Weathering the storm

The coronavirus is just one more hit for Wisconsin’s resilient farmers.

From the pages of In Business magazine.

Champing at the bit to get their fields planted, farmers are crossing their fingers that the 2020 crop will be a good one with plenty of sunshine and soft rains. Getting on a tractor these days can be a therapeutic respite from the global and deadly coronavirus (COVID-19), just another hit farmers must endure through no fault of their own.

At Kellercrest Registered Holsteins in Mount Horeb, dairy farmer Tim Keller checks the futures market for milk. It’s not good.

“As of right now, it’s down 72 cents,” he relates, and projections keep falling through next year.

“I’ve never seen it this bad. We’re talking $13.86 right now for May. That’s what we got paid in 1983! Thirty-seven friggin’ years ago! Could you live off what you were paid 40 years ago? And people wonder why we’re stressed out.”

As recently as July 2017, the fifth-generation farming operation with about 325 milk cows was receiving $18.34 per hundredweight for milk, the main source of annual revenue for Keller and other dairy farmers, but prices have tanked since.

After a cold, wet spring in 2019 and a surprise Halloween snowstorm, prices ticked up and farmers anticipated better news in 2020.

Nobody planned for a global pandemic.

With schools, restaurants, and bars shuttered until further notice, processor warehouses filling up, and dairy exports at a virtual standstill, dairy farmers are now being asked to dump much of the milk they produce due to oversupply.

It’s a revolting development.

In fact, in a recent podcast, Dr. Mark Stephenson, director of dairy policy analysis at the UW–Madison College of Agricultural and Life Sciences, noted that just two or three days of milk-dumping could wipe out an entire year of a farmer’s profits.

Meanwhile in the fields, farmers focus on the spring planting season.

It’s what they do best.

Wearing two hats

Dawn Haag was a lender before marrying into her husband’s dairy farm business, Virhada Registered Holsteins LLC, about 35 years ago.

The milk-dumping situation, she says, is “heart wrenching.” The family has been farming in the valley just outside of Mount Horeb for over 100 years and currently milks about 180 Holsteins plus young stock. Cows are milked twice a day and the milk is sold to a nearby cheese factory. On a daily basis, Haag says it’s not uncommon for a dairy cow to produce between 75 and 100 pounds of milk.

Her husband, son, and daughter run the dairy business so Haag can head to her full-time job at Compeer Financial, a member-owned, ag lending cooperative. Usually, by the time she puts her ag lending hat on, she’s already cared for baby calves and helped start the milking process, which begins routinely at 5 a.m.

A good farmer-lender relationship is vital, Haag comments, but as a dairy farmer in the time of COVID-19, she’s most concerned about her family and those that service the dairy industry — the experts or breeders they rely upon — hoping they’ll stay safe and aren’t forced to shut down due to illness or staffing issues. On a broader scale, she wonders if foreign countries will have the money or resources to continue purchasing dairy from the U.S., and how food will get from one place to another. “The food chain is huge,” she states.

The United States-Mexico-Canada Agreement (USMCA) was a start. “In my opinion, any time we can get people to agree on trade agreements, it benefits agriculture because we know they’ve framed up a process. It may change, too, but it’s very, very important for the Wisconsin dairy industry to have these agreements.”

That said, COVID-19 has already negatively affected milk prices. “Time will tell,” Haag sighs. “Obviously we were not anticipating this type of event.”

A futures beef

In Janesville, Austin Arndt, 36, a partner in the third-generation Arndt Farms Inc., a farm-to-table beef farm, raises Black Angus beef cattle with his dad, brother, and two uncles. Together, the operation “feeds out” about 1,800 Black Angus steers on an annual basis, with most sold to Tyson Foods.

The Arndts also grow feed to support the livestock and plant about 3,000 acres of crops, from field corn for ethanol and cattle, to soybeans, peppermint, peas, sweet corn, green beans, and seed corn.

In early April, the farmers were itching to get their crops in the ground. “We only have so many growing-degree days in May,” Arndt explains. “If we push them out too long, we may end up dealing with wet-grain issues, frost, and other challenges that fall can bring.”

His particular beef is with the futures markets, which was designed to let farmers know how to price their animals.

Led by CME Group, the largest global derivatives exchange, Arndt says the markets aren’t trading fundamentals anymore.

“Computerized trading favors volatility,” he explains, “but farmers hate volatility! When you have high-frequency trades and computers doing quarter-ticks, I don’t think it’s good for farmers or consumers.”

Meanwhile, cost basis, or the difference between the cash market and the futures market, has grown so wide that it’s affected the accuracy of the futures market, Arndt explains. “Americans are good at what they do, but if traders can set computers to trade a quarter-cent on volatility, sure, they can make big money, but that’s not what the futures market was set up for, and that’s a challenge we’ll have to address moving forward.”

Farming is all about managing and protecting risk, Arndt explains, and futures provided a tool in the toolbox to help mitigate that risk, “allowing us to hedge prices, do options, put floors or ceilings on prices so we’d know where we’d be on a breed of cattle or crop of corn. We could manage our selling price risk when purchasing inputs (seed) six months beforehand, but with the basis so wide now, we can’t use the board anymore to manage our risk.

“Our margins run tight. Sometimes we only have a 5 percent margin. Ten percent would be fantastic!”

The result is a fickle system where some days the farm loses a lot of money, and some days it rebounds, “and it’s all due to the global marketplace,” he says.

Arndt wishes people had a better understanding of where food comes from. “We do care for the environment and we do care for the land, and we’re always doing our best for the consumers. My family eats the beef we raise, the vegetables we grow, and we drink the water from our well, so it needs to be safe for us, too!”

