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February 4, 2003

Dairy producers face financial challenges in 2003

WEST LAFAYETTE, Ind. – Purdue University experts expect dismal milk prices and continued increases in production costs for the coming year, signaling potential difficulty for some dairy producers.

"Milk prices have been at low levels for almost a whole year," said Mike Schutz, Purdue Cooperative Extension Service dairy specialist. "And it doesn't look like there will be any relief until late this summer. Some dairy producers will have to evaluate their operations and determine if they should stay or if they should look elsewhere."

Chris Hurt, a Purdue Extension agricultural economist, pinned the blame on overproduction in 2002.

"Dairy really suffered from major increases in production in 2002," he said. "That production wasn't consumed because of weaker demand. This built up dairy product inventories. As a result of those inventories, we're going to see substantial price depression for milk during 2003."

Schutz said the U.S. Department of Agriculture predicts a marginal increase in July or August in prices for Class III milk, which is used for cheese. Other than that increase, prices are expected to be low.

"Right now the target support price is $9.80 per hundredweight (cwt) for Class III milk. In truth, that milk is trading for about 4 cents below the support price," Schutz said. "USDA figures show average costs of production at $14 per cwt for this part of the country."

Hurt said the USDA also estimates that all-milk prices will be around $11.85 per cwt this year. Last year the all-milk price averaged about $12.10 per cwt.

The predicted prices don't cover cost of production on some farms, Schutz said. That may leave some producers asking where to go from here.

The answer to that question varies from farm to farm. Schutz said farms in the 200-400 cow range will be most hurt by the situation. Farms with smaller herds will be helped by program payments from the farm bill. Larger farms can spread their production costs over more cows and usually have a better relationship with their lender, he said.

Schutz said dairy producers have several options.

The first step is to evaluate the operation and determine its strengths and weaknesses.

"Sometimes a farm struggles with harvesting hay and silage, or isn't efficient at raising replacement heifers," he said. "Those are things producers can contract out and save money on."

Producers with milking herds should consider culling conditions. Schutz said it could be more profitable to cull low producing cows and save money.

USDA first quarter cull cow estimates are 39 cents to 41 cents per pound, second quarter are 48 cents to 50 cents, third quarter are 47 cents to 49 cents and fourth quarter are 45 cents to 47 cents per pound, Schutz said.

"Right now cull cows are priced between 25 and 46 cents per pound at Topeka Livestock Auction in Topeka, Ind. That's around $500 per cow," Schutz said. "Just be sure you don't cull so many cows you compromise the long-term potential of the herd."

Schutz said perhaps the most important thing dairy producers need to do is talk to their lenders. A banker needs to know the short- and long-term goals for the herd, he said.

"Lenders are often a good resource on how to reorganize debts to reduce payments. They also know other money saving strategies," Schutz said. "The better informed the lender is, the better he or she will be at helping make the best decisions for an operation."

If a producer decides that selling the herd makes the most sense, there are other options, Schutz said.

"Sometimes an operation has great dry-cow management but is struggling with production. That producer might consider specializing in dry-cow management and giving up the milking herd," he said.

Producers also could capitalize on their knowledge of forage production or raising replacement heifers and develop a business based on those skills, Schutz said.

"Just as it makes sense for some producers to contract out tasks, it makes sense that another producer can provide that service," he said.

Selling the milking herd isn't always a losing proposition. Some dairies are looking for replacement cows for their operations, Schutz said. It's not uncommon for a large dairy to purchase an entire herd, he said. In those cases a producer might be able to sell a herd for as much as $1,400 per cow.

Dairy producers also will get help from the Milk Income Loss Contract program, a federal milk support program. Program payments for 2002 production are just now reaching farms. In fact, Schutz said he thinks that might be another reason for last year's overproduction.

He said some producers kept cows in milk longer than they normally would have, and others planned expansion projects because they knew the program payments were coming. Once the barns were built, banks encouraged producers to fill them with cows. Therefore farmers increased their production, even though milk prices were low, Schutz said.

To help Indiana dairy producers make the best decisions possible, the Purdue Dairy Extension team has set up a Dairy Roadshow to address dairy outlook, manure management, profit tips and animal health. Roadshow presentations are planned for various sites around the state from Feb. 17 to March 25.

Writer: Kay Hostetler, (765) 494-6682, kjh@purdue.edu

Sources: Mike Schutz, (765) 494-9478, mschutz@purdue.edu

Chris Hurt, (765) 494-4273, hurtc@purdue.edu

Ag Communications: (765) 494-2722; Beth Forbes, bforbes@aes.purdue.edu; http://www.agriculture.purdue.edu/AgComm/public/agnews/


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