Milking Price Spikes Just a Bit Longer

As Wisconsin farmers approached the 2011 planting season, optimism was higher, even though they are still in recovery mode from the disastrous years of 2008 and 2009. Milk prices have been well above the break-even point for much of the year, and food inflation has driven commodity prices higher across the board. But input costs such as fuel, seed, and fertilizer also are high, which means margins are not as healthy as the milk and crop prices might suggest.

Those high inputs make it hard to quickly recover from the losses of 2009 in particular, when many farmers had to borrow against their equity just to pay the usual assortment of bills. The money now coming in helps them maintain a good cash flow, enabling them to pay off some of that debt incurred in 2009, but it will take several years of healthy prices to recover completely.

While farmers recently got between $18 and $19 per 100 pounds of milk – the break-even point is anywhere from $16.50 to $17 – the price is forecast to fall back to about $16 per hundred weight. Some farmers receive premiums, while others get docked for the quality of the milk, so the current price might not be what they are getting at the mailbox, but all will be affected by price moderation.

"They were hurting big-time in 2008 and 2009," said Dave Muehl, a partner and CPA in the agribusiness division at Wegner CPAs and Consultants. "2010 was a bit of a rebound, and 2011 is helping, but having prices projected to go down is not a good sign for them."

Farm living

Alan and Fran Rademacher have a 700-acre dairy farm in the Town of Sun Prairie, and rent additional acres. They have a 210-cow herd, and are currently milking 185 of them (the others are resting for five to six weeks before having their calves). Alan, 56, has been milking cows since he was nine years old, but never before has technology turned farming into more of a mental, rather than physical, exercise.

The farm's largest revenue stream is the 6 million tons of milk produced per year. It raises corn – 80% for silage and high-moisture corn; 20% for cash – plus soybeans, alfalfa, and wheat. In 2009, when milk prices plummeted from $18 down to $10, and the per-bushel price of corn was cut in half, the Rademachers had to tap into their equity to make ends meet.

Rebounding milk prices, now about $18.50 per hundred weight, and corn, which has risen from $3 to $6 per bushel, could help them recapture lost equity over three to five years.

Diversification helped the Rademachers in 2009, as the sale of steers and crops helped offset the milk losses. While milk and crop prices have rebounded, costs have risen for a range of inputs – seed, fuel, fertilizer, and the steel used for new buildings and machinery. A few years ago, they paid $2 for a gallon of diesel fuel. Now they pay $4 per gallon.

According to Alan Rademacher, only the price of chemicals has stabilized, and these input prices remain an overriding concern. "We also need these higher milk and crop prices to offset the higher cost of feed and fertilizer and other input costs," he noted.

If not for daughter Heidi, who works the farm, owns 10% of the operation, and could someday run it, and her fiancé, Stuart, Alan and Fran might not be milking today. If not for technological enhancements, they might not be in farming at all.

Technological upgrades have helped farming become a more cerebral, and less physical, occupation. Thanks to modern machinery, farmers have gone from small, 50-pound bales to large, 1,000 pound bales, from vertical silos to horizontal bunkers, from milking in stanchion barns to milking in parlors with stalls that are more comfortable for cows. The couple estimates they have invested anywhere from $800,000 to $2 million in new farm buildings. (To make it easier for farmers to modernize their farms, Gov. Walker has signed into law a dairy and livestock farm investment tax credit.)

The farm also has gone from cruder methods of mating bulls and cows – basically guesswork – to more scientific ways of breeding good milk producers. It's a combination of artificial breeding, genetic matching, and computer programs. "We have our cows mated based on the traits you want," Fran said. "It goes into a computer, and the computer can pick the match."

As a result of this genetic approach, plus feed technology (a more expensive input) and other innovations, cows are more productive. Cows once produced 60 to 90 pounds of milk per day, and now they give 80 to 160 pounds. "It used to be where it was hard to get a cow to produce 100 pounds of milk per day, but some of these cows do it effortlessly," Alan said.

Food planet

In 2010, Wisconsin agriculture saw a record amount of product exports, a 36.4% increase to a value of $2.41 billion. Experts cited higher commodity prices and the decreased value of the dollar, but there are other explanations.

While Ben Brancel, secretary of the Wisconsin Department of Agriculture, Trade, and Consumer Protection, said Wisconsin needs to improve its animal identification system to reassure overseas consumers, the future of selling overseas looks bright. "As the world's population grows, and as its middle class grows and they desire more prepared products and different types of products," Brancel said, "it gives us a future with opportunities."

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