High and dryHigh and dry

October 1, 2012
Dairy Farmers of America

Weather is unpredictable.

Rob Wonderlich has come to expect it, but expectations don’t make it easier. It’s the third straight year his operation in Ollie, Iowa, has felt the extreme conditions of nature’s wrath.

He’s refigured the farm’s finances countless times to stick it out, but with his once sharpened pencil now dull, next year is questionable.

It’s a similar situation for Billy Lasater as the summer’s severe drought, which gripped two-thirds of the United States by July, continues to take a toll on the price and availability of feed.

Quality forage is scarce near his 800-cow dairy in Hamilton, Texas, and the surrounding five-state area. He’s using what he can to get by — sunflowers, corn stalks and sugarcane — but without high-quality crops to purchase, the crystal ball continues to cloud.

Even Dale Ruisch, a planner by nature, has thrown all planning tactics aside after harsh drought conditions wreaked havoc across the Corn Belt. Uncertainty replaced optimism weeks ago as the weather’s impending effects on his future feed purchases looms on his Hinkley, Calif., operation.

“There’s not much we can do except pray,” Ruisch says. “I wish I had an answer of what grain prices are going to do; but feeding our cattle a less-than-optimal feed ration is not an option. My gut tells me that eventually milk prices will catch up with increased feed costs, but until then, we’re just taking it a day at a time.”

Feeling the pinch
Current drought conditions are the worst farmers have faced since the mid-1950s, and experts anticipate its effects will be felt for years to come. As of September 12, U.S. Department of Agriculture (USDA) had designated more than 2,000 counties in 40 states as primary disaster areas.

As ponds bake dry and fields remain riddled with cracks, the drought’s severe devastation has forced dairy farmers nationwide into survival mode. But even survival comes with a cost as corn, soybean and wheat prices continue to surge.

In late-March, corn averaged $5.50 per bushel but as the drought persisted, market prices topped $8.24 per bushel. Fortunately since mid-August, the corn market has moderated, but producers are still feeling the effects from the recent price increase.

Since January 1, Terry Rowlett’s feed cost has increased $140 per ton, up 47 percent since last year. To help offset rising costs, he recently switched feed suppliers. Since September 1, Rowlett has saved $100 per ton on his weekly 8 to 10 ton mix, but says he’s unsure how long the savings will last if prices continue to rise.

In addition to feed woes, Rowlett’s 120-cow operation, located in Campbellsburg, Ky., hasn’t seen a good rain since mid-May. Yet, farms five to 10 miles west of his operation are lush with green grass and viable crops.

“There’s a line through Henry County about two to three miles wide,” says Rowlett, a DFA Board member and Mideast Area Council member. “It’s like there’s a big bubble over us. Every time we see a storm coming, it splits either to the north or to the south. If we get anything, it’s just a sprinkle; not even enough to settle the dust.”

Each year, Rowlett, who is in partnership with his wife and sister, raises corn silage, grain and grass hay on 600 acres. Unlike years when they grew enough feed to supplement half of their feed intake, this year’s crop is at a 50 to 60 percent loss. Ears of corn are barely 4 to 5 inches long and kernels are nonexistent.

In Iowa, Wonderlich is facing similar issues. He grows 50 to 70 percent of his feed on 750 acres for his operation’s 260 head. However, with less than 2 inches of rain since June, he expects a 50 percent loss in his corn yields and a 20 percent loss in soybean yields. It’s another devastating year for Wonderlich who’s been fighting floods or drought-like conditions since 2010.

To help make ends meet, he has been hedging his corn and soybean meal on the Chicago Mercantile Exchange. He’s also turned to feeding his milking herd homegrown hay, which works as both a fiber and filler, but says it’s not ideal for production.

“I’m hoping I can stretch this out for a while,” says Wonderlich, a DFA Board member and Central Area Council member. “I’ve only been adding a couple of pounds in their ration to avoid buying any more since hay prices are around $300 a ton right now in my area.”

But it’s not just the price of feed concerning Wonderlich and Rowlett, it’s also feed availability.

In September, USDA reported that 50 percent of the U.S. corn crop was in poor to very poor condition and predicted corn production will be 10.727 billion bushels, the lowest in six years.

While Ruisch has purchased enough hay for the year, he is waiting to see how the grain prices play out and hopes to purchase feed when prices hit downturns.

“The drought kind of caught us off guard,” he says. “We planned on buying our feed from the Midwest like we do every year. We never expected it to be this severe. It sounds silly, but without grains to purchase, we’re not sure what to do.”

