Testimony Offered for Pennsylvania Farm Bureau
Before the Pennsylvania Milk Marketing Board
Regarding the Level of Over-Order Premium

February 27, 2015
Presented by Glenn Stoltzfus, Dairy Farmer, Pennwood Farms
Chairman, PFB Dairy Committee

This testimony is offered on behalf of Pennsylvania Farm Bureau, an organization representing nearly 60,000 farm and rural family members throughout Pennsylvania. Dairy farmers are the largest segment of producers within Farm Bureau membership.

My name is Glenn Stoltzfus. I operate Pennwood Farms in partnership with my three brothers, Don, Dwight and Duane, in Berlin, Somerset County. We milk just shy of 600 Holsteins. We also raise all of our heifer calves and have a custom grower who feeds approximately 250 of those heifers. Our milk production per cow averages 75 pounds per day. We ship our milk to Maryland & Virginia Milk Producers Cooperative Association, Inc. Eighty to ninety percent of our income comes from our milk check.

My brothers and I farm approximately 1,300 acres (700 owned acres), growing corn, soybeans, alfalfa and grass hay. We grow all of our forages and high moisture corn, and we often sell our excess corn – sometimes as much as 20,000 bushels a year.

Pennwood Farms might not be as typical as a traditional Pennsylvania-style average herd sized, one owner operation. Our farm business needs to financially support the four owners and their families. So, in addition to having a larger herd size, we’ve expanded to other areas to help supplement our income. For example, we do custom crop work for farmers. We also place a high priority on good genetics, selling top genetics, doing embryo transfer work, etc. In fact, I’d estimate we’ve sold between 60 and 100 head per year for purposes other than culling for the last six to seven years. These sales are made throughout the year, often to repeat customers and range from breeding age heifers to mature cows.

In addition to my on farm activities, I am a member of the PFB State Board of Directors and I am the new Chair of PFB’s Dairy Committee.

Farm Bureau would like to thank the Pennsylvania Milk Marketing Board (PMMB) for providing the opportunity to offer testimony today regarding the over-order premium. The objective of our testimony today is to offer evidence in support of our recommendation that the Board continue the Class I over-order premium of $1.60 for six months. We also support continuation of the fuel adjuster premium as calculated under the Board’s current Order.

The Need for the Requested Premium
Agriculture is not an easy, nor predictable industry in which to make a living – and dairy is no exception. I’ve been dairy farming since graduating high school in 1984 and, in my years as a dairy farmer, my family has had to manage the farm through high levels of volatility in milk prices, input costs, feed costs and weather. We struggled through the lengthy periods of low milk prices. I’ve seen government entities work to mitigate some of the risk and volatility including the PMMB over-order premium, the former MILC program and the as-yet unproven Dairy Margin Price Protection Program.

At Pennwood Farms, we’ve done our best to manage this volatility, by making sensible business decisions, managing our margins to the best of our ability, and utilizing government programs to help our farm avoid economic disaster. Over the years, we’ve learned key lessons – particularly during the hard times – and I’ll talk about some of those lessons through my testimony today.

I don’t think you can talk about dairy prices and on farm conditions without talking about 2009. Without question, it was a tough year on our farm. As with many other farm families, the huge losses from low milk prices caused a serious drain on the net equity of our farm. And we were set back at least two years in the business plan we wanted to do to improve the farm business. By 2011, we had gotten ourselves back financially to where we were prior to the crash and today, I’m pleased to say we’re fully recovered again.

As dairy farmers, my brothers and I are always watching our margins. Even in the good times, we are always trying to figure out how to save. We find that’s even more important than the price. We try to make wise business decisions, because as we learned in 2009, disastrous prices can come at us pretty quickly.

Since margins are so important to farmers, milk premiums, including the PMMB over-order premium, play a very important and helpful part in the financial stability of Pennsylvania dairy farms. Not only does the PMMB premium directly benefit those farmers whose milk qualifies for the premium that Board requires to be paid, the level of premium required by PMMB also indirectly benefits farmers like me who ship to cooperatives. Although our milk is not subject to a “mandated” premium, the premium level established in the Board’s pricing orders helps identify a target that helps us obtain a more adequate level of voluntary premium in neighboring markets.

Today, I’ll offer a look at the cost and price factors on Pennwood Farms to demonstrate the continued need for the over-order premium.

Conditions on Pennwood Farms
For background purposes, we reviewed financial records and receipts from Pennwood Farms to compile the base numbers discussed today. As you can see in Table 1, our annual average cost of production has climbed by 9 percent between 2011 and 2014, averaging $23.10 per hundredweight. Fortunately, our cost of production has dropped from its high of $24.62 in 2012. But average cost of milk production for 2014 is still $1.87 per hundredweight above the cost we incurred in 2011. Based on my farm’s recent history of operation, I do expect the average cost of production for Pennwood Farms this year to rise above 2014’s cost because of rising seed, fertilizer and equipment costs.

Prepaying expenses is one of those tough lessons that arose out of the dairy crash in 2009. In the year or so before 2009, instead of prepaying expenses, we updated equipment. This hurt us, because during the dairy downturn, we still had bills like feed and fertilizer coming at us. This presented a significant challenge as we saw our margins shrink. Now, we make sure we use the available tax provisions to ease our tax burden and any place we can do that over the last few years, we did. We were able to prepay a portion of our crop expenses in both 2013 and 2014 for the next year. In fact, in 2014, we were able to prepay possibly as much as 70 percent, so that is likely to be at least partially reflected in our cost of production numbers for those two years.

