Wisconsin dairy producers entered 2013 with more uncertainty than usual due to the lack of a long-term federal farm bill and continuing financial concerns.
The opening session of Cow College 2013 - part of a series of three sponsored by the University of Wisconsin Extension Service and the Fox Valley Technical College (FVTC) - was designed to provide information related to agricultural lending and federal dairy programs.
On Tuesday, Jan. 8, more than 50 dairy producers from east central Wisconsin gathered at the Clintonville FVTC Regional Center to hear presentations from Mark Stephenson, UW-Extension dairy policy and marketing specialist, and Gary Sipiorski, dairy development manager for Vita Plus who also has decades of experience in agricultural lending.
Despite an extension of the 2008-12 farm bill through September 2013, many questions remain unanswered, according to Stephenson.
"Even with the Dairy Product Price Support Program (DPPSP) at a $9.90 target and Milk Income Loss Contracts (MILC) at September values, we still don't know about retroactive payments because there would have been a 60-cent payment in September," he said. "Currently, February appears to be the most likely month for payments in 2013."
Stephenson said a new farm bill stalled in Congress because of opposition to the Dairy Security Act (DSA) provisions that were included, which some view as socialism.
"The DSA will probably be the starting point for dairy provisions going forward. That's because producers have identifies milk and feed price volatility as the biggest problems they can't deal with on their own."
Farm Bill Provisions
Examining provisions of the stalled farm bill (H.R. 6083), Stephenson noted that it would:
• Terminate the production margin protection and stabilization programs on Dec. 31, 2017, and;
• Repeal the dairy products price support program, the milk income loss contract program, and the dairy export incentive program.
The bill also would establish a dairy production margin protection program under which participating dairy operations are paid when production margins are at less than threshold levels.
"A dairy market stabilization program would assist in balancing the supply of milk with demand when participating dairy operations are experiencing low or negative operating margins," Stephenson said.
While stressing the voluntary nature of the program, he also emphasized that the margin Insurance and market stabilization portions are fully linked.
"There will be time to decide whether to register after the bill is enacted," Stephenson said. "If you register, you will need to decide about the level of supplemental insurance and the percent of milk covered - from 25-90 percent of your annual production history (APH), which will be the highest of the three years before the bill's enactment."
Basic $4 margin coverage is free. "If you want to protect more than the free margin base, you can buy up in 50-cent increments," Stephenson said.
"For example, if you select supplemental protection at the $5.50 level at 75 percent of your APH base, and the margin is calculated at $4.50 for two months, your total two-month payment would be $37,500."
DAIRY MARKET STABILIZATION
The Dairy Market Stabilization Program uses the same trigger calculation based on consecutive two-month periods. However, the milk production base offers a choice of the most recent three-month average or the same month from the previous year.
"A producer does not have to reduce milk production under the program, but he will not receive payments for 'penalty' milk," Stephenson said. "Any penalty milk payments will be made by the milk handler to a national board for purchase of dairy products."
Stephenson suggests the program would help reduce market price volatility and the probability of negative net farm income.
"Less price risk would encourage slightly more milk production, and more milk production would mean a slightly lower average milk price and somewhat higher exports," he said. "The level of impact on the industry is highly dependent on participation rates."
He noted the Congressional budget Office is projecting a 70 percent participation rate. "Realistically, I think participation would be 25-30 percent. If you're planning to add cows and expand your operation in the near future, this might not be a good program for you."
"I don't think U.S. producer prices have much further to fall," Stephenson said. "I suspect world prices will rise to close the current gap. I'm looking for Wisconsin prices to increase almost one dollar in 2013.
He's predicting a drop of $70 per ton for soybean meal and corn prices to decline by about one dollar per bushel.
"Further debt problems in Europe would threaten our fragile U.S. economy," he cautioned. "We'll start over again with a farm bill. A radically new program will require careful consideration regarding participation."
Sipiorski confirmed that high feed costs related to drought conditions that occurred over much of the U.S. in 2012 will continue to be a problem for many dairy producers in 2013.
He cited hay prices as especially challenging. "Small square bales are bringing $5 $9 apiece and hay is generally around $290 per ton, with prices in California up to $350."
Producers also need to be aware global financial conditions.
"Many governments are spending far more than they collect in revenues," Sipiorski warned. "Brazil, Italy, China, Mexico, Germany, Canada and Russia are spending up to seven percent more than they collect. Spending over budget is up 7-10 percent in Spain and Greece, and from 10 to 15 percent in the U.S., U.K. and Japan."
He also noted the percentage of debt to gross domestic product (GDP) ranges from 75-100 percent in many European countries, with France, the U.S. Italy, Greece and Japan at 100-200 percent. "In the U.S. our GDP is $14 trillion, and our current debt stands $16.4 trillion," Sipiorski said.
"The Federal Reserve just keeps printing more money, and that means our dollars are worth less," he said. "But interest rates aren't likely to go lower, so lock in now."
Sipiorski sees several opportunities for increased dairy exports. "Japan imports 50 percent of its food; they want what you have to sell," he said.
With 22 percent of the world's people, only seven percent of the tillable land and three percent of the world's water, China continues to be a good market for our exports. "China is also buying farm land in Australia and property in Africa," Sipiorski said. "China already controls 36 percent of rare earth elements."
He also advises looking toward Middle East countries as a market for cheese. "Cheese production started in the Middle East, and the people there have a taste for it."
FARM LAND VALUES
Despite thigh farmland real estate prices, Sipiorski says dairy producers remain in a good position when it comes to net per acre return on land investments.
He says soybean production will net $180 per acre, corn $350 per acre and a milk cow will net $342 per acre. "Purchasing good crop land at $4,300 per acre, should still yield an eight percent return on investment."
"Invest in high-producing cows with good genetics and feed them right," Sipiorski advised. "Invest in modern milking facilities and other farm buildings that provide cow comfort."
He recommends investing in machinery that will improve crop yields, increase harvesting efficiency and reduce labor costs.
"Buy land within one mile of your dairy operation, expand or purchase another dairy, consider raising steers as a specialty crop, use proven computer software to analyze your finances and provide education for your employees and yourself," Sipiorski said. "Be sure you know your cost of production."