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

September 3, 2014

Presented by Richard Ebert
Dairy Farmer, Will-Mar-Re Farms
Chairman, PFB Dairy Committee


This testimony is offered on behalf of the Pennsylvania Farm Bureau, an organization representing more than 59,700 farm and rural family members in 63 counties. Dairy farmers are the largest segment of producers within Farm Bureau membership.

My name is Richard Ebert. My brother and I operate Will-Mar-Re Farms in Westmoreland County. My son, Josh, is our herd manager. We milk approximately 90 Holsteins, and grow corn, alfalfa hay, and soybeans. Eighty-five percent of our income comes from our dairy operation. In addition to my on-farm activities, I am the Vice President for Pennsylvania Farm Bureau (PFB) and also serve as the chairman 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 is to offer evidence in support of our recommendation that the Board continue the current Class I over-order premium of $1.60 for six months. We also support continuation of the fuel adjuster.

The Need for the Requested Premium
As I’ve stated before, over the past several years, Pennsylvania’s dairy farmers have been living through a drastic and difficult economic roller coaster. The dairy industry has seen high levels of volatility. We’ve had to manage our farms through spikes in input costs, extremely low milk prices, very high feed costs and significant weather challenges. Very recently, we have seen needed increases in milk prices, and some relief from the extreme prices we had to pay for animal feed. Even with the very positive income margins we have had recently, managing our farms continues to be financially challenging.

We’ve done our best at Will-Mar-Re Farms to deal with these challenges over the years, learning hard lessons in the challenging times and applying the lessons when times are good. As you can see by Table 1 (page 8), our annual average cost of production has climbed by 23 percent between 2009 and 2013. Fortunately, our cost of production has dropped from the five-year high of more than $24 per hundredweight, and only rose by ten cents between 2012 and 2013. Based upon what we’ve seen so far this year, I’d guess that our cost of production for 2014 will be a little lower than it was for 2013.

When I testify before the PMMB, I often talk about the importance of margins for farmers, and how farmers – including myself – need to make the most out of every dollar and tighten our costs as much as possible. As a result, the premium – whether it’s the direct, over-order premium paid on the milk that qualifies, or the indirect benefit which impacts the level of voluntary premiums – remains an important part of the equation for Pennsylvania’s dairy farmers.

In my testimony today, I’ll offer a look at the cost and price factors on Will-Mar-Re Farms as a way to demonstrate the continued need for the Over-Order Premium and the fuel adjuster.

Conditions on Will-Mar-Re Farms
Margins are a good measure of the strength of economic conditions on farms. Income over feed costs (IOFC) provides a good snapshot of the conditions on Will-Mar-Re Farms and, today, I’ll offer recent figures for July 2014, and provide a historical perspective for the month of October in years 2011 through 2014.
On Table 2a (page 9), you can see that our IOFC for July of this year was $11.89 per hundredweight. This is quite a strong number, especially if you compare it to IOFC numbers for the month of October during the past three years, which are shown on Table 2b (page 10). October’s IOFCs were $8.92 for 2011, $5.96 for 2012, and $9.14 for 2013. Our IOFC is expected to climb to $12.88 for October 2014, based on an estimate using projections for feed and milk prices.
At Will-Mar-Re, our costs are fairly evenly split between feed and other costs. If you look at Tables 3 and 4 (pages 11 and 12), you can see that prices for both feed concentrate and soybean meal in July 2014 have increased from price levels for July of 2012 and 2013. Table 3 (page 11) shows that July’s price for feed concentrate was $112 per ton, or 23 percent higher, than the price for concentrate in 2012. For the months of July through October of 2013, the average price for feed concentrate was $8 per ton, or two percent higher, than the price for the same period of months in 2012.

Table 4 (page 12) shows the monthly prices paid for soybean meal for July, August and October of 2012 and 2013, and monthly price for July of 2014. Monthly prices of soybean meal for 2013 averaged below the monthly prices for 2012. But the price for soybean meal increased significantly in July 2014. July 2014’s price more than offset the price reduction that had occurred in July 2013, and was $13 per ton above the price paid for soybean meal in July 2012.

It’s important to point out that costs for purchased feed are still very high compared to what we were paying only a few years ago. And recent reductions in price of field crops have not resulted in significant reductions in purchased feed costs. For example, I testified at a previous hearing that my cost for soybean meal was $430 per ton in October 2011. But as I mentioned a few minutes ago, I paid over $600 per ton for soybean meal this past July. That’s quite an increase.
Additionally, based upon what I have seen with feed price increases in July, I am concerned that this upward trend might continue. Of course, feed costs will ultimately depend on the success of the harvest across the U.S. and, more locally, in Pennsylvania, since many dairy farmers grow a significant portion of their feed.

