Hurtin' for Certain: Farmers Waiting it Out

Wisconsin's diverse agricultural portfolio hasn't saved it from the ravages of a global recession. In America's Dairyland, where about one out of every 10 citizens works in a job related to agriculture, farmers are facing acute financial pressures due to a combination of lower prices for milk, cheese, and crops, and high input costs — particularly for energy-related expenses.

A little more than a year ago, the milk price farmers were getting (not to be confused with the retail price) was about $18 per hundredweight, which translates to $1.55 per gallon. Today, farmers are getting closer to $10 per hundred weight, which translates to about 85 cents per gallon.

(Consumers would pay more than that in the store due to transportation, refrigeration, and other costs).

Foreign markets are not rebounding as quickly as projected, which will make it difficult for Wisconsin agricultural exports to top the $2 billion mark for a third consecutive year. Until agricultural exports rebound, Wisconsin farmers will be hard pressed to run profitable operations.

"There is less demand in the world economy for agriculture," said broadcast journalist Pam Jahnke, more popularly known as The Fabulous Farm Babe. "In 2008, Wisconsin farmers capitalized on strong demand for powdered milk and other products consumed worldwide. That helped us reach that $18 per hundredweight for milk, but world demand has collapsed."

Agricultural markets are traditionally cyclical. A variation of 2% or 3% between supply and demand can cause significant changes in price, which is why the federal government has tried to remove some of the price volatility with farm programs like the milk price support system.

Under the Dairy Herd Retirement Program, administered though Cooperatives Working Together, a farmer-funded group, some farmers are selling their cows for slaughter in an attempt to manage their own supply and demand situation. Thus far in 2009, two rounds of purchasing have taken place, which is unprecedented.

"Usually, they only have one round [annually] when prices are low," Jahnke said.

Crops aren't faring much better than milk. Before the full extent of the financial crisis became known, corn growers were getting upwards of $7 per bushel, but now the per-bushel price is just above $3 for a crop that is expensive to plant, given fertilizer and pesticide costs.

In terms of price for their products, farmers are experiencing the worst nine-month period in several generations, according to Rod Nilsestuen, Secretary of the Wisconsin Department of Agriculture, Trade and Consumer Protection. "Agriculture and dairy and pork, in particular, are very, very challenged right now," Nilsestuen said. "The deep recession we've had, which is worldwide, has broadly impacted dairy and meat and commodity prices in significant ways."

Dairy farmers, in particular, bear a heavy burden. The United States Department of Agriculture has estimated that in the first six months of the year, the average dairy farmer was losing more than $47 per cow, per month, which would be about $4,500 per month for a 95-cow herd.

Nilsestuen is worried that Wisconsin will lose more farms if the current price trough doesn't end soon. "There are a lot of farmers saying they are losing up to $100 per cow, per month," Nilsestuen said. "If you have one hundred cows, put two more zeroes behind it and get to $10,000 per month, they are bleeding equity at that point."

The near term looks like it's going to continue to be a challenge. From now through next April, Nilsestuen said the futures market for milk is forecast to remain under $14 per hundredweight, which is $2 less per hundredweight than the cost of production for most farmers.

That's a big reason the state's economy has slumped so badly. According to a recent study conducted by the University of Wisconsin-Extension, Wisconsin's farms and agricultural businesses generated $59.16 billion in economic activity and provided jobs for 353,991 people in 2007. The data includes $38.8 billion in direct economic impact from the sale of all farm products and value-added products.

Many of the recent calamities are beyond a farmer's control. If record floods aren't saturating south central Wisconsin farmland in 2008, the lack of genuine summer weather early in the 2009 growing season had them worried that their crops would not reach maturity before the first frost.

If the global economy isn't suppressing demand for exports, the H1N1 flu is being mislabeled as the "swine flu" when it has nothing to do with pigs. For this and other reasons, pork producers saw both national and international markets suffer.

Farmers can prevent some of the mayhem that comes their way, as Wisconsin potato farmers did when they used fungicides to combat the latest episode of late blight fungus, the rascal that caused the great Irish potato famine 160 years ago and potentially could have caused a 100% potato crop loss here — all 68,000 acres worth.

While the American Recovery and Reinvestment Act did not have much of a direct impact on agriculture, the Feds are trying to help around the margins. After meeting with Wisconsin agricultural interests, U.S. Secretary of Agriculture and former Iowa GovernorTom Vilsack has adjusted the price support program upward, increased the government's buying of surplus dairy products for nutrition and hunger programs, and agreed to buy more pork for school lunches.

