Analysis: Small dairy farms worst hit by historic drought

CHICAGO Fri Aug 10, 2012 2:14pm EDT

Dairy cows feed from a trough in Chino, California, April 25, 2012. REUTERS/Alex Gallardo

Dairy cows feed from a trough in Chino, California, April 25, 2012.

Credit: Reuters/Alex Gallardo

CHICAGO (Reuters) - The worst drought in half a century will hit livestock producers in the United States harder than grain farmers as soaring feed costs erase profits and drive many to take on more debt, downsize herds or simply leave the field altogether.

But no one will be hit harder than dairy farmers.

Analysts say it will be the small dairy farmer who will be in the most intense fight to survive. Milk producers came into 2012 already weak from abundant supplies and stagnant prices. Larger farms and well-funded corporate milking operations continued to squeeze out small producers. Then the drought nearly doubled the price of corn, soybeans and hay.

Unfortunately for dairy farmers, milk prices have not - and are not likely to - keep up with such soaring feed costs. Consumers tend to absorb higher prices of staples like milk but also reduce consumption, which can force costs back on to the producer, analysts say.

So the economics of supply and demand are set to tighten the vise even more.

"Survival is on the minds of all," said John Wilson, a senior vice president with Dairy Farmers of America, Kansas City. "Whether they are in a drought area or not, their cost of production is greatly impacted by these high corn and soybean meal prices and alfalfa hay. The milk price has not kept up. The dairy commodity prices are inching up but not fast enough to offset the increased costs. So dairy farmers are really thinking about survival," Wilson said.

In 2011, there were 60,000 dairy farmers in the United States, down from 62,500 in 2010, according to the U.S. Department of Agriculture. While the number of milk cows on July 1 was 9.2 million head steady with a year ago, milk production rose. Output in the top 23 states totaled 51.5 billion pounds in the April-June 2012 quarter, up 2 percent from a year earlier, USDA said last month.

Each cow in 2011 produced about 21,000 pounds of milk for the year - about 58 pounds a day. Each needs a daily ration of corn, soybean meal and hay.

"The challenge in the dairy industry is that during the first half of the year, we had record production. Inventories of finished dairy products in the United States and around the globe are adequate. As a result, I don't see our milk prices rising quick enough to catch-up or offset the rapidly rising feed costs," said Mary Keough Ledman, a dairy industry consultant and a former USDA economist and manager of dairy economics for cheese-making giant Kraft Foods.

"That's going to put dairy farmers in a real tough margin squeeze in the second half of this year. It is likely that the industry will experience pretty significant reduction in the U.S. dairy herd between now and the end of the year," Ledman said.

She said the U.S. dairy herd could shrink by as much as 2 percent by January 2013, compared with a year earlier.

South Dakota dairy farmer James Neugebauer, with a herd of about 170 dairy cows and heifers, said he began hauling some of his animals to market a couple weeks ago as the hottest July since the 1930s burned his crop fields to a crisp.

"There were super long lines. The sale started two hours early and they had record amount of cattle," said Neugebauer. "Those that aren't making us any money are getting out of here. We can't afford to feed them."

FROM BAD TO WORSE

During June, dairy farmers lost about 25 cents on every gallon they produced, said Tom Gallagher, chief executive for Dairy Management Inc, a trade group.

The outlook for feed costs is sure to get worse before it gets any better.

USDA on Friday cut its U.S. corn crop estimate to 10.8 billion bushels - down 4 billion from its first forecast. USDA also slashed it soybean crop estimate, now expected to be a nine-year low.

After the data was released, corn prices set a new record high at $8.49 a bushel at the Chicago Board of Trade and soybeans look set to follow suit this month.

Milk futures traded steady to weaker.

Even with feed costs soaring, USDA did not project a large jump in milk prices for the next year. Average price for 2012 was raised to $17.65 per hundred pounds (cwt), from $17.20 seen in July. For 2013, USDA projected the average price to rise to $18.30.

Michael Hutjens, dairy specialist at the University of Illinois, said milk consumers were likely to absorb the initial rise well.

"Milk was $16 per cwt in the spring. It looks like it could rise $3-4 by fall. Since each gallon of milk weighs about 8 lbs that comes to 35 cents a gallon," he said. "If the price of a gallon of milk goes up 35 cents in August, no big surprise at this point."

The outlook for a mild rise in price is tied to the outlook for only the mild cut in milk output. USDA cut its 2012 estimate by 1.6 billion lbs to 200 billion lbs - less than 1 percent. For 2013, output was cut only 1.3 percent from earlier projections. The reason? The dominance of large farms will grow.

Chris Hurt, agricultural economist at Purdue University, said that for nearly 20 years the U.S. dairy industry has been transitioning to larger dairies of 1,000 head or more from smaller family farm dairies that might milk 50 to 200 cows.

"The families that are left are very strong financially, so it's not easy to displace them. If they want to milk cows, you're not likely going to be able to discourage them easily," Hurt said. "On the other hand, you get the dairies with 1,000, 2,000, 3,000, 4,000 cows and they financially with their lender are absolutely entrenched. So they cannot just get out of this business next year," he said. "Everybody looks at each other and says you get out."

But for smaller dairy farmer like Neugebauer in South Dakota, such staying power may be beyond their means.

"I know one dairy farmer two weeks ago who was on the phone for over four hours trying to find a load of corn. He finally found some for $8.30 a bushel. He was 250-head dairy and he said he's done. His banker is going to shut him down because he can't afford to do that," Neugebauer said.

Desperate for forages and watching his soybeans wilt in his field, Neugebauer sounded resigned.

"We will probably be baling soybeans before too long here. There won't be anything there either," he said, adding that if he doesn't find cheaper feed and things don't improve soon his own future looked dim.

"I probably won't be milking next year," he said.

(Editing by Peter Bohan and Marguerita Choy)

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