Testimony Offered for Pennsylvania Farm Bureau
Before the Pennsylvania Milk Marketing Board

Regarding the Level of the Over Order Premium

May 22, 2013

Presented by Michael Evanish
Manager, MSC Business Services, PFB Members’ Service Corporation

Introduction

This testimony is offered at the request of Pennsylvania Farm Bureau, which represents over 55,000 farm and rural family members in 63 counties. Dairy farmers comprise the largest segment of agricultural producers who are members of Farm Bureau.

I am Michael Evanish. I currently serve as manager of MSC Business Services, a division of PFB Members’ Service Corporation (an affiliate company of Pennsylvania Farm Bureau), and have served in this position since 1997. MSC Business Services provides an array of business services to assist farmers economically manage their farm operations. The services provides include income tax planning and preparation, business and tax accounting, payroll services and recordkeeping, business analysis and benchmarking, and business consultation.

I am responsible for overseeing the operation of the division and the 35 accountants, known as Account Supervisors, and 15 support staff. I have been employed by MSC Business Services since 1976. Until January 1989, I served as Account Supervisor, working with members in Butler, Beaver and Lawrence Counties. From 1989 through 1997, I served as Director of Training. In this capacity, I was responsible for educating and training Account Supervisors who work with MSC’s clients.

During my tenure with MSC Business Services, I have been directly involved, usually as project leader, in the development and upgrade of programs used by MSC and MSC clients. Each program is specifically designed to meet the business and financial needs of staff and clients, including development of electronic recordkeeping and a modern business analysis.

In my capacity as Manager of MSC Business Services, it is imperative that I have a working knowledge and understanding of existing economic and financial conditions that exist in Pennsylvania’s dairy industry and the likely financial impacts these conditions will have on the current and future operation of Pennsylvania dairy farms.

MSC Business Services has approximately 4,500 contracts with PFB Members the largest enterprise being dairy farms representing over 1,000 contracts.

Each year the operational data of these farms is summarized and published in the Dairy Herd Analysis. It is this body of data that I will be referring to in my testimony. Copies of the current and past Dairy Herd Analysis are available at our resource web site http://dairy.pfb.com.

As I mentioned earlier, an important service that MSC Business Services provides is business consultations. As part of this service, we are often asked to develop budgets and make cost of production projections. I personally review and approve all consulting reports produced by MSC Business Services. At present, I am co-chairman of the Economic Development, Finance and Infrastructure Committee of the PA Dairy Leadership Council. Other features of my work experience and educational background are contained in PFB Exhibit 1.

Cost of Production

Financial information in each year’s Dairy Herd Analysis includes annual averages of total costs of production and income resulting from operations of the four categories of dairy farms serviced by MSC:

  •  the top 10 percent farms;
  • farms milking 100 or fewer dairy cows;
  • farms milking 101 to 250 dairy cows; and
  • farms milking greater than 250 dairy cows.

The averages of total cost of production and income are additionally calculated and shown in terms of cost and income per hundredweight of milk sold and per cow for the four categories I just mentioned to you.

PFB Exhibit 2 is MSC’s 2012 Dairy Herd Analysis. This is the same document as PFB Exhibit 2, which was presented at the over-order premium hearing that the Board held last December. As I indicated at the December hearing, the cost and income averages contained 2012 Dairy Herd Analysis reflect those applicable to the reported dairy farms for 2011.

For year 2011, the average cost of production per hundredweight for dairy farms milking fewer than 100 cows reported in the Dairy Herd Analysis was $25.53. For the category of farms milking 101 to 250 cows, the average cost of production per hundredweight was $22.86. And for the category of farms milking over 250 cows, the average cost of production per hundredweight was $23.04.

Costs of production per hundredweight incurred for 2011by MSC-serviced farms reported in Dairy Herd Analysis, rose dramatically from costs of production incurred for 2010:

- for farms milking 100 or fewer cows, from $22.27 to $25.53 per hundredweight (an increase of $3.26);

- for farms milking greater than 250 cows, from $19.54 to $23.04 per hundredweight (an increase of $3.50);

- for farms milking 101 to 250 cows, from $20.53 to $22.86 per hundredweight (an increase of $2.33);

As I noted in my testimony last December, the past several years have seen the profitability of