Plunging profits Farmers hope to weather perfect storm of high production costs, low sales

Mar 1, 2009      Centre Daily Times

Nick Malawskey

Mar. 1, 2009 (McClatchy-Tribune Regional News delivered by Newstex) -- ZION -- A few miles past the village of Zion, a gravel road peels off of state Route 64, heading toward a tree-lined ridge.

Not far from the road sits a red barn, surrounded by four silos and a few outbuildings. It's Stringer's Sand Ridge Farm, one of almost 300 dairy operations in Centre County.

Bill Stringer, the second generation to work the farm, moves confidently through the barn. The cows, used to his presence, barely take notice until he begins pushing a wheelbarrow full of feed down one of the aisles.

Twice a day, Stringer and his family milk the cows. It's the same routine, 365 days a year.

"You don't get weekends off when you milk cows," he said as he walked through the barn, home to about 90 dairy cows.

Stringer's family has been milking cows on the farm for close to 50 years. He took over the day-to-day operations from his father in the 1980s.

During that time the family, like other farmers, has seen good times come and go and has ridden out the bad days.

That's what they're doing now, as dairy wholesale prices continue to decline even as production costs creep higher.

In the first half of 2008, milk prices were high -- a year ago they averaged $19 per hundred weight. In November and December, the price retreated precipitously as demand for dairy products plummeted in the face of the worldwide recession.

Today farmers are being paid about $12 per hundred weight (about $1 per gallon), depending on what the milk is used for.

That might not sound bad until you consider that the price of corn increased between December and the beginning of January, and other feed prices followed suit. Gas and diesel prices, after dropping, also began edging upward.

So farmers are seeing their incomes drop at a time of "historically high production costs, and when you look at your bottom line that's not good news," said Mark O'Neill, media relations director with the Pennsylvania Farm Bureau.

Craig Altemose, with the Penn State Cooperative Extension of Centre County, said local farmers are finding themselves in a "very ticklish situation."

Many farmers, Altemose said, are lucky just to break even, and some are producing at a loss. The break-even point for some farmers, Altemose said, is actually about $3 to $4 dollars per hundred weight above what they are being paid.

Part of a global market

Altemose and O'Neill said several factors are contributing to the decline in milk prices, almost all of them related to the world's economic troubles.

In the past few years, the United States was exporting more dairy products than ever before, buoyed by droughts in other parts of the world and an increase in demand from China and Indonesia, O'Neill said.

Farmers stepped up production, added cows to their herds and pumped more milk into the global marketplace.

Then the bottom dropped out of the world economy.

Now the droughts in Australia and New Zealand have ended, and demand within the U.S. and around the world has dropped, O'Neill said.

As the fifth-largest producer of milk in the nation, Pennsylvania feels the effects of changes in that global market.

And that's true as well of Centre County, where 300 of the county's 1,200 farms are devoted to dairy production, contributing about $40 million in annual revenue to the county's economy.

Milk produced in Centre County is shipped all over the Northeast and used in a number of products, including bottled milk, cheese and other dairy items.

Stringer's farm, which produces about 800 gallons of milk a day, supplies grocers in the Philadelphia, New Jersey and the New York areas.

"It (farming) is a huge part of our economy in Centre County," Altemose said.

O'Neill said the bureau has estimated that each cow alone brings in about $13,000 to the local economy, with farmers spending about 85 percent of their profits in their communities.

"So if the prices get so bad where our farmers are going out of business or are selling off their cows, then it hurts the community as well," he said.

Culling herds an option

The obvious alternative for some dairy farmers is to cut costs by reducing the size of their herds, thereby saving feed, fuel and other expenses.

"And if that happens on a global level, then the milk supply drops and prices increase again," Altemose said. But there's a catch.

Since August, the price of a slaughter cow has declined even more steeply than milk prices, from $60 per hundred weight to $38 per hundred weight in December.

There is also a cultural resistance against wholesale herd cullings.

O'Neill said that in Pennsylvania, many dairy operations are family affairs that have been handed down over several generations.

"They're not just dairy farmers for the money. ... It's a lifestyle for many, and they've been in dairy farming for generations," he said. "It's more to them than just about income."

There is a private initiative available called Cooperatives Working Together, in which dairy farmers submit bids to the cooperative for their herds. Those selected are slaughtered and the farmers are paid on a per-cow basis according to the bids. The hope is that reducing the supply of dairy products on the market will stabilize prices.

But in Pennsylvania, O'Neill said, it is not an option that many are considering.

"Because once you sell out, it's very difficult to get back in (to the industry)," O'Neill said. "Although it's an option out there for some, it's not an option we expect a lot of farmers to participate in."

Riding it out

With beef prices down, milk prices down and costs going up, many farmers find there's only one other recourse -- seek additional income or borrow money to keep the farm going until prices rebound.

But the national credit crunch, which has affected everything from car and house loans to inter-bank lending, is also casting a shadow over the agricultural markets.

Bottom line: Farmers, already struggling to make ends meet, are finding financing harder to come by.

The last farm bill passed by Congress makes some help available.

A program in the bill, the Milk Income Loss Contract program, establishes a baseline for milk prices. When milk prices drop below that baseline, the farmer is eligible for some income assistance, O'Neill said.

"Now, the money they are able to get from that, it helps them pay some bills ... it helps them stay afloat," O'Neill said. "It certainly does not pay off all their bills, and they certainly are not making a profit."

Until things improve, many farmers are putting projects and equipment purchases on hold.

At his Zion farm, Stringer said he had anticipated purchasing new equipment to replace a milk pipeline installed in the 1970s. But the cost -- he was given a quote of $23,000 -- is one he can't justify now.

"So things are being put on hold for a while," he said.

What is more important is keeping the cows fed, the farmhands employed and the farm operating.

"You just have to keep plugging away," he said. "You just have to ride it out."

O'Neill and Altemose say that farmers are facing a tough year ahead. But if they can hang on, there may be light at the end of the tunnel.

"The prices are going down, but are expected to even out around April or so before going back up slightly," O'Neill said.

They're just hoping farmers, in better times, were able to pay off some of their debt and put enough money into their reserves to carry them through. In the meantime, the Penn State Cooperative Extension is working with farmers to help them assess and manage their farms and educate them about the market, Altemose said.

In this economy, he said, "you've got to manage your business, and you've got to hedge your bets."

Altemose said he has been around the agricultural industry for close to 30 years and has seen farmers weather declines before.

"But I have never seen the market fluctuate as much as it has in the past year," he said. "It's scary."

Nick Malawskey can be reached at 235-3928.

Newstex ID: KRTB-0179-32431281

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