Outlook turns more positive for dairy farmers

Issue Date: December 25, 2013
By Ching Lee

With feed costs declining and milk prices strengthening, California dairy farmers say their short-term economic outlook appears to be improving, but their frustration with the state's current milk pricing system and Congress' inability to pass a new farm bill projects a more sobering forecast.

Thanks to a bumper U.S. corn crop this year, dairy farmers have seen corn prices drop from a high of $330 a ton last year to the recent $215. This downward trend may help lower the cost of other feeds, said Tulare County dairy farmer Tom Barcellos, although he noted that prices of cottonseed, soybean meal and dry distillers grains have remained strong. Alfalfa hay prices are also still high but have begun to soften, he said.

But falling corn prices coupled with higher milk prices have definitely provided financial relief to producers, he said, even as some dairies are still struggling to stay in business. The current market situation has also allowed dairy farmers an opportunity to use risk management tools, such as locking in their feed cost, he said.

"On an input-and-return basis, there's room to pay the bills, to have some money left over to catch up or try to weather the next dip in (milk) prices," Barcellos said. "I'm confident that the outlook is positive. But outlook also changes."

Corn, including corn grain, silage and gluten, represents 28 percent of a dairy's total feed costs, according to the latest data from the California Department of Food and Agriculture. Alfalfa hay is about 17 percent, while cottonseed is 6.2 percent and soybean meal is 0.7 percent.

Barcellos said the concern with hay prices lowering too much is that it also increases export demand for hay.

"China is buying as much as they can," said Michael Marsh, CEO of Western United Dairymen, "and so they've been in the marketplace helping to drive up prices for U.S. livestock operators with regard to hay."

In addition, lack of rain has shortened this year's California hay crop, keeping prices high, Marsh said. And with more farmland converting to trees and vines, there is also less alfalfa acreage planted to meet the growing demand for hay, Barcellos said.

Despite positive signs in the marketplace that have helped improve profit margins on the farm, dairy farmers said they remain discontented with how their milk price is determined under the state's current milk pricing system, and are now moving forward with a plan to petition the U.S. Department of Agriculture to replace the state milk marketing order with a federal order.

Marsh said the state's three dairy cooperatives, which represent 80 percent of California milk production, are now drafting language on such a proposed federal order. But they are waiting for passage of a new federal farm bill because the current House version contains language that would allow California producers to petition USDA and, more importantly, allow them to keep their quota system, which is valued at $1 billion.

Producers attempted through several hearings before CDFA this year to change how dry whey is valued in the state's milk pricing formula, which they contend underpays them for Class 4b milk compared to what farmers in other states earn under the federal milk marketing order. Each time, the state implemented price increases that fell short of what producers requested.

Dairy farmers also turned to the state Legislature, sponsoring a couple of bills meant to address issues with Class 4b milk, which is used to manufacture cheese. The first one, AB 31, got stalled in the Assembly. The other, AB 1038, would formalize a dairy task force previously established by CDFA to propose changes to the state milk pooling and pricing system. That bill was approved by the Senate in September and moved to the inactive file in the Assembly.

In part because those bills haven't progressed, Marsh said, he's "seeing a lot of interest being paid in the producer community to this idea of a federal milk marketing order." But he said his organization has not given up on trying to fix the milk pricing issue through state legislation, noting that the process to join the federal order could take two to three years.

Barcellos, who is on the CDFA dairy task force, said he is also not ready to throw in the towel with regard to the task force, even though "there's not a lot of faith (among producers) in what might come out of there."

The task force is scheduled to have its next meeting in January to discuss options.

CDFA Secretary Karen Ross previously said a group of technical experts has been working on potential alternative pricing scenarios and that the department has contracted University of California, Davis, economist Daniel Sumner to analyze those scenarios. She also indicated that CDFA staff would develop comprehensive pricing proposals by Dec. 15. CDFA spokesman Steve Lyle said those proposals are currently "under internal review" and that the department has yet to determine whether to share the information with the task force or make it public.

While passage of a new farm bill is important to dairy farmers as it relates to their efforts to join the federal order, Marsh said most of the programs in the nation's farm policy also affect producers. He said farmers need surety on safety-net programs but also, for example, on conservation programs that offer cost-share incentives for air- and water-quality improvements.

But the House and the Senate still need to hammer out differences on the dairy portion of the farm bill. Key among them is a supply management program in the Senate version but not included in the House version.

Marsh and Barcellos agreed that the so-called "dairy cliff," in which U.S. farm policy would revert to a permanent law established in 1949 if a new farm bill is not passed, is not a likely scenario. That law would require the U.S. government to buy dairy products at about twice the current market rate.

"In order for that to occur, USDA would have to spend several months in rulemaking just to devise the specifications that would be necessary to buy all that product and store it for an extended period of time. And so it's just not going to happen," Marsh said.

(Ching Lee is an assistant editor of Ag Alert. She may be contacted at clee@cfbf.com.)

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.

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