Rustic crossroads sign.
February 8, 2018

Uncertainty Rains (sic pun intended)

 |  By: Dairy Talk

Dairy farmers are facing the most uncertain times since the Great Recession of 2009. Uncertainty over markets, immigration reform and the farm bill will etch the coming months into our memories for years to come and ones we already know we’ll want to forget.

I did a little look back to 2009 just to remind myself of how ugly things were back then. Feed costs approached $10. The all-milk price averaged $12.82/cwt, though some months in some states fell below $10. Idaho prices fell even further. I distinctly remember Mike McCloskey, Fair Oaks Farm, speaking at the Dairy Forum in early 2009, projecting that milk prices might not even cover his feed costs. That statement sent shudders through the crowd, and even dairy processors were shaken.

If feed costs hold steady this year, they could average maybe $8.50 to $9/cwt of milk produced this year. Most economists are projecting 2018 to be similar to 2016 in terms of milk prices. That means Class III could average $14.75, for an all-milk price of $15.25 to $15.75.

So the $3 or $4 milk-feed margins of 2009 likely won’t be revisited. But a $6.50 to $7 margin in 2018 won’t be anything to write home about. Other costs have risen as well. Prime example: The federal minimum wage in 2009 was $7.25/hour. Today, though the Federal minimum wage remains at $7.25, many states have upped their local wages, and many farms are paying $12/hour or more to keep and attract workers in a stressed out labor market.

On top of that, immigration reform seems as distant as ever. The debate over how to handle the 800,000 DACA kids (Deferred Action for Childhood Arrivals) has already created one government shutdown this year, with both sides seemingly willing to use these kids as pawns in their senseless partisan war. And if Congress and President Trump can’t get DACA solved, heaven help us on the rest of immigration reform.

There are a number of immigration reform proposals out there, ranging from a revised H2A program to state-based visa programs to a new H2C program. The H2C program, which would create a three-year visa with an 18-month extension, seems the most promising. “But in its current form, H2C is not strict enough for some Republicans, is too strict for some Democrats, and lacks support from some in agriculture,” says John Holevoet, director of government affairs for Edge Cooperative.

If there’s any good news, the current H2C proposal could be used as part as a starting point for a  compromise package on immigration reform. “[But] If immigration reform doesn’t happen this session, next session will likely be even worse,” he warns.

And then there’s the farm bill. Last weeks' budget bill adds $1.2 billion to the dairy baseline for the Dairy Margin Protection Program (MPP). The bill will lift the Tier I production cap from 4 million lb of annual production (about 185 cows) to 5 million lb (225 cows), eliminate premiums for Tier I $4.50 and $5.00 coverage levels and greatly reduce premiums for higher levels. Left unchanged is the MPP feed formula, so indemnities still won’t be triggered until all-milk prices fall to about $16. At that point, it doesn’t matter how cheap premiums are—farmers once burned will simply shrug off the program.

So here’s some grim, but prudent advice: If you’re a highly leveraged producer or trying to preserve equity at the end of your career, a visit to your lender sooner rather than later is in order. Try to fully understand your current equity position, what another 6 or 8 or 10 months of negative cash flow will do to it, and then make some informed choices.

In 2009, I proffered the same advice. Some producers loudly chastised me for it, saying I should instead have been advocating for policy solutions that would raise milk prices. Like then, there are no quick fixes now.  Only time and markets will correct the mess we’re in. Can you afford to wait?