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U.S. Dairy Farms Miss Agriculture Boom on Feed Costs

This year’s agriculture boom is a bust for U.S. dairy farmers as surging costs for cattle feed compound a glut of milk products.

While the 27 percent jump in wheat prices and 48 percent gain in cotton may send farm income to a record, dairies will lose money in 2011 for the second time in three years, said Mike Brown, an economist at Glanbia Foods Inc., which processes milk in Idaho and New Mexico. Corn, a feed ingredient, jumped 33 percent in the two months ended Oct. 31, almost three times the gain in wholesale-milk prices. Futures slumped 11 percent.

Dairy farmers expanded herds following the 70 percent jump in prices to a record in 2007, just before the U.S. began its longest recession since before World War II and unemployment rose to the highest level in a quarter century. Weaker demand was compounded by this year’s drought, floods or freezing weather from Canada to Kazakhstan that ruined crops and boosted competition for U.S. grain that dairies require.

“The crop farmers around here have been driving around with new equipment all the time,” said Linnea Kooistra, who owns a 250-cow herd in Woodstock, Illinois, with her husband, Joel. “They’ve been making so much money the last couple of years because of high commodity prices, but for livestock farmers, it’s really been a hard time.”

‘Rough Times’

Farmers lost $2.50 to $4 on average for every 100 pounds (45.4 kilograms) of milk last year, and the deficit may be $1 to $3 in the first half of 2011, Brown of Glanbia Foods said. The company’s three plants in Idaho and a joint venture in New Mexico process a combined 22 million pounds a day and make cheese and whey.

“We don’t think some dairymen will be able to survive,” Brown said from his office in Evanston, Illinois. “They’re looking at some rough times.”

Corn futures have risen 48 percent since the end of June, the biggest gain in the Thomson Reuters/Jefferies CRB Index of 19 raw materials after sugar. The U.S. Department of Agriculture cut its estimate for the crop on Nov. 9 for a third straight month because of flooding in Iowa and Missouri and hot, dry weather from Illinois to Ohio.

Futures jumped to $6.175 a bushel on the Chicago Board of Trade that day, the highest since August 2008. Soybeans and wheat are up more than 37 percent since the end of June and cotton reached a record on Nov. 10.

Farm Income

Crop rallies may send farm income higher than the record $87.4 billion reached in 2004, according to Neil Harl, an agricultural economist at Iowa State University and a former adviser to the governments of Ukraine and the Czech Republic.

On Nov. 24, Deere & Co. (DE), the largest maker of agriculture equipment, forecast that U.S. net farm cash income will jump 31 percent this year to the highest ever, before gaining an additional 15 percent in 2011.

While higher farm incomes improve prospects for Deere tractors and Mosaic Co. fertilizers, Dean Foods Co. (DF), the biggest U.S. milk processor, said on Nov. 9 that consumers are swapping name-brands for cheaper products.

“Our industry is going through a wrenching ordeal,” Dean Foods Chief Executive Officer Gregg Engles said on a conference call Nov. 9, after the Dallas-based company reported a 51 percent drop in third-quarter net income.

Culling Herd

The National Milk Producers Federation spent $240 million culling more than 231,000 cows in the past two years. The industry-funded group stopped subsidizing the herd reductions last month in favor of promoting exports, Jerry Kozak, the federation’s president, said Oct. 28.

The U.S. herd had almost 9.12 million head in October, or 0.2 percent more than a year earlier, according to the USDA. Milk output will rise to a record 192.8 billion pounds this year, the USDA said Nov. 9. Production per cow in May, usually the peak month, reached a record 1,868 pounds, the data show. Cheese inventories reached 1.037 billion pounds in October, the highest for the month since 1984.

Consumers aren’t benefiting from the glut. While farmers sell to processors at higher prices, it’s not enough to cover additional feed costs. Processors in turn are charging more to retailers. Grocers sold whole milk at $3.321 a gallon (3.8 liters) on average in October, up 9 percent from a year earlier and the highest since January 2009, Bureau of Labor Statistics data show.

