years of dairying.
 
“We had to stop the losses somewhere,” Traweek says. “We’d been losing money every day since 2009.”
 
Some of his cows went to slaughter, some to Iowa dairies. None went to other Texas operations.
 
As he closes up shop at Jam-Dot Dairy, Traweek, 48, says his mood is bittersweet. His festering anxiety of the past three years is finally over, but he’s saddened and angry at the turn of events in the dairy industry. He knows of a dozen other Texas dairies that have also reached the end of the line. Lenders, he says, have not been supportive enough. “The land banks have failed agriculture miserably,” he says.
 
“The dairy industry is broken,” Traweek adds. “We’re continuing to lose dairy producers and generations of knowledge. We can’t compete with the corn market, the government, ethanol policies, slow-reacting cheese markets and a banking industry that won’t help us out. Someone should understand this is not working.”
 
LAST STRAW WITH LENDERS?

Nationally, dairy customers are the most stressed of all the Farm Credit System’s agricultural customers, says Bill York, CEO of AgriBank, based in St. Paul, Minn.

Corn and soybean farmers have crop insurance to fall back on if crops fail. But dairy producers will struggle to find enough feed to get through the next year, and will pay dearly for it if they find it.

“There will be a lot of creativity in putting together rations in the coming months,” York says. “And there will be need for increased operating loans to cover those costs.”

In California, Texas and Idaho dairy country, anti-lender sentiment is high amid shrinking credit lines. Some producers claim that lenders have withdrawn support for the dairy business and are too quick to move troubled dairies into special-asset status.

“Lone Star Land Bank courted a lot of dairy loans in 2006, but they’ve decided to exit the dairy industry,” says Darren Turley of the Texas Association of Dairymen.

Wells Fargo, one of the nation’s largest dairy lenders, disputes claims that it has withdrawn its support from the dairy industry.

“Wells Fargo has banking relationships with individual people and businesses, not industry groups,” says bank spokesman Gabriel Boehmer. “Wells Fargo remains committed to dairy producers throughout the U.S., including California, whose businesses and strategies appear to be viable over the long term. Wells Fargo believes that successful dairy producers will recognize that the risk profi le of this industry has changed and will make appropriate adjustments to succeed.”

Herd liquidations and dairy closures aren’t always because the lender didn’t do its job, says Mitchell Harris, CEO of AgTexas Farm Credit Services. “A lot of lending and dairy business models were not designed to handle the level of challenge we’re seeing in the dairy industry,” he says.

But Harris also urges producers not to paint all financial institutions with the same broad brush. “We haven’t foreclosed on a dairy since AgTexas was formed in 1999,” he says.

While AgTexas is still making loans to dairies, it’s busy counseling worried dairy producers, Harris says. The lender has used USDA loan guarantees to help some of its dairy borrowers work through the tough times.

 

“If you’re working with a borrower who has a challenged situation, the worst thing you can do is pull the operating line,” Harris says. “There are a lot of reasons why you want to keep that line of credit in place. It’s not just about compassion. As a lender, you need to consider the impact of caring for and preserving the cattle while helping the borrower to preserve as much equity as possible. If the herd husbandry is not adequate, the value of the dairy herd can deteriorate by 50% in a matter of hours or days.”

 

It ain't good folks.

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10 Replies
Honored Advisor

Re: From the parlor pit 9-02

Look at the bright side JR, when you make it to 2013, your margins will be tremendous. It is shame that the consumer won't be able to afford as much milk/cheese/etc. but margins will be good for you finally now that you finally burned out the ineffecient financial managers in your business. The banks should have done this in the 2009 meltdown for dairy. Plus, dairy can easily now blame all the food inflation on those rich subsidized grain farmers. :-)

 

JR...if you want to get even more frustrated...calculate what the insurance subsidy per thousand (around 50%) and then think of how that would of helped a dairyman.

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Veteran Advisor

Re: From the parlor pit 9-02

Yep Time the banks didn't want to get the house in order then becasue they had overvalued so much collateral they couldn't even begin to balance the books.  So they kicked the can down the road.  I wonder what the real value of most banks prtfolio is?

