Monday, January 14, 2008

Will milk prices keep supporting farmer margins?

Even with historically high milk prices, dairy farmers aren't feeling too secure in their profitability. Input prices continue to rise, threatening margins. This can be seen most easily with corn prices.

Washington dairies do not depend on Midwestern corn. Unlike feedlot beef cattle, dairy cows primarily consume local grass or chopped-corn silage, augmented by alfalfa hay grown in drier regions. However, as grain prices have risen, crop farmers have shifted more of their fields to grain production with predictable effects on the availability of land for feeding cows.

Corn, soybeans, and wheat are all setting records this year. Corn futures on the Chicago Board of Trade are near the record of $5.50 a bushel set during the 1995-96 drought, and the chart of historical corn prices above shows that--in nominal terms--we are in new territory. Even here in Skagit County, winter wheat--a lowly rotation crop--is experiencing a boom as farmers contract for May prices quadruple the historical average. Landowners accustomed to earning a few hundred dollars per acre providing feed for dairy cows can rake in up to two thousand an acre by switching to wheat.

What is going on? The market seems to be driven by both American biofuels and international food demand. Almost a quarter of U.S. corn will be turned into ethanol this year, but strong exports have added fuel to the fire. Wheat does not have much of a biofuels role, so its price reflects a larger shift in worldwide carbohydrate needs.

At Farm Power, high grain prices will push our partner farmers into even greater reliance on their own land for animal feed. We have noticed increasing interest in our plans to increase the nutrient value of manure that we process, so we hope to start helping reduce feed production costs before higher prices really start to bite. Those farmers who have been adding extra grain to their cow rations will undoubtedly cut back, although milk production will suffer. As long as milk prices remain high, the transition won't be too painful; with a little luck, by the time margins start getting squeezed Farm Power will have its first digester running and provide a little more cushion. In the end, that's why we're here.

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