Losses Mount

Mounting losses will force producers to keep sending cows to slaughter, said Phil Plourd, the president of Blimling & Associates, a commodity researcher in Cottage Grove, Wisconsin. That should reduce supply and drive milk prices to $17 per 100 pounds by the end of 2011, he said. Futures rose 0.8 percent to settle at $13.81 at 1:10 p.m. today on the Chicago Mercantile Exchange.

About 60,700 dairy cows were slaughtered in the week ended Nov. 13, or 11 percent more than the same time a year earlier, according to the most recent USDA data. That’s the ninth consecutive week of higher year-on-year figures.

Ed Schoen, a farmer in Phelps, New York, is selling 155 of the 575 acres (233 hectares) of cropland he co-owns to raise cash for his 180-cow dairy. Schoen said he lost $140,000 in 2009 because of higher costs and lower milk prices.

“We were still under water” for the first nine months of this year, Schoen, 65, said. “It just got drastic enough that in order to pay the bills and bring things back into line, we had to liquidate some real estate.”

Carrying Debt

Plunging exports and rising global production sent futures for class III milk, used to make cheese, to a six-year low of $9.24 per 100 pounds in February 2009 on the CME. Farmers took loans to avoid bankruptcy, and those debts will carry into 2011, said Jim Dunn, an agricultural economist at Pennsylvania State University in University Park.

Wholesale-milk prices rose 4.2 percent to $16.94 per 100 pounds in October, the latest USDA data show. Corn futures advanced 17 percent.

The “cost of production has been higher in 2010, because they’ve got a lot more interest and principal payments,” Dunn said. “If 2010 had occurred without 2009 in front of it, nobody would have thought anything of it. Because of the balance-sheet deterioration in 2009, a number of farmers weren’t able to make money in 2010 either.”

The industry is pinning its hopes on rising exports to China, Russia and India, said Hayley Moynihan, a Christchurch, New Zealand-based senior analyst at agriculture lender Rabobank International. The U.S. Dollar Index, tracking the currency against six counterparts, slumped 8.5 percent in the third quarter, the most in eight years.

‘Attractive Global Prices’

A weaker dollar “makes exporting more attractive from a U.S. perspective,” Moynihan said by e-mail. There are “attractive global prices for dairy commodities, in comparison to domestic U.S. market returns, due to good demand for dairy products from developing countries,” she said.

Record shipments of milk products to countries including China led New Zealand, the world’s biggest dairy exporter, to narrow its trade deficit in October, Statistics New Zealand said today in Wellington. Total exports climbed 16 percent from September to NZ$3.68 billion, led by an increase in milk powder.

Earlier this month, the U.S. dollar dropped to a 31-month low against the New Zealand dollar, boosting the appeal of American supplies. Dairy products account for almost a quarter of New Zealand’s merchandise exports and 7 percent of the economy, according to the USDA.

Obama Boost

Agriculture already is giving President Barack Obama a boost toward his goal of doubling overseas sales of U.S. goods by 2015. Farm exports from the U.S., the world’s largest grain shipper, may top the 2008 record of $115.3 billion in 2011, according to Joe Glauber, the USDA’s chief economist.

Dairy exports totaled $2.751 billion in the first nine months of 2010, on pace to break the 2008 record, according to the Arlington, Virginia-based U.S. Dairy Export Council.

Third-quarter shipments of cheese rose 69 percent to 45,788 metric tons, led by sales gains to Mexico, South Korea and Japan, council data show. Nonfat-dry milk, the biggest export product by value this year, surged 45 percent, driven by consumption in Southeast Asia.

“We’ve already gotten some very nice demand recovery in export markets,” said Scott Brown, an economist at the University of Missouri. “2011 will continue to see some expansion.”

That may not be enough to eliminate the glut, said Cal Brandt, 50, who runs a 110-cow dairy herd with his brother in Bryant, Wisconsin. He lost about $128,000 in 2009 and was unprofitable in six of the first 10 months of this year.

“The biggest problem with the dairy industry is every time the price gets to $17 or $18, guys start adding onto their farm operations,” Brandt said. “When you start adding cows, that’s when the prices fall quickly.”

To contact the reporters on this story: Whitney McFerron in Chicago at wmcferron1@bloomberg.net; Jeff Wilson in Chicago at jwilson29@bloomberg.net; Elizabeth Campbell in Chicago at ecampbell14@bloomberg.net.

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net.

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