Iowa dairy farmer testifies to U.S. House Agriculture Committee on the effect of the biofuel revolution on dairy operation costs

April 13, 2007

Washington, D.C. - Dairy farmer Rob Wonderlich of Ollie, Iowa, testified recently before the U.S. House Agriculture Subcommittee on Livestock, Dairy and Poultry. Wonderlich’s testimony focused on the biofuel revolution and how it has increased the feed and fuel costs associated with operating a dairy. According to Wonderlich, these costs are adversely affecting not only his dairy farm, but the 62,000 dairy farms across the United States.

The hearing held in Washington, D.C., was chaired by Leonard Boswell (D-Iowa). Wonderlich, a farmer-member of cooperative Dairy Farmers of America, Inc. (DFA) and an elected farmer representative of DFA’s Board of Directors, explained to the subcommittee that feed and fuel costs are the greatest cost for most dairies and an increase to feed costs directly impacts farm finances. Wonderlich operates a 270-cow dairy and farms 520 acres of cropland.

“As many of you are well aware, commodity grain prices, particularly corn, have dramatically increased over the past seven months to price levels not seen since the mid 1990s,” Wonderlich said. “Many economists are attributing this phenomenon to a growing demand from the ethanol industry, which uses corn as its primary feedstock. While this is great for U.S. grain farmers that have experienced several consecutive years of depressed prices, it is tragically affecting the financial viability of dairy farmers.”

Over the previous 10 years, the annual average corn price has not been above $2.60 per bushel; however, the Chicago Board of Trade futures market is valuing corn no less than $3.75 over the next three years, which will greatly damage the profitability of dairy operations. The futures market is primarily being driven by increased ethanol demand.

In addition, energy costs are also having an affect on dairy farm profit margins. The year 2006 was a bad year for dairy farmers who receive an average of $14.62 per hundredweight (in Iowa) for their milk. While 2007 prices are expected to reach higher levels, the skyrocketing costs noted by Wonderlich are outpacing the dairy price increase.

“Based on my farm’s financial reports, my costs have risen sharply since 2004, which on hundredweight basis is an operating cost increase of approximately $2 per hundredweight,” Wonderlich added.

While the value of milk has started to increase due to increased global demand, it has not been enough to fully offset the increased operating costs. Wonderlich adds that if the value of U.S. milk rises too high, then the United States will no longer be competitive with other global products.

“Despite any perception formulated from my comments today, I am a firm believer in renewable fuels derived from agriculture commodities…,“ Wonderlich told the committee. “However, this biofuel revolution occurred very quickly and did not allow for farmers, such as myself, in the various livestock industries to properly adapt, which has sent a shock across the industries in the form of increased operating costs.”

DFA and other dairy industry groups are attempting to help dairy farmers in a variety of ways. One of those ways is through DFA Member Fly-ins – visits with legislators on Capitol Hill. As of early April, DFA members and staff have had 162 visits with 128 U.S. representatives or senators and with half of the members of the House and Senate Agriculture committees. While DFA members attending Hill meetings were from different regions of the country, a few common themes dominated these meetings. First and foremost, milk production input costs were the clear frontrunner on the minds of DFA’s producers. Most offices were sympathetic to the cause and indicated that they have been hearing similar concerns from other livestock groups.

Some good news is that March represented the eighth consecutive month that the Class III price has increased over the prior month. Many dairy producers are encouraged that more price level improvement will occur in coming months. One reason for this optimism is due to the efforts of another Cooperatives Working Together (CWT) Herd Retirement Program. CWT officials announced that the Herd Retirement Program will be retiring approximately 54,000 dairy cows from the U.S. dairy herd within the next two months. This represents approximately one billion pounds (0.6 percent) of milk production. Officials reported that 1,397 bids were submitted to CWT this round, which represents more bids than the number of bids submitted during the two prior rounds of the program combined. CWT is being funded by dairy cooperatives and individual dairy farmers, who are contributing 10 cents per hundredweight assessment on their milk production through December 2007. The money raised by CWT’s investment is being apportioned among several supply reduction programs to improve the national all milk price. Through the herd retirement program, if a farmer's bid is accepted, CWT pays that farmer for the volume of milk produced by that herd in a 12 month period. The farmer is responsible for selling the cows for slaughter, and they retain the proceeds from that transaction.

Even with higher milk prices, DFA understands that the net impact of these revenue gains on dairy farms has not been realized as producers’ cost structure has increased as well. As reported in USDA’s Monthly Milk Cost of Production report, feed costs in February 2007 have increased $2.25 per hundredweight (+31 percent) since February 2006, while the U.S. all milk price improved only $1.40 per hundredweight (+10.4 percent) over the same time period.