And while he has no issues with organic farming, he wants people to know that producing organic food reduces efficiency, costing farmers more time and money.

“If the public wants locally grown, locally sourced food made to their specifications, they have to be willing to pay for it,” he remarks, a slight bite to his words. “Otherwise, they’ll be shopping at the Amazons, Walmarts, or Costcos of the world rather than helping the mom and pop shops down the road.”

Another mistruth is that farmers use antibiotics in their products. “There are no antibiotics in meat!” he bristles. “It’s illegal!”

End of a generation?

At Kellercrest Registered Holsteins, Tim Keller couldn’t agree more. The idea of antibiotics in food is clearly a sore spot. “There are no antibiotics in milk or chicken, and labeling a product as ‘antibiotic-free’ implies otherwise. It’s a marketing ploy that twists the truth and I’m sick of it!”

Kellercrest Registered Holsteins is operated by Keller; his wife, Sandy, treasurer; and agronomist-brother, Mark, vice president; plus five employees.

The farm has won national awards for its land and water conservation, including a concerted effort that reduced phosphorus runoff by 40 percent. In fact, Keller says his 86-year-old father, who still visits regularly, introduced contour farming to Dane County as a way for farms to keep soil intact and reduce runoff.

The family’s cows are milked three times a day at 4 a.m, noon, and 8 p.m. Keller has nurtured and cared for the herds since he was just 10 years old, yet he hints that this could be the farm’s final generation.

“I’m having a hard time promoting this lifestyle to my two grown children as a good career choice.”

There are some positives. On the geopolitical stage, the aforementioned USMCA is one; and if China follows through to purchase more agricultural products, so is the phase one trade agreement the Trump administration negotiated with the world’s most populous country. As for tariffs, in Keller’s opinion they haven’t affected the dairy industry as much as they may have other parts of agriculture.

Globalization has had more impact, he notes. African swine fever, for example, which decimated most of the Asian hog market over the past couple of years, dried up exports of dairy whey, a milk byproduct used to feed hogs. “Back in the day, [farming] issues were local or regional problems,” Keller explains. “Now, what happens in Asia or Australia affects us here in Mount Horeb.”

Weather is always an outlier as planting and harvesting windows have been reduced. Kellercrest is on a hill, so while it drains quickly, it also dries out quickly.

But stretches of dry days have been rare since 2018. “Last year we cut our entire crop in a day and a half,” he says, leaving all 300 acres — enough to feed the cows through the rest of the year — vulnerable. “We finished at 2 a.m., and we were elated!”

By 6 a.m. the rains started again. “There’s nothing better than good quality feed,” Keller says. “If it’s crap, your production will show it.”

The economic impact of COVID-19 is still unknown, but thus far, it’s not good.

“Ever since it became the talking point, prices have dropped $3 to $4 due to a fear of markets shutting down and bottlenecks in the supply chain. Now we’re told by our milk plant not to send them more milk because their markets are slowing down, too.”

Dumping milk seems unfathomable.

Keller hopes those quick to criticize farming practices spend more time learning the truth about agriculture management. “Put an American farmer against anyone in the world and we can be more efficient and outperform anyone if you put us on a level playing field,” he challenges, “and nobody has a smaller carbon footprint or loves the land or their animals more than the U.S. dairy farmer.”

These are scary times for dairy, he admits. “We need to move our products from restaurants and schools to grocery stores and food pantries, but the supply chain is not set up to change quickly.”

Lending a hand

Steve Eager, market president-agricultural division at State Bank of Cross Plains, lives and works in Evansville where his former bank, Union Bank & Trust Co. [UB&T] recently merged with State Bank. “We’re not changing our outlook or commitment to the agricultural community as a result of the long-term downturn,” he states. That said, farmers just need a break.

“Ethanol plants, a huge driver in the corn market, have ratcheted back production due to a lack of demand, while Saudi Arabia and Russia are flooding the market and won’t restrain production,” Eager explains. “We also have a shale industry that has helped make us an oil-independent versus oil-dependent country. All of these factors are playing into the ag market.”

Besides COVID-19’s negative impact on commodity pricing, the recent surge in substitute milk popularity (oat, almond, etc.) doesn’t bode well, either.

It’s tough on lenders, too, Eager notes, many of whom have worked with farmers for decades. “We all move in the same circles. Our success is based on their success.”

Lenders counsel farmers through the toughest of times, perhaps even through liquidation, and it’s tough to tell a farmer who has farmed one way for decades that they may have to change their ways.

The 40-acre farm handled by a single Allis Chalmers tractor and a small plow and planter is rare, Eager notes.

Consolidation has created 1,000- or even 5,000-acre farms, and current technology can plant as many as 32 rows of seed in one sweep. GPS, which agriculture has used for years, allows farmers to read the yield on a crop as they move through the field.

“It’s very capital intensive to put a crop in,” he explains. Many farmers take loans out every year to cover input, planting, fertilizers, and chemical applications to keep pests away. Ideally, loans will be paid back by the end of the year with some extra money leftover to apply to the bottom line. “Nobody wants to do all that work just to break even.”

There are options, Eager notes, such as selling the herd and switching to crop farming, or renting land to others.

He’s less excited about leasing land for enegy (i.e., solar) farms. “Once you build something like that on farmland, it will be
really difficult to repurpose [it] back to farming land. It wouldn’t be the highest or best use of the land.”

Digesters that process manure into methane gas could provide some financial benefit down the road, Eager suggests.

“Some people wonder if in the future we’ll milk cows just to produce methane gas, with milk being an oh-by-the-way byproduct, versus milking cows for milk and the manure being a byproduct.

“Stay tuned. It’s an out-of-the-box idea but it’s definitely happening.”

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