 

AS to huge margins coming.............well I am not as hopeful as I once was. we can't seem to get ahead of costs.

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Veteran Contributor

Re: From the parlor pit 9-02

So....what's new?  The dairy industry has been it's own worst enemy for my entire lifetime. The constant low prices followed by financial stress followed by herd liquidations/milk shortages followed by high prices followed by herd expansion followed by...well you get the point.

 

It looks to me like dairy can hedge a decent profit through the fall of next year if they can raise most or all of their feed inputs. Does $20 milk and $6 corn work for you? Just asking....

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Honored Advisor

Re: From the parlor pit 9-02

Great points Patriot....when you can just build a factory with 6000 cows, import the labor, it is just too easy to over-expand. Much like chickens, and now hogs, vertical and lateral integration has never produced many profits over the long-term. Sure, a few guys get huge wages for managing a few million hogs, but the companies have never produced a consistent ROE that is close to a diversified grain/livestock farm. Dairy is the same I suppose, everyone's ego thinks if they control enough cows they can make money. Doesn't work for airlines, or Pilgrims Pride. Hasn't worked for dairy either.

 

Real profit comes from managing the input cost and the output values at the right TIME. Anybody can milk a cow, right JR?

Well off to mass, probably stirred the pot enough this morning already. :-)

 

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Senior Contributor

Re: From the parlor pit 9-02

Time:  I agree with you, when I was a kid, most all farms had pigs, chickens and milk cows. You can count the farmers  on one hand have all three of these today. Drive up and down the country roads now, very few do the same as before. 

I torn a old dairy barn down and gave what good lumber was in it to the local Amish community. The Amish farmer got rid of the cows  and now are milking goats. Even they don't want bunt head with the big farmer. No pun intended. 

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Veteran Advisor

Re: From the parlor pit 9-02

Well patriot yea 20 dollar milk and 6 corn will work only one problem..............................

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Neither of those are the numbers I am working with!

 

GOt 17.01 for my sept 1 milk check and I had to start buying corn and guess what?  It is 301 a ton or 8.45/ Bu. !

 

So in the real world guess what you can't hedge a profit at those levels. Heck you can't even hedge break even!

 

 

 

 

 

And Don't forget these hot days have had an adverse effect on dairymans production also.  But guess what?  No one is mailing me a check for lost milk production!

 

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Veteran Advisor

Re: From the parlor pit 9-02

Actually Time I am more frustrated with the dairyman who want the GOverment system that grain farmers have.  Yea this sucks right now but this to shall pass.

 

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Veteran Advisor

Re: From the parlor pit 9-02

I want to preface these remarks by saying that dairy is not something I know much about and my perceptions may be out of date or just wrong.

 

But my understanding is that the US Government actually had its policy, by offering higher support prices to milk in other areas, to move the production from the tradtional midsize midwestern diversified farms, to large farms in urban states like California.

 

Didn't it make more sense for the government to let the market decide without intervention, and then we would have more midwestern dairies, still, and these would be in better shape to weather the ups and downs since they would grow their own feedstocks, and probably keep a reserve like my father and grandfather did, and also they would get proper value from the manure residues.

 

Maybe this belongs more on the forum, since it brings up the issue of what government intervention accomplishes, and how changing a traditional market has backblow...unintended consequences. It just seems to me to be one more instance of a federal government run amock, and messing up more things. If the goal was food security, it seems to have made our system less secure. Trucking the milk seems to be a lot easier than trucking all the feedstocks and then having the manure disposal issues.

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Veteran Advisor

Re: From the parlor pit 9-02

Actually Red California has never participated in the Federal order pricing system that gave the "pricing policy" you talk about.  Actually the driving force behind the increase in western dairy was three fold.

 

1. Cheap illegal immigrant labor.

2. the Community reinvestment act which allowed for huge increase in land becasue of Goverments drive to get more people to own homes.

3. a cheap corn/energy policy which allowed folks in a dessert to import feedstuffs for less than the cost of production.

 

All 3 of these are now over.

 

The Cali model is finished.

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