While still affected by the drought, brothers Tim and Dave Bernhardt, owners of Bernhardt Dairy Farm in Milliken, Colo., are sitting better than most. Due to nearby reservoirs, they’ve been able to keep some moisture on their crops. Although the state’s water engineer issued regulations on the amount of water that can be diverted from the river for direct run ditches, the Bernhardts are managing.

By stretching their ditch system to three days on, three days off, the Bernhardts estimate they may see a 30 percent loss in crop yields for their 850-cow operation.

“Any loss hurts, but it’s a lot better than dairies around that will have to buy everything,” Dave says. “The biggest issue we’ll face is finding replacement feed in our area. The competition is going to be fierce, especially when we’ve got a 200,000-head livestock operation near us that’s got the money to cover these high feed prices.”

Wonderlich believes the drought’s impact, especially on corn, will be felt for years. Not only is corn a staple in animal feed, but also in ethanol production. According to USDA, more than 40 percent of last year’s corn crop was used for the production of more than 13.9 billion gallons of renewable fuel.

This summer, several governors, legislators and a coalition livestock of groups including DFA submitted official requests for waivers of the Renewable Fuel Standard (RFS) from the Environmental Protection Agency (EPA) for 2012 and 2013. The RFS requires that 15.2 billion gallons of ethanol be produced in 2012 and 16.55 billion gallons in 2013.

EPA responded by announcing their plans to review the issue and opened a 45-day comment period for impacted industries to weigh in on waiving all or part of the RFS requirements.

“It was a mistake to ever let a feed source go to be used as fuel,” Wonderlich says. “We’ve experienced droughts before. Someone should have seen this coming. The amount of hurt this is going to put on livestock producers and consumers
is astronomical.”

Quality an issue
To combat skyrocketing feed costs and low milk prices, many producers, including Rowlett, have turned to alternative feeds or lower-nutritional-value forage to make ends meet.

“I’m looking at having to feed more alternative feeds for the next 12 months, since grain costs have gone up so drastically,” Rowlett says. “I expect there are a lot of us who won’t be able to supplement forages with higher-quality rations for our livestock. And that’s not good, because we all take pride in taking good care of our livestock even before we get taken care of ourselves.”

The price of feedstuff has also caused Lasater, a third-generation producer, to try different feed variations. However, unlike Rowlett, this is the third year that Lasater’s dairy, located in the Southwest Area, has been hit with hot, dry conditions.

“Over the last few years, we’ve learned to feed some interesting ingredients,” he says. “Never in my wildest dreams did I ever think I’d be feeding my cows sunflowers.”

Although 8 inches of rain fell on Lasater Dairy in early September — the first moisture since August 1 — Lasater says it hardly came close to filling the gaps in the ground.

“We’re high and dry with nothing to feed,” he says. “It’s like an open-range drylot. We’re already two-thirds through the year, and I don’t think we’ve even come close to 15 inches of rain. In a good year, we’re up around 30 inches.”

Last year, only 6 inches of rain fell on the dairy, and Lasater estimates that less than 18 inches fell in 2010. The lack of rain has also caused an infestation of grasshoppers. The hungry swarms are devouring crops and farmland, Lasater says.

The drought’s impending effects on feed coupled with the summer’s intense heat has caused a significant production drop on the farm. During the last 18 months, Lasater has watched his average 20,000-pound-per-cow production drop below 16,000.

“Cows are responding as best they can,” he says. “Overall, they are in good health, but we just can’t make milk off sunflowers and careless weed.”

Culling rates across the United States have increased as well, since producers are having to choose between culling their herd or paying significantly higher cost for feed for their cattle. By the end of August, USDA reported that 293,000 dairy cows were culled, a nearly 10 percent increase compared to last year.

Wonderlich culled aggressively last year and says he’s facing a repeat.

“There’s going to be a lot of dairy cattle sent to slaughter,” he says. “I haven’t been profitable this year, and it doesn’t look like we will be next year.”

Rowlett, however, says he wants to wait until his corn is harvested and forage results come back to see how much feed he’ll need to supplement before he makes any rash decisions.

“In my mind, I’m already figuring that I’ll have to cull up to 25 percent of my herd in order to weather this storm,” he says. “Other dairymen, however, are already talking about completely going out of business. These are scary times.”

Rowlett says the country’s current conditions are the worst he’s experienced since entering the industry 38 years ago, and that financially, he’s concerned with what lies ahead.

“We’re still working to rebound from the low milk prices in 2008–2009 and the equity that it pulled out of our operation at that time,” he says. “Every time we think we see the light at the end of the tunnel, milk prices drop and our feed costs skyrocket. I’m not sure how much more we can take.”

Federal assistance
To assist struggling crop and livestock farmers this summer, various programs administered by USDA were available to assist those impacted by the nation’s worsening drought.