Earlier I spoke about the lessons I’ve learned from the price/cost challenges of the past. One of those lessons is paying close attention to our feed costs and the rations we feed our cows. We’ve been fortunate that with the addition of my son Josh working on the farm, we’ve been able to increase efficiencies on the farm, which has positively impacted our operation. With Josh’s help, we are better able to monitor our feed rations and maximize these rations to achieve the greatest impact. We’ve been able to increase our level of milk production to 85 pounds per cow per day, which has certainly helped cushion our margins. But maintaining that increase isn’t easy. If we don’t feed a balanced ration, we could see a corresponding drop in milk production, something that could negatively impact our margins. If feed prices do continue to trend higher, the resulting margin squeeze could impact our ability to maintain the higher production per cow.

But there are other costs we need to consider. Fuel is one of those costs. The information provided in Tables 5 and 6 (pages 13 and 14) gives reason for maintaining the fuel adjuster. While we’ve seen our fuel costs move up and down since 2009 (see Table 5 on page 13), the prevailing trend has been increased fuel costs. Even when you compare the fuel cost for the lowest year since 2009 (2013) our total fuel cost was still 20 percent or $1,775 more than 2009. Our fuel costs during our busy season, seen on Table 6 (page 13), are slightly higher this year compared to 2011. In addition, fuel costs for May and July 2014 ($3.56 and $3.40, respectively) are four percent higher than they were during the same time in 2013 ($3.35 and $3.34, respectively).

Finally, let’s look at Will-Mar-Re’s farm insurance costs on Table 7 (page 15). Our annual cost for farm insurance increased by 44 percent between 2009 and 2014. Between 2013 and 2014, we saw our costs increase by two percent, a number that would have been higher, had we not taken steps to lower our premium by adjusting the way we insure our machinery. Instead of listing all of our machinery separately, we chose a blanket-type coverage to lower our costs.

Conclusion
I hope that my testimony today demonstrated the unique situation Pennsylvania’s dairy farmers are facing. On the face of it, things seem pretty good for dairy farmers. Milk prices have been high. The weather has been good. The crops are looking promising. Simply looking at these factors makes the premium ask difficult.

But the improvements in price and income that dairy farmers have experienced in recent months isn’t the only story. Pennsylvania’s dairy farmers have been facing years of volatility – milk prices, weather, crop prices, etc. Input costs – feed, fertilizer, chemicals, fuel – continue to be high. Other costs – farm insurance, health insurance – continue to climb. The bottom line? It’s still very challenging for many dairy farmers to make ends meet. There are still a lot of dairy farmers out there who are still struggling to recover from the economic rollercoaster we’ve seen over the last five plus years.

I know I’ve been rebuilding the equity that was lost over the last five- to six- years. I’m seeing some fantastic IOFC numbers, but I’m not resting on those laurels. I’ve been burned by the challenges of past years and I’ve learned my lessons. I’m still looking for the best buys out there. I’m watching expenses and new debt. I’m still only replacing what is needed and I’m holding onto what doesn’t need to be replaced.

My experiences have taught me that prices can turn very quickly. And farmers with new debt can get caught pretty quickly in an economic downturn. Futures are decent, but doesn’t mean they will stay decent. And, my long-term question still remains: will we be able to weather the storm when it comes?

Pennsylvania’s dairy farmers continue to need the premium. As a result, Pennsylvania Farm Bureau strongly recommends that the Board adopt an order that maintains the current level of over-order premium at $1.60 per hundredweight for the next six months, as well as continuing the fuel adjuster.

Again, thank you for considering our request and my testimony today. I’d be happy to answer any further questions.


 

1 Milk check includes the PMMB over-order premium and processor-paid quality premiums.
2 Based upon an approximate average of 70 lbs of milk for October 2011, 70 lbs milk for October 2012, 75 lbs of milk for October 2013, and 85 lbs of milk for October and July 2014.
3 Projected price based on $32.62/cwt (projected Lancaster blend price) and 85 pounds of milk per cow.
4 Milk check includes the PMMB over-order premium and processor-paid quality premiums.
5 Based upon an approximate average of 70 lbs of milk for October 2011, 70 lbs milk for October 2012, and 75 lbs of milk for September and October 2013.
6 All prices per ton and based on a mix of 32-33 percent protein.
7 All prices per ton and based on a mix of 48 percent protein.
8 Soybean meal was not purchased until August 1, however, I am including the $623 as a point of reference. Since the number is a duplicate, I did not use it to figure an average increase and percent change for 2012 to 2013.
9 No claims or major coverage changes from 2009-2013. In 2014, there were no claims, but as discussed in the testimony, changes were made to the policy to reduce costs.