Correspondent
STEVENS POINT
Even with the financial stress brought on by a combination of recent sharp declines in milk prices coupled with increased feed costs, Wisconsin continues to be a good place to be a dairy producer, according to Mike Krutza and Dr. Bob Cropp.
The two men cited several factors that currently help the dairy industry in our state as they addressed a group that included town and county supervisors, and dairy producers during the 2010 Agriculture Community Engagement Seminar sponsored by the Wisconsin Towns Association, Wisconsin Counties Association and Professional Dairy Producers of Wisconsin Feb. 25 at the Holiday Inn & Convention Center.
Krutza, the chief executive officer of Lighthouse Leadership and former CEO of FCS Financial Services, has a career of proven leadership that spans more than three decades. He was instrumental in the development of Wisconsin’s Dairy Investment Tax Credit and helped guide it through the complex legislative process.
Signed into law in 2004, DITC has provided much of the impetus for $120 million in dairy modernization by Wisconsin producers through $12 million of tax incentives.
“If just 10 percent of Wisconsin dairy farms took advantage of the tax credit and modernize, they could generate an additional $500 million in gross farm receipts for the state, according to some estimates,” Krutza said. “One agricultural economist estimated the tax credit could generate a net gain of almost $18,000 per average farm and the economic value to the local community would be 2.5 times that amount.”
Generally limited to those investments that yield increased net economic returns on dairy farms, the dairy investment tax credit helped reduce the net cost of durable assets, such as milking parlors, barns, manure handling equipment and feed storage structures.
The key to getting the DITC proposal through the legislature was to help people, especially urban and suburban state legislators, understand how much the additional farm income from modernization would benefit people throughout the state.
“We had to explain to senators and representatives from Milwaukee how the tax credit would provide more tax dollars to support their schools,” he recalled. “DITC would benefit every segment of the state’s economy. The state needed money and we had these 20,000 businesses that would be able to generate more taxable income if they were able to modernize. The ultimate payoff was $240 million for all Wisconsin citizens.”
Krutza suggested a similar approach would be successful at getting other beneficial programs – including health care reform – enacted. “Listen and probe for the common interests that grow revenue and cut costs, develop a set of principles to solve the problem and then connect the dots in the story to show everyone how their needs are being met,” he advised. “By giving others what they need, you can get what you need.”
These investment tax credits were set to expire in the 2009 tax year even if they had not been fully used to offset income tax liabilities during the 2004-2009 period; however Gov. Jim Doyle has proposed continuing them into future years and expanding the value that’s allowed for dairy modernization.
Dr. Bob Cropp, who has spent more than four decades working with producers and others in the dairy industry studying trends in milk pricing, marketing and dairy price risk management, offered his analysis on the factors behind the recent milk price volatility.
He noted the reason for declining milk prices in 2009 was different than for other price drops over the previous decade. “For the past 10 years the average annual increase in commercial sales of milk and other dairy products was about 2 percent, and whenever production increased by more than 2 percent farm milk prices declined,” Cropp affirmed.
In 2009, however, the economic downturn in the U.S. and much of the rest of the world negatively impacted domestic sales as well as exports. Dairy product exports, which had climbed to nearly 11 percent of production in 2008, took a big hit last year, falling to about 7 percent.
“As a result, improved milk prices required a drop in milk production to below year-ago levels, and most of that drop in production occurred in California and other western states,” he remarked.
He cited lower milk prices and higher feed costs as primary factors for the drop in Western milk production. “California’s milk production was down about 4 percent in 2009 and Idaho was down about 1.5 percent,” Cropp reported. “The competitive advantage in milk production has definitely shifted back to Wisconsin and other Midwest states where producers grow the majority of their own feed.”
The mail box price for milk from January through September 2009 reflected a $1.86 advantage for producers in Wisconsin compared to those in California. He estimated a slight increase in Wisconsin cow numbers, from 1.252 million head in 2008 to 1.257 million head in 2009. However, he predicted milk production increase of 2.9 percent, from 24.472 to 25.185 billion pounds.
“There’s a 100 percent probability that milk prices will be improved this year over 2009,” Cropp remarked, “however, there’s a considerable difference of opinion about how much that improvement will be.”
He views an increase in export sales as vital to a continuing recovery for the U.S. dairy industry. “The recovery in world milk production has been slower than earlier expected,” Cropp said. “Australia’s production is down 2 percent but New Zealand production is up about 2 percent.”
Cropp noted the European Union has halted subsidies for dairy exports, and indicated that could put a damper on production increases in those countries.
Predicting a 7 percent increase in cheese exports this year, Crop said the fact that 85 percent of milk production in Wisconsin is used to make cheese bodes well for state producers. “A 10-cent increase in cheese prices means a $1 increase in the milk price,” he stated.
Looking long-term, Cropp sees Midwest producers enjoying a competitive advantage, with continued growth in Wisconsin production. “The trend will be fewer and larger dairy herds but successful small and large farms will continue to provide the diversity to help give our industry the strength it needs in the years ahead,” he remarked.