Dairy Diary

Pat O'Brien runs a Fitchburg dairy farm in partnership with his brother Tom. The 600-acre (owned and rented) family farm has operated continuously since 1898, and now milks about 240 cows and raises corn, alfalfa, soybeans, winter wheat, and winter rye.

O'Brien said his farm's break-even point is somewhere between $16 and $17 per hundredweight of milk. "We are having trouble, like most dairy farmers are having trouble, making ends meet and meeting our expenses month to month," he said.

O'Brien said the milk prices farmers received 12 to 18 months ago were probably excessively high because there was so much demand caused by the falling value of the dollar. There was a lot of demand for agricultural products in countries that either increased their purchases or became new customers. Then, as the bottom fell out of the global economy, the demand for agricultural products fell off.

So while the weaker dollar helped initially, it generated unrealistic prices, including corn prices as high as $7 per bushel and, at one point, prices approaching $20 per hundredweight of milk. Farmers started spending those dollars, but not always in discretionary fashion. Corn prices and the soybean prices were high, and that made feed input prices high. At that time, the cost of oil also went up, so transportation and other charges "started coming in for their share," O'Brien said.

Since then, however, the costs of production have not fallen as rapidly as the prices farmers now receive for their commodities.

Due to the size of their herd, the O'Briens produce too much milk to qualify for the government's milk income loss program. The program is designed to help smaller producers who annually generate about three million pounds of production. The O'Briens produce about 600,000 pounds a month, so they reach the three million pound threshold by mid year.

O'Brien's biggest expense probably is the purchase of feed. Even though Wisconsin farmers produce most of their own forage and grain to help feed their livestock, they need to purchase supplemental protein and minerals. Since the O'Briens don't have enough land base to produce all the feed they need, they also purchase grain.

The O'Briens haven't participated in the Dairy Herd Retirement program, but they do remove animals that are falling below a certain level of production. The farm has enough young replacement animals to fill in for the non-producers.

If low prices persist for another six months, and farmers cannot get credit from banks, Pat O'Brien believes they will sell their most valuable asset — their land — and perhaps at a sacrifice. There could also be more herd dispersals.

"As dairy producers, we have to face the fact that there is an over supply right now," he said. "One way to get rid of the over supply is to cut short the production."

For the O'Briens, there have been no problems with credit so far, but if prices remain suppressed, the farm will need to secure another loan. "Fortunately, the banks that we've been dealing with are predominantly agricultural and they understand the ups and downs, but this is probably one of the most severe 'up and downs' in the ag economy that I've experienced in the 36 years I've been actively farming."

In terms of what he can do to weather this economy, O'Brien admits his options are limited. "I think we're hoping to ride it out," he stated. "I think we're going to have to go back, possibly in October, and sit down and talk with our financial institution and be honest with the bank about where we're at … I worry about whether we are going to be eligible to acquire more financial backing."

O'Brien, 61, also is hoping for his health to turn around because 2009 has been a medical nightmare. It started with rotator cuff surgery in May, at which point he was told to avoid strenuous work for six months and focus instead on physical therapy. Then he had knee surgery in July, developed a blood clot, and was hospitalized after suffering a pulmonary embolism, a blockage of the main artery of the lung.

"I'm getting awfully anxious because it's been frustrating to have these health issues at a time when I'm needed on the farm," he said. "I walk around and I see things that I should be doing and things that should be done but aren't getting done."

He has health insurance, but it's so expensive that he can no longer offer it to four full-time and four part-time employees.

Meanwhile, living extravagantly is out of the question. Pat and Tom have had to cut back on the amount of draw they take for family living expenses. Pat drives a 1999 model year car, and the farm, itself, owns two trucks, a '93 and a '99. They also have a contract with a custom farmer to plant and harvest crops, which has pared back machinery maintenance costs.

As for succession plans, the lack of timing means the farm may not remain in the family. "Our sons and daughters are in their 30s," O'Brien noted. "Because of the family structure here — my dad was an old Irish patriarch — my brother and I did not own the farm until my parents passed away in 2001. So, when they [children] were the age when we might bring them into the operation and expand to make room for them, we didn't have the equity or the position of ownership to say, 'Come and join us. Someday, this will all be yours.'"

Instead, the O'Briens are working on an exit strategy to put the farm in a position where it is attractive to a younger couple to come in and take over more of the management.

Cropping it Close

Jerry Bradley, a crop farmer who grows corn and soybeans, works with his brother Mark on Bradley Farms in Sun Prairie a family farm that dates back to 1848.

