Tulare County dairyman and Western United Dairymen president Tom Barcellos expects “double digit bankruptcy filings” by local dairymen in coming weeks as the feed price crunch caused by the Midwest drought hits the credit crunch at home this summer.
“Dairymen are getting out of the business – sending their cows to slaughter as fast as they can” says Barcellos whose family has been milking cows on their ranch near Porterville since the 1940s.
Barcellos ships milk every day to his co-op, Land O Lakes in Tulare,one of the largest milk receiving locations in the nation.”In the past week Land O Lakes has been receiving 1.1 million pounds of milk less every day than a week ago.That’s not the summer heat,which reduced milk volume earlier this summer – that’s due to cow liquidation.”
“People are exiting this business in droves.I would say catastrophic just about describes the situation.” Tulare /Kings Counties is the most productive dairyshed in the US, accounting for about 38% of the milk in California.
Hanford dairyman Joaquin Contente says “everywhere I go around my area I see vacant dairies or places being put up for sale. These are my neighbors – people who have been in the business a long time, some three generations. Now they just want out. It’s the big wipeout.”
Fresno bankruptcy attorney Riley Walter agrees.”This is just a bloodbath. In the past 18 months I have been worked on 58 dairy bankruptcies.Remember that does not tell you the whole story when you include going into receivership with your bank or voluntary dissolution”, a sale or auction for example.”These are all ways dairymen are getting out.” Add to this that the pace of filings” has increased dramatically in the past few weeks” says Walter who has been doing this “for a very long time.”
The typically volatile dairy business was made worse this Spring with a surge in production resulting in a glut of milk that further lowered prices. At Land O Lakes-Tulare they retired 17 dairies in April to try to right-size the milk supply.
Now the issue is feed costs that have surged this summer taking not just corn but soybeans, other grains and hay up to to levels not seen ever. ”There is not enough money from their milk check to pay the feed costs” exclaims California Dairies Inc. CEO Andre Mikhalevsky.
Corn’s Impact…It Sucks
USDA says this week that corn prices on the cash market have soared and the season average price for 2012/13 is now projected at $7.50 – $8.90 per bushel, a substantial increase from July’s forecast $5.40 – $6.40 per bushel.
Back in 2009 banks and feed companies would back dairymen up, carry them for a while to tide them over. Dairymen had equity but in many cases after the tough years of 2009/2010 – that’s not true any more explains Barcellos. They still owe money and banks and feed companies can’t wait any more this time.
In a domino effect that leaves the lender – whether in the feed, supply or finance business – holding the bag on some of this debt.
“I am doing OK because I grow most of my own feed” adds Barcellos “but I also supply some of my neighbors and I hope I get paid.”
In the relatively small business community local feed companies are being forced to say no to long time customers. “I would say this is the worse I have ever seen it with dairymen going out of business, farms on COD and lots of bankruptcies.I don’t know what to tell you except it just sucks” laments Visalia grain dealer Kevin Kruse.
Attorney Riley Walter says from the feed companies point of view the super volatility of the corn market is making their business more risky.”I had a feed guy tell me what they have to face.They call Omaha and order a 100 unit train of corn and the guy says wire me $4 million. By the time the corn is shipped and sold here the local grain company is waiting 70 days before he even starts to collect.Even if he is sympathetic to the plight of his dairyman customer,he has a lot tied up.”
Driving around the backroads of Tulare County”you definitely see depopulated dairies “says UC farm advisor Jim Sullins. “It’s mostly the little guys who can no longer hang on.”
Others says what has changed is that “it’s the big guys going out now.”
A prominent multi-location dairy operator Alvin Souza of Tulare, filed for bankruptcy this Spring making news because he employed nearly 200 workers.
Sources says four prominent dairymen declared bankruptcy just last week but their names cant be verified. Yesterday, an auction of an 1800 cow Hilmar dairy took place because the farmer “had no feed and no money to buy it” says a knowledge source.
Sullins puts some of the blame for high corn prices on the mandate to make ethanol,a refrain heard across the dairy belt. Some 156 House of Representatives members wrote EPA’s Lisa Jackson recently to reduce or eliminate the fuel ethanol mandate while corn supplies are tight.
Western United Dairymen executive director Mike Marsh says in the tough 2009/10 period about 20% of existing dairies in the state went out of business.”We cant afford to lose more – endangering the infrastructure of the industry that is a $63 billion business in the state.”
WUD has filed a petition for emergency relief from CDFA Aug 6 including a a fifty cent per hundredweight increase on all classes of milk. In addition, WUD proposes a permanent exemption from the whey component on the first million pounds of bulk milk produced monthly. Marsh says he is waiting for a reply from state ag secretary Ross.”We can’t wait until September for a hearing“ argues Marsh.
In a letter to Ross, Joe Augusto, president of the California Dairy Campaign (CDC), urged CDFA to schedule the emergency hearing, saying the previous decision failed to address the immediate needs of dairy producers. “The fact that the 4b formula undervalues milk has led to a loss in revenue of more than $200,000 for the average 1,000-head dairy in our state over the last 12 months.”
“Already this year, more than 65 dairies have closed their doors due to the fact that dairy producer prices do not cover historically high production costs,” he continued. “In 2009, the worst year many can recall, 100 dairies
closed their doors. If closures continue at this rapid pace, 2012 will take an even greater toll on dairy producers if action is not taken by CDFA to restore fairness and equity to our dairy pricing system. Dairy producers are unable to pass on the record high feed costs that have resulted from the nationwide drought so it is critical that CDFA take emergency action to raise the price of all classes of milk to prevent more dairies from closing.”
Reis Soares, Soares Dairy, Chowchilla, Calif. also wrote in support of the petition, pleading for CDFA to consider WUD’s petition for an emergency hearing.
“I am a first-generation dairy producer and have been dairying for 28 years,” he wrote. “Dairying in 2009 was about as devastating as I could have ever imagined until 2012. I don’t have to tell you what has happened to our grain/feed costs, as you are fully aware of the nation’s worst drought in decades. In 2009 I borrowed on our farm in order to be able to feed our cattle. I refinanced our farm for more than what I originally paid for it just to stay in business. I guess you can say I bought our farm twice now. The equity of our farm is gone; the equity in our cattle is gone; so we have nothing left to borrow on.
Cow Culling Up
According to USDA/AMS, weekly estimated dairy cow slaughter turned substantially upward in July. Higher apparent culling, combined with higher feed prices, leads to a reduced 2012 herd size estimate of 9,215 thousand head in August.
While herd size is expected to be slightly higher on a year-over-year basis compared to 2011, the U.S. dairy herd is forecast to contract to 9,110 thousand head in 2013 says USDA.
This week the lower milk volumes were being felt in the market and milk prices on the CME soared to near $20 per cwt for October.But the lag time for California dairymen to get the relief may be too long for some – 60 to 90 days by some estimates.” We used to think if we could get $15 milk we would be OK.Now we don’t know if $20 milk will pay the feed costs worries Marsh, with some predictions of $9 to$12 corn.