Pandemic fallout delivers staggering blow to ag economy
Economic shock waves from lost markets and declining prices due to the coronavirus pandemic are being felt across the entire supply chain of the agriculture industry.
With the food service industry literally shut down, the current supply of agricultural goods far outweighs demand. In southern Florida, produce is being left to rot in the field, ethanol plants across the Midwest sit idling and many dairy farmers are being asked to dump their milk.
According to the American Farm Bureau Federation, milk prices have fallen 26% to 36% (depending on utilization), while prices have fallen as much as 25% for cattle, 31% for hogs and cotton, 14% for corn and 8% for soybeans.
"The entire supply chain is trying to adapt to match supply with the changes in demand. Meanwhile, the markets continue to swing daily," Zippy Duvall, AFBF president, told the media during a conference call last week.
Despite the initial run on dairy and meat products that resulted in empty shelves at grocery stores across the country, Duvall says there isn't a shortage in the food supply.
"Doesn't even pay"
Jim Alderman, an organic produce grower in Palm Beach County in southern Florida says with the shuttering of the food service industry, it doesn't pay to even harvest the crop.
"Squash needs to be picked every day or it will be too big to sell. The market today is about $4 and change for a half bushel box...that's way below our cost of picking and packing. So there's no sense in packing it because there's no market for it. Some growers are cutting it and throwing it on the ground.
"It's hard to have a crop out there that you can't sell," Alderman said.
A fellow Palm Beach County farmer Paul Allen told United Press International that he plowed under a million pounds of green beans that were once destined for South Florida restaurants, cruise ships, school cafeterias, airlines and theme parks.
Allen said the food banks in the region were already inundated with produce donated by the state's shuttered tourism and food-service industries and that there was "nowhere to go with it."
Pete Bakken, who runs a cattle operation in Minnesota with his brother, had hoped to see the business passed down to his children one day.
While it's business as usual on the farm, with family members caring for the stock as best they can to keep costs down, the prices for his beef cattle continues to fall.
"This has become a management nightmare," he said. "We're trying the best that we can...so much is out of your control. We're looking at the potential of having to recover from a million-dollar loss which could keep the next generation from farming."
The ethanol industry has suffered a double blow due to the falling demand for gasoline as well as the fallout from the pandemic. Bakken told reporters that several ethanol plants that serve farmers like him with dried distillers grain, have either slowed or have been forced to idle.
This week, POET, Inc., the world's largest ethanol producer, announced that it will idle production at two facilities in Iowa and one in South Dakota, and delay the opening of its new plant in Indiana.
Many ethanol plants across the country have stopped buying corn from farmers. According to industry group, Renewable Fuels Association (RFA), the impact could result in an 8 billion gallon drop in ethanol production, resulting in a reduction of 2.7 billion bushels of corn used to make that ethanol.
AFBF economist Veronica Nigh said the loss of production at ethanol plants could create a shortage of carbon dioxide. Already 29 of the 45 ethanol plant in the U.S. that sell the gas have idled or cut rates, according to the RFA.
The meat industry uses carbon dioxide as a refrigerant and preservative for meat, and also uses the gas to stun animals before slaughter.
"Carbon dioxide is a product that is relied upon heavily by the meatpacking industry. And the ethanol industry supplies about 40% of that market and right now they're feeling the impact of that limited supply," she said. "It goes to show how all systems (in the food industry) are interconnected. When one is impacted, you will often see another sector of agriculture or the consumer impacted."
Down the drain
John Umhoefer, executive director of the Wisconsin Cheese Makers Association, said during an April 3 Dairy Stream podcast sponsored by the Dairy Business Association and Edge Dairy Farmers Cooperative, that Wisconsin's dairy industry was hit hard when restaurants and schools closed due to stay at home orders issued across the country.
"This is a situation where in a matter of days we saw about 50% of the restaurants in the U.S. close or do a limited offering through food service and about 80% of Americans sheltering at home" he said. "This is unprecedented and in dairy you're looking at our largest market facing closure."
Umhoefer said about half of the cheese produced in the United States moves either directly into food service or to companies that prepare cheese products for food service. Just one-third of dairy products finds their way to retail markets.
"In Wisconsin, where we're really the cheese kings, you've lost a massive market for product," Umhoefer said. "Half of our market share has been decimated in an unprecedented fashion and we are struggling as an industry to make up for that."
Umhoefer says farmers, processors and others in the industry are working closely together to find solutions.
"This has the entire industry buzzing and sharing ideas, and even sharing milk and moving milk in different directions," he said. "Everyone is trying at their highest potential to get every drop of milk processed in Wisconsin and around the country."
Unfortunately some of that milk just couldn't find a home. Several producers that are members of the Dairy Farmers of America dairy cooperative were asked to dump their milk down the drain. One of those farmers is Jeff Pickart who farms just east of the little hamlet of Johnsburg in Fond du Lac County.
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"I had heard rumors a couple of weeks ago but at the time it didn't seem all that serious. But when I saw it was my field rep was calling last week, I pretty much knew what she was going to say," said Pickart, a second generation farmer.
Pickart's dad, John, purchased the farm in 1968 and is now semi-retired. Jeff handles most of the management responsibilities on the 800-cow dairy farm that produces between 61,000 to 65,000 pounds of milk per day.
"It's frustrating and depressing to think of all that work literally going down the drain," Pickart said. "And when you look at the (futures market) for milk prices it gets more depressing so I've quit looking at them."
Paul Bauer, CEO of Ellsworth Cooperative Creamery, in Ellsworth, and a board member of the state Department of Agriculture Trade and Consumer Protection since 2017 said the scenes playing out across the country is "unreal".
"If you had told me six months ago this was the scenario I would have said you’ve been watching too many horror films. But it’s just been a cascading effect,” said Bauer.
Brutal year ahead
Mark Stephenson, director of dairy policy analysis and director of the Center for Dairy Profitability at UW-Madison, said a number of cooperatives and dairy plants buying milk directly from producers have sent out letters to patrons asking for voluntary reductions in milk production
"If you look at the totality of the collapse of demand and the relatively big supply that we've had across the country, we need to reduce the milk supply. That's the only way of getting out of this," Stephenson said.
He said cooperatives have also reminded many of their members that they do have supply management protocols in place that could be invoked.
"The last I heard was that around 100 producers were dumping milk already and that's not even the totality of what we've seen. There's also milk that's not being dumped but being sold at distress prices," he said. "This could be a brutal year."
And an especially cruel one for Wisconsin farmers who have already weathered a five-year economic downturn that saw the state leading the country in Chapter 12 family farm bankruptcies in 2019 that mirrored the exit of hundreds of dairy farms from the industry.
"In the middle of January we had prices at $17.50 to the $18/cwt. range. It was looking like 2020 would be a price recovery year," Stephenson said.
The May futures price for Class III milk (used to produce cheese) has fallen by nearly $5/cwt. to approximately $12.50/cwt. – a 28% decline. The futures price for Class IV milk (used to produce nonfat dry milk) had a more significant decline, falling by more than $6/ cwt. or 34%, to less than $12/ cwt..
"Those are huge drops and declines. Now 2020 has the potential to probably be the lowest price year that we've had in five years," Stephenson said.
He urged farmers to understand their cash shortfalls and meet with their bankers to establish good communications about whether they need additional access to credit or to explore the possibility of restructuring loans.
"I also think that we have some farms that are so stretched (financially) that they're not likely to get much more credit...and it might be time to ask those hard questions about whether they should be looking at exiting the industry," he said. "I think these price declines this year are likely to be deep enough that we get into a level where we're not even covering operating costs such as the feed or labor costs to milk the cows let alone pay off your costs and fixed costs as well."
Easing the pain
The $2.2 trillion CARES Act stimulus law provides $9.5 billion to U.S. Secretary of Agriculture Sonny Perdue to provide financial support to farmers and ranchers as well as $14 billion for the Commodity Credit Corporation.
Even though the unprecedented aid package earmarks a combined $23.5 billion for agriculture, Duvall doesn't believe it's enough.
"We're going to find out very quickly that amount of money is not going to sustain our farmers through this difficult time," said Duvall.
One program available to farmers is the Paycheck Protection Program, or PPP, a new loan program offered through the CARES Act. The program is offered to small businesses, and is designed to help those businesses offset the cost of payroll and other expenses for eight weeks as they deal with complications around the COVID-19 outbreak.
The PPP is designed to provide funds to small businesses to help pay certain payroll costs, including benefits. Funds can also be used to pay interest on mortgages, rent and utilities. The loans provided are eligible for forgiveness if the small business retains and continues to pay its employees.
The Midwest Dairy Coalition, a group of dairy cooperatives, has asked Perdue to spearhead an effort to help move dairy products to food banks and other programs dealing with food insecurity. They have also petitioned the Ag Secretary to reopen the 2020 Signup for the Dairy Margin Coverage program.
"The catch on this is that it would be a mandatory election for the rest of the farm bill and with no discount, meaning you would be signing up for the next three years," Stephenson said.
Another proposal submitted to the USDA for consideration to help ease the pandemic pain for dairy farmers is the "Milk Crisis Plan" authored by the International Dairy Foods Association and National Milk Producers Federation.
The plan proposes to pay dairy producers $3 per hundredweight on 90% of their production — if they cut production by 10% from a March 2020 baseline.
Stephenson says the groups are also asking that farmers dumping milk receive a disposal reimbursement.
"Producers would be paid at least the lowest class price with the program running from April through June for milk dumped during that period," Stephenson said.
The Milwaukee Journal Sentinal contributed to this report.