Exhausting. That’s how Hank Choate describes the last three years in Michigan as dairy farmers there have continued to receive the lowest milk price in the country. “The impact, the economic toll it is having on many producers is heart-wrenching,” he says.
The fifth-generation dairy farmer from Cement City operates Choate’s Belly Acres in partnership with his family. The Centennial farm can trace back its roots in southern Jackson County more than 180 years.
Choate says that strong foundation and an incoming generation with a desire to farm are helping him push through one of the most challenging economic times of his career. “It’s not fun to sit down and try to pay the monthly bills with our current milk check,” he says.
Choate says he is deeply saddened by the suffering that’s taken place in Michigan’s dairy industry and questions what it will look like in just five years.
“Because of the dairy economy, we’ve made a decision that we were going stop our building mode, pay down some debt and just try to hold our own,” he says.
The farm has been in a growth mode for more than 15 years and added a heifer barn in 2014 to expand the herd to 480 cows. Low prices have put some plans on hold.
Since 2016, it’s been difficult for most dairy farmers to cover 100% of their cost of production. Choate says that has meant burning equity to stay afloat, and it’s a reality in all sectors of agriculture he’s seen as a board member of GreenStone Farm Credit Services.
“There’s even been some producers GreenStone is working with to be interest-only customers to cover debts,” he says.
For dairy farmers the coffers are running dry, and according to Choate, simply selling the cows isn’t enough. “There are so many cows going to market right now, and the number of purchasers has diminished so much that the value of the cows is 60% of their worth on a producer’s balance sheet,” he says.
What’s left?
The question for many has come down to how much equity is left? Ken Nobis, Michigan Milk Producers Association president and a dairy farmer, says the length of the downcycle has expedited some farmers’ decisions to leave the business.
“You can only burn equity for so many years, and either your lender strongly suggests that you exit the industry, or what I’ve seen more of is that farmers are just getting worn out after three consecutive years of a downturn,” he says. “You are starting to see more of them making the decision that enough is enough.”
Over the last 10 months, MMPA has lost more than 120 farms. “That’s more than 10% of our membership on an annual basis because that doesn’t include the months of August and September on farms going out,” says Choate, who serves as a district director on the board.
A large portion of the farms have been Amish. “The Amish are getting out of the dairy industry very, very rapidly and getting into other sectors of agriculture to operate their farms,” Choate says.
While there’s been an uptick in the number of dairy farms that have closed, milk production is not declining as much as is needed. “Up till now it would appear that those cows are just going on other farms, says Chuck Courtade, Dairy Farmers of America regional manager, who covers Michigan and parts of Indiana and Ohio.
“All farms are under stress right now. It doesn’t matter what size, [or] how many generations have been on the farm. Everybody is struggling right now,” he explains.
Fewer dairies have also added pressure to the milk hauling system. According to Courtade, 25% of Michigan’s production is shipped across stateliness to be processed. “If you have a remote area where there aren’t a lot of dairy farms, and two or three decide to sell out, it puts a real challenge on getting haulers there at the same time we’re experiencing a driver shortage,” he says.
Michigan’s milk production had been growing 4% to 5% annually, until this year it started to contract. USDA reports July 2018 production declined 0.9% from last year, which Choate believes is not only a sign more farms are exiting the business, but also more cows in general are being culled.
“You used to see maybe 25% of the herd being sold going to slaughter when a dairy sold. Today that’s now about 30% to 40% and even entire herds in some cases,” he says.
Tough times have only become amplified with retaliatory tariffs from China and Mexico, as well as reduced feed supplies after a dry growing season.
“Purchasing feed when you’ve got a narrow margin on your milk check already is going to be very, very difficult for a lot of farmers,” Choate warns.
Courtade expects finances for farms to get even tougher this winter. “You take the cost of planting a crop and then not getting one, having to buy feed with a milk check that’s small already, it is just putting tremendous strain on a lot of families,” he says.
Nobis believes prices will get better, but farmers are too efficient to ever experience similar highs to what was seen in 2014 with $24 milk. “Our producers around the world are too good at what they do. Unless we can get the pricing structure changed and permanently remove subsidies that exist in some corners of the globe for dairy, like the EU, we’re going to have a challenge,” he says.