Unfortunately, the authorization for those programs, including the Livestock Indemnity Program and Livestock Forage Program and others expired; however, their reauthorization is included in the 2012 Farm Bill, which is currently stalled in the House of Representatives.

Since the Farm Bill has not been finalized, USDA and other agencies announced changes to and more flexibility in current programs to provide agricultural producers relief.

“The Obama administration is committed to helping the thousands of farm families and businesses who continue to struggle with this historic drought,” says Agriculture Secretary Tom Vilsack. “It is also important that our farmers, ranchers and agribusinesses have the tools they need to be successful in the long term. That’s why President Obama and I continue calling on Congress to pass a comprehensive, multi-year Food, Farm and Jobs Bill that will continue to strengthen American agriculture in the years to come, ensure comprehensive disaster assistance for livestock, dairy and specialty crop producers, and provide certainty for farmers and ranchers.”

Programs such as the Conservation Reserve Program, Environmental Quality Incentives Program, Wetlands Reserve Program and Federal Crop Insurance Program have all been made more flexible to help producers address weather-related challenges.

According to USDA, nearly $16 million in financial and technical assistance will be used to help eligible producers move water to livestock in need, provide emergency forage for livestock and rehabilitate land that is severely impacted.

But for many dairy producers, available assistance isn’t enough to battle low milk prices and high feed costs. Since Wonderlich resides in a USDA-designated disaster county, he is eligible for assistance; however, several restrictions have deemed his operation ineligible for aid.

“It’s disappointing,” he says. “Most of the programs aren’t as good as what they sound, which is really unfortunate.”

Lasater says it’s frustrating that dairy producers, unlike corn producers, are left high and dry without a fall-back measure.

“I feel for the corn farmers, but they have insurance. When their crop fails, they have insurance to pay for it,” Lasater says. “As dairy producers, we don’t have a national insurance program, so when our feed prices are high but our milk prices are low, we just have to take it.”

For things to improve, Lasater says policy reform is key. For the last three years, DFA has worked alongside National Milk Producers Federation and other industry partners to develop new federal dairy policy that has resulted in the Dairy Security Act (DSA). DSA contains a margin insurance program that would offer the kind of margin protection Lasater needs.

Currently, both the House Agriculture Committee and Senate versions of the 2012 Farm Bill contain DSA. But with the current Farm Bill set to expire at the end of September, Lasater says change cannot come soon enough.

“Historically, the milk price cycle was like a smooth ocean, where you just had some little rolls and valleys, but now, it’s like peaks and valleys,” he says. “The valleys are a lot deeper than the peaks are tall. We need stabilization for a smoother rolling cycle.”

Looking ahead
As Hurricane Isaac pushed northward in late August, several drought-stricken states received its drenching rains, but it came far too late for this summer’s crops.

John Wilson, senior vice president and chief fluid marketing officer, said that as difficult as this summer has been, it is expected to shorten up the milk supply and create higher prices for members.
“Things are going to get better,” he says. “They have to.”

And while higher prices would be a relief for dairy producers, Rowlett’s concerned to see the price rise too much.

“It’s a vicious cycle. When prices go up, consumption drops,” he says. “Consumers are going to start questioning whether milk is worth it when they can look behind them and get three liters of soda for the price of one gallon of milk.”

According to Ed Gallagher, president of DFA Risk Management, the wild market swings experienced as a result of the drought conditions are stark reminders of the volatility faced each and every day in the dairy business.

Gallagher says price risk management strategies can protect producers during difficult times such as this. DFA Risk Management has several contract adjustment options available for DFA members who have forward contracted a milk price, but are facing changing circumstances — in regard to margins or input costs — and would like to adjust their forward contracting plan due to changing dairy market conditions.

“With uncertainty in where feed costs will be in three to six months, it is important to select a risk management tool that will allow for upward movement in Class III prices to offset the rising feed costs,” he says. “DFA Risk Management has strategies that protect a minimum Class III price, while giving some or unlimited opportunity for upward movement in Class III prices [which allows for margin protection].”

Jill Waite, DFA field representative in the Mideast Area, says she encourages her members to visit with representatives from DFA Risk Management and other organizations to learn how contracting may benefit their operation.

“While contracting varies from farm to farm, I had a few members this year who contracted feed and milk and have found it to be somewhat beneficial,” she says. “However, it’s a difficult time for everyone. Contracting may not be right for every operation, but in times like this, it’s worth a call to find out.”

Wonderlich just hopes it’s not too late to move forward.

“I want to stick it out,” he says. “I’ve got a plan in place. I’m working closely with my lenders, nutritionist and feed suppliers, and I’m praying at least twice a day. We’ve been through this before and made it through. I just hope we can do it again.”