Prices for both corn and soybeans have been cut in half since the economy went into a tailspin. Now getting roughly $2.30 per bushel of corn and $8.90 per bushel of soybeans, Bradley recalls getting $7.30 and $15, respectively, at their peak in 2008. He, too, says input costs have not come down correspondingly, and he has never seen a situation quite like it. "I've seen markets tumble," he noted, "but what I've never seen before this situation a year ago, when the markets climbed up so high and so fast, and along with that, fertilizer prices doubled, everything else doubled. The price of diesel fuel went to $4. That's what I had ever seen before.

"Now the market is backing off. We're actually getting back to the norm, except those prices on fertilizer and fuel and everything went up so high, they are not coming down as fast as your [crop] markets are."

Bradley agreed that farmers are basically at the mercy of the national and global economies, and there aren't many options available other than to outlast the recession. As he waits for global markets to recover, he has tried to sharpen his pencil on costs.

"You're certainly going to look at all your purchases — fuel, seed, fertilizer, and herbicide prices — and you're going to look at buying in bulk, and really shopping around to make sure you're getting the best bang for the dollar," he said.

Recovery will largely depend on demand, particularly overseas. "We still export about 25% of everything we raise in this country," he noted.

At age 55, Bradley is still 10 to 15 years away from retirement. Since farm nest eggs are tied to the land — Wisconsin, unlike California, has enjoyed stable farm land prices — his preference would be to sell his property either to heirs, another established farmer, or a young farmer.

That's not always possible. Bradley has no children, while brother Mark has two daughters who don't appear to be interested in the farm. That could change, but at this point the smart money is selling it outside the family, and to the highest bidder.

"Farmers don't have a state retirement plan," he stated. "Our business is our retirement. Basically, what it amounts to is that we're always land rich and cash poor. All of our dollars are tied up in our farming operations. To retire, we need to sell our farming operations to the highest bidder."

"I'm not looking to retire," he added. "I enjoy doing what I'm doing and as long as I can continue to make a profit, I'll certainly continue to do what I'm doing. When the time comes when I cannot make a profit, and when the regulation and taxation has gotten to be so tremendous on my operation that I can't make money anymore, then I'll quit."

Dairy Ledgers

Agricultural lenders often are more flexible than their banking counterparts in working with borrowers, especially in a recession. Depending on the situation, Nilsestuen said they may charge only interest, or they will renegotiate a loan or extend it so that terms don't fall as heavily in a sluggish economy. Wisconsin farmers make great use of lending from the USDA's Farm Service Agency, which permits farm lenders to make guaranteed loans to farmers who do not meet the lender's usual underwriting standards.

In the current context, however, Jahnke said lenders are demanding to know more about how farmers will proceed before extending credit. "The talk is that there is plenty of ag credit available. That's the standard line," Jahnke said. "I think it's out there, but my contention is that farmers are going to have to come to the table with a business plan, and with a marketing plan. They're going to need their accountant readily available to the ag lender. They're going to have to show, potentially, some contractual agreements that they have, maybe potentially for their 2010 crops.

"Even though they haven't purchased the seed, even though they're months away from even putting that seed in the ground, lenders will want some security in knowing that farmers have got a plan, that they've got insurance on those crops, and that they've got a marketing plan at a certain price so that they can figure out whether their money is going to be in a secure investment."

Nilsesteun said the agricultural lenders feel they are in crosshairs and believe they need to tighten up. He worries that if they downgrade loan portfolios to value them at fire sale [foreclosure] levels, even loans that have never missed a payment can be classified as troubled, which is what happened in the early 1980s. At that time, interest rates were historically high and there were large loan losses, causing regulators to tighten down the screws.

"We're trying to stay away from that," Nilsestuen said. "Congress is aware of that and has done some basic things, but that is the tension that exists in the credit mess that we've had. The whole push is for tight regulation, and to not lose money, but you've got to fit the tool to the situation and the need, not just go across the board."

Silver Linings

The news isn't all bad for Wisconsin farmers. The state's strawberry growers, who have to cover a year's worth of operating expenses in less than a two-month window, were able to increase the price consumers paid at the patch because of their growing interest in buying locally. Cranberry production has been solid, and beef prices have rebounded, a sign the market has hit bottom.

A global economic surge would be just what the doctor ordered. Yet before the current doldrums, Wisconsin agriculture had experienced a revival in recent years, thanks largely to growth in corn-based alternative fuels and specialty cheeses (about 70% of Wisconsin milk goes into cheese.) Ten years ago, most of the state's cheese plants were operating at 70% of capacity; today, they are full and expanding, even during a very weak economic period.

Nilsestuen points to a huge spike in the number of young people who are going into farming. "If this recession doesn't totally erode that, we'll be able to come out of this," he said. "Had we not had these recent good years, it would be much more difficult."

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