Is more processing enough?
Michigan farmers have nearly doubled milk production since 2000, with about 40% more cows. “It has put us a little behind the eight ball compared to our neighboring states because we don’t have enough processing capacity,” Nobis says.
He attributes the lack of processing and unbalanced dairy processing portfolio for some of the lower dairy prices in the state. “We’re short on the Class III category, which plays heavily in the producer pay price and puts us at a disadvantage with neighboring states,” he says.
MMPA saw the need for more processing in Michigan as early as 2007, according to Nobis. “We expanded our facility at Ovid, but nobody expected production to increase at the rate that it did for as long as it did,” he says. “In our co-op, that’s kind of where we got behind. We incorporated other expansions over this time frame. But with the rapid increases in production, we weren’t keeping up.”
Nobis believes the low milk prices in Michigan are not solely tied to a lack of processing. “The real game-changer was when the European Union did away with their quota system in March of 2015, and production increased so dramatically it added too much milk to the global supply system,” he says.
Courtade says while some farmers may be wondering how they’ll keep operating until the new St. Johns processing plant opens in 2020, it will raise the tide for all farmers. “The more milk that can stay in the state, it’s less hauling costs. It’s less under-order-pricing. In fact, there will be a premium on the sales to the cheese plant,” he says.
It’s estimated the plant will provide at least $50 million annually to the state’s dairy industry, which Courtade believes is a conservative number.
Choate says recent processing projects in Michigan will only treat the symptoms rather than treating the “illness.”
“Global production is increasing more than 2.2% to 2.3% at a time when consumption is only increasing 1.7% to 1.8%, which is creating a gap of overproduction,” he says. Choate believes until that gap narrows, recovery to profitability is not possible.
Is supply management needed?
Choate says the cost of production for dairies still is highly variable, which would make it difficult for the industry to set one price for milk. Farms that have expanded to lower costs and provide living wages for family members typically benefit from economies of scale, but size has not necessarily protected them from the downcycle.
“There have been producers who have been asking for some type of production controls, and we’ve been told the tone of the conversation nationally has reached a point where producers may be more willing to bring production and utilization more in-line,” he says.
For supply management to work, Choate says it needs to be a national decision for farmers, and he believes there’s more urgency for the discussion.
As the industry continues to struggle, Nobis, who serves as the first vice chair of the National Milk Producers Federation, says talk of taking control of the supply has increased, but the method of doing that is extremely complicated.
“If you’re going to talk about something like the quota system in Canada and what was in the EU, I don’t see that ever happening in this country,” he says.
Nobis expects pricing milk in a way that excess milk is priced lower will be more seriously looked at in the next several months.
Two years from now when the St. John’s plant is operational, Courtade believes Michigan farmers will go into another expansion mode, but they need to be careful. “We probably need to watch that a little bit more and manage it better to maintain the prices, so we don’t get right back into this situation,” he says.
Take the margin
Choate says the continued tight prices has forced him to take the margin when available in the market, rather than waiting for something higher.
“Over the last three years, there’s been marketing opportunities we’ve seen go by that we haven’t taken advantage of that would have put us in a better situation,” he explains.
Choate calculated that during that time, if he had received $1 more per cwt, he could have captured at least $500,000 more for his operation.
Over the past four years, about 20% of Michigan dairy farms have closed, according to the Michigan Department of Agriculture and Rural Development.
The department reports the state has 1,331 Grade A dairy farms, down from 1,662 in October 2014. Nearly half of those closures have occurred since September 2017.
The county that lost the most dairy farms during that period was Hillsdale County, down 46 dairy farms, or 38%. The current plight of the state’s dairy farmers, according to the department, is caused by depressed milk prices due to oversupply of milk and high transportation costs due to the current lack of milk processing facilities in the state.
In 2017, the loss to Michigan milk producers was more than $164 million, according to MDARD.
USDA continues to report Michigan’s all-milk price as the lowest in the country, $14.20 per cwt in July, $1.20 below the national average.
Source: michiganfarmer.com