Income over feed costs (IOFC) provides an excellent way to look at margins on farms. As you’ll see on Table 2, our farm’s IOFC for December 2014 was $11.29, demonstrating that based upon a strong milk price and reasonable feed prices, we had a profitable month.

As I mentioned earlier, at Pennwood Farms, we grow all of our corn silage, alfalfa and hay. We do however, purchase protein – generally soybean meal – and feed concentrate, along with some other supplements for our herd. Tables 3 and 4 show prices of feed concentrate for August through December in 2013 and 2014, and Table 3 provides additional historical perspective from 2011 and 2012.

As you can see in Table 3, the price of feed concentrate has increased by 13 percent between 2011 and 2014, from $536 to $604 per ton. Fortunately, for the months in question, we saw a slight drop of $10 between 2013 and 2014.

In Table 4, soybean meal increased by 42 percent between 2013 and 2014 for the months shown, increasing from an average of $398 per ton to $548 per ton. In an effort to respond to the spike in soybean costs in previous years, we switched between using soybean meal and canola meal in our feed rations, depending on which was priced more affordably.

While I don’t like to switch between feedstuffs for our cows, switching helps us maximize our management of feed costs without adversely impacting milk production and herd health, since canola and soybean has fairly similar protein properties. However, even though canola was often lower in price, we had problems with availability due to transportation from the Midwest.

In the end, we’re now using soybean meal again, and will not be able to use canola meal as a way to mitigate rising costs. Fortunately, we did see a drop from $550 per ton to $503 per ton between November and December 2014. But on average, the price we for soybean meal in 2014 has increased roughly $150 per ton, considerably more than the price in 2013.

Like all dairy farmers, we also have to take into account other costs which affect our margins. Next, I’ll highlight our fuel and insurance costs which also add significantly to our expenses.

Though prices for gasoline have moderated more recently, fuel costs overall are still high. Tables 5  and 6  provide figures for our total annual fuel cost and fuel costs per gallon for select months, and demonstrate the continued need for the fuel adjuster. We’ve seen our fuel costs rise every year between 2011 and 2014, with the exception of a slight drop in 2012 (Table 5). During this time, we’ve seen a 12 percent increase ($19,422) for our fuel – this includes on and off road fuel, diesel and propane. During our “busy season” months (see Table 6) our fuel costs have fallen for the months in question between 2011 and 2014 by approximately 34¢ or 10 percent. I hope these trends continue.
Our farm’s insurance costs – for both our property and liability and worker’s compensation – have also increased, as you can see on Tables 7 and 8. Our property and liability insurance has increased by 26 percent, from $15,776 in 2011 to $19,947 in 2014. Our worker’s compensation insurance has also increased by 18 percent, from $14,582 in 2011 to $17,206 in 2014.

My testimony today attempted to provide an overview of Pennwood Farms and hopefully captured a snapshot of some of the conditions dairy farmers in Pennsylvania are facing. There’s no denying that things very recently have been good for dairy farmers. High dairy prices. Relatively good weather. A strong harvest. It’s been a good time to be a dairy farmer.

But, there’s a lot of uncertainty. This next six-month period will take us through spring planting and into the harvest. This leads to questions about the weather and the harvest. There’s also the likelihood of a downturn in milk prices. I’ll be the first to admit that I’m more optimistic than some. If the downturn is short lived, fine. But, if by August or September, there’s no turnaround, dairy farmers – including me – may face significant challenges.

And there’s other challenges that are important to mention. Increased regulations and new technology certainly have an impact on profit. As we look at the slew of regulations coming at us – changes to the “Waters of the U.S.” rule under the Clean Water Act and possible listing of the Northern Long-Eared Bat under the Endangered Species Act to name just two – I have to wonder what we’ll do and how much will it cost to comply. Will we need to replace equipment? Change our farming practices? Need new permits?

And on technology side, costs are certainly surprising. As dairy farmers, we have to determine what technology is best for our operation. We have to question how will the technology pay for itself and it’s important to remember that technology doesn’t always work for an operation. Again, more potential costs.

For my farm, we need to keep moving forward to improve our farm, manage financial and weather-related risks, apply innovative production practices when it makes sense, and comply with increasing governmental regulation, all while paying careful attention to our margins. Because, at the end of the day, it’s that positive margin that will keep Pennwood Farms in business.

Though we may have diversified beyond what other Pennsylvania dairy farmers have, we still feed our cows, we still depend on our milk check, and we still depend on those voluntary premiums which we receive in large part due to the over-order premium.

Again, Pennsylvania Farm Bureau strongly recommends that the Board adopt an order that maintains the current level of Class I over-order premium at $1.60 per hundredweight for the next six months, as well as continuing the Class I premium fuel adjuster established under the Board’s current order.
Thank you for considering our request and for hearing my testimony today. I look forward to future opportunities to testify before the Pennsylvania Milk Marketing Board in my new role as PFB’s Dairy Committee Chair.

I’d be happy to answer any further questions you might have.