Here's the background: One style of dairy that has been increasing in popularity is the "California style dairy. The basic technique is to confine your cows to a feedlot or barn, bring the food to them, and keep them off your fields. I've show you guys pictures of this style of dairy -- you'll see one below.
|"California style" dairy|
Now this isn't what most consumers think about when they think about dairies. They have visions of what's on the milk carton. The red barn and the green grass, and the cow with the bell.
|My little dairy cow -- more what consumers have in mind|
And the feed. A lot of these dairies actually feed great stuff to their cows. As shown n the picture above, there's clearly some good quality forage there -- grass, probably, and alfalfa, and no doubt there's some corn-based feed somewhere in that system. Our modern dairy cows need all the calories that they can get to produce the 80lbs of milk (roughly 10 gallons of milk) a day that they do.
One of the more expensive parts of a dairy is the manure handling. In my area, just the manure handling portion of the farm can cost you $500,000 to $1 million dollars to set up. You wash out your barns periodically, run the manure slurry through a water/solid separator, and you pump the reclaimed water back into your tank or manure lagoon.
Current environmental regulations specify that a modern dairy produce no runoff, and it strictly limits the amount of manure that you can apply to fields. Having it contained allows it to be trucked around or pumped around. The term for this is "best practices", and a manure lagoon or giant tank is how we as a society have decided we want to handle our dairy cow waste. Enjoy your ice cream.
Why is there a dairy bloodbath this year?
California style dairies typically don't have the amount of land that they need to grow the food for the cows that they are milking. They are specialists -- they breed and milk cows, and run the milk production side. They depend on feed from other farms, and, for the dairies that are located in states that don't have enough dairy cow forage production, they have to ship the feed in from where it is grown.
When feed and transport are cheap, this is a way to make a lot of money, and get a better return on your investment dollar. Land and facilities are expensive -- why not use them for as many cows as you possibly can? Corporations are very sensitive to profits, and they're often judged on how efficient their use of capital is. Return On Investment (ROI) is higher for California dairies when the conditions are right.
But this year, and last year, the conditions weren't really right. Two years ago there was a prolonged drought in Texas, causing a demand for hay there that drove up prices. In the last 12 months we had a huge drought in the midwest, which destroyed crops and forage. So for the past two years the feed that a California style dairy depends on hasn't been cheap. In fact, it's been super expensive.
It's not just corn. Here's a quote from an open letter from a grass fed dairy in Colorado:
"...We dislike doing this, [raising prices to cover the feed cost increase], but the alternative is to sell everything we own and/or file bankruptcy and quit dairy farming. Expenses for feeding our cows and your cows are eating us alive. "
That dairy is pretty small,and they're in Colorado. Lets see what dairymen in California are saying:
"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.” Dairymen president Tom Barcellos
"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” California Dairies Inc. CEO Andre Mikhalevsky.
Why is it so bad?
Our modern dairy industry has had several advances in both genetics and drug/hormone use that has resulted in cows that produce more milk per cow than has been possible. They have also made advances in breeding dairy cows, resulting in more female cows being born. When farmers want to make more money, often the easiest way to do so is to just do more of what you're currently doing. Milking 300 cows? Make more money if you milk 500. Not enough money with 500 cows? Well, 1,000 cows seems like a good idea. In fact, there's a dairy that is milking 30,000 cows.
But it's a lot cheaper to buy cows and confine them to a barn than to buy the land that would normally support those cows. Bingo. California style.
Traditionally dairy farmers have weathered the ups and downs in milk prices by being vertically oriented. 50 years ago it was much more common for a dairy to have all of its, or at least the vast majority of its cow feed raised on land owned by the dairy. What that meant is that the dairyman had much better control over his feed costs. Sure, a drought will affect anyone who owns land, but droughts are regional. There wasn't a drought in California this year -- if the dairies were raising their on feed closer to their operation they'd be fine. But the majority of the feed for California dairy cows comes from outside of California.
The other thing that farmers did is that they banked the profits from the good years, and used those profits to level out the bad years. That's what Irwin described to me when I talked to him about it.
What have we done in the past?
There used to be a price support system for dairy products, that would help cover the costs if milk prices dropped too much, or feed prices rose too much. It was part of the farm bill, and it's one of the evil government subsidies that people love to complain about. But the effect to the consumer was that it made milk prices stable. Who wants $10 a gallon milk? Consumers, us. You and I, love stable, low food prices. It looks like that stability for milk prices is ending.
How can you help?
Well, actually, the problem is being solved right now. Hamburger is cheaper this year than it should be because there are over 400,000 dairy cows being sent to slaughter. It's too expensive to milk them. The supply of milk will fall, the prices will rise, and farms that have better control over their feed costs or are adequately capitalized will survive.
If you're looking at investing in a dairy farm, it'd be wise to look carefully at where the feed comes from, and if the farm can produce the majority of what it consumes, as that combination seems to add a degree of stability.