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Lou Brown is hard at work crunching numbers on his dairy farm during the current stretch of low milk prices.

Dairy farm economics not adding up

It has happened to every farmer.

The production numbers are plugged into the calculator, and double-checked, but they just do not seem to be adding up quite right on the short side of profitability.

These days many dairy producers are drinking a couple of extra glasses of milk to calm their nerves and enjoying an additional scoop of ice cream to take their minds off of the unpleasant budget realities on the farm.

Lou Brown of New Bremen has been crunching the numbers on his dairy farm and does not like the numbers he is seeing.

“We’re at $13 milk right now on our 275-cow herd with a 70-pound average. That is 19,250 pounds of milk a day. That is 192.50 hundredweights at $13 that comes to $2,502.50 a day in the value of the milk. At $7 a day per cow with 275 cows, that comes to $1,925 a day for my feed bill. That leaves me with $577 to pay all of the other expenses. If I had one hired person full time I would need 40 more cows to justify that one person,” Brown said. “My price goal to average over five years is $20 a hundredweight. Two years ago it was $26, but feed costs were higher then. The milk price actually went down to $9 in 2009, which has been the low in the last eight years.”

At $10 per hundredweight it is $57,750 a month in income. At $15 milk, it is $86,625 in monthly income and at $20 it is $115,500 a month in income.

“That milk price makes a huge difference in gross revenue for us,” Brown said. “You’re constantly on a price roller coaster.”

The farm (like many others) has implemented numerous long-term strategies to handle the inevitable economic tough times inherent in production agriculture. Brownhaven Farm is all family labor. The Brown family has been on the land since 1959 when Lou’s parents bought it. It is now run by Lou, his brother, and Lou’s son.

“We started with two cows and by the 70s we were up to 80 cows,” he said. “Today we have grown to 280 cows  — all Holstein. Our wives and children help as well.”

The vast majority of milk from Brownhaven Farm goes to nearby Dannon and is marketed through DFA.

“I don’t really see a premium but I am only three or four miles away and it doesn’t make sense to truck it anywhere else,” Brown said.

Dannon is a very valuable local market, but has been requiring increasingly stringent requirements in recent years based on various consumer and industry demands, each adding costs along the way. In addition, Brown’s 250-acre farm is in both the Grand Lake St. Marys Watershed and in the Lake Erie watershed, the two most regulated watersheds in the state. This regulation also brings with it extra costs and challenges in the form of manure management and cover crops.

“We raise half our hay and all of our corn silage,” Brown said. “All of our corn silage ground gets cover crop on it. I grow no soybeans, just corn and hay. The best ground stays in corn. I use an oats and radish mix which winter kills. My cost for just the oat seed is $1,500 on 150 acres.

“I get government funding for cost share on the cover crops, but I have to match all of their guidelines to qualify. They have a cost share program. You could do it on your own but you will have $3,500 to $4,000 to put cover crops on 150 acres. And some cover crops are twice that cost. If I didn’t have cost share, it would be much harder to make the decision to do that. Maybe I would only do half the farm verses the whole farm. What is the value of the organic matter I’m getting, the erosion I am stopping and the runoff I am preventing? It does definitely help the corn yield too. Cover crops may be worth $4,000 a year, very easily, but they are also an extra cost.”

The liquid manure lagoon storage for the farm is adequate to hold enough to apply in the spring before planting.

“The majority of the time we apply lagoon manure before we plant corn. We either use a Miller disk or field cultivator before and after manure application. We knife it in and go over it again and then plant corn,” Brown said. “They want us to work the ground before we apply the lagoon manure to disturb the soil so it doesn’t have a direct route to the tile. The only other fertility I add is liquid 28% — 10 gallons at planting and 40 gallons an acre sidedress.”

The Browns get the rest of their cattle feed needs met through neighboring farms to help control costs.

“All of the corn for grain is bought from neighbors and we grind it here on the farm. We have our own bean extruder as well. All the wheat straw for bedding is grown by neighbors too — for the last 10 years we have been buying from neighbors. It makes more sense to buy from the neighbors then to go and pay $10,000 or $12,000 an acre for more ground,” Brown said. “We use our own equipment and labor to harvest the neighbor’s crops. We harvest earlage, silage and grain for grinding. We do everything on the hay. Usually first cutting is chopped for haylage and the rest is in big squares. We try for five cuttings.

“This last weekend we chopped 92 acres of rye which gave us 600 tons of extra feed valued at $15,000. We had a neighbor who decided to put it out as cover and he let us chop it. It gave him an extra cash crop and we provided all the labor.”

These and other practices help keep costs down when milk prices drop. Major purchases are made carefully during good times.

“We don’t change a lot when milk prices are low, but we keep close tabs on expenses. We try to put off buying more expensive $5,000 to $10,000 investments or higher. We fix more things instead of investing in new,” Brown said. “You have to set your priorities every day and look at your goals. You might make mistakes, but you hope that doesn’t happen. For a dairy farm, a mistake could be as simple as what if milk from a treated cow went into the bulk tank that day. That is a costly mistake. You have to be careful to avoid those when times are tight.

“If you need to expand or improve, do it in small amounts. Don’t try to do it all in one year. Hopefully the smart managers saved back $2 a hundredweight when it was over $20 for now when things are low.”

And, at least for the immediate future, milk prices look to stay low.

“Historically it is a seven to eight year cycle but it is anybody’s guess with the global market the way it is today. Changes in China or Russia impact our farm,” Brown said. “Mother Nature will either have to throw in a drought or we’ll have to wait for the school year to start so the volume of fluid milk will go up again.”

A big production bump in Europe has helped build up a large global milk supply, according to John Newton, the Senior Director of Economic Research for the National Milk Producers Federation.

“It will take time for us to work through the global inventory and one way to do that is through lower prices to the consumer. In the European Union they just removed the quota system and we’ve seen milk production in Europe increase significantly in the last year into the global market place. In the U.S., we export 12% to 15% of our milk production every year and we are exposed to what is happening internationally,” Newton said. “Farm prices are set based on wholesale commodity prices. When wholesale prices of cheese, or butter, or milk powders decrease, so too does the farm gate milk price. In this case, we have seen powder prices decline quite a bit, close to a dollar a pound. We have seen a dramatic decline in milk price from the highs in 2014.”

As milk producers feel the pinch of low prices, milk processors enjoy strong profits.

“Processors make money on the down side because their input costs are declining, but when input prices increase, they cannot turn around and raise their retail prices dramatically. There is an ebb and flow. End users need consistency. Pizza chains don’t change the price of their pizza on the menu every week as cheese prices change. They try to have a fixed price menu item,” Newton said. “Farm gate prices come down and soon after the retail price will follow. There is some price transmission, but currently the farmer’s share of the retail dollar is lower than it was in recent years. We would expect to see that with lower input costs, it will drive processors to have lower prices at the consumer level. When prices decline, retailers can offer more promotional specials. You could see two for one cheeseburgers, for example, and you would sell twice as much cheese when the prices for cheese are low. Those things in turn will help the farmer’s price.”

Lou Brown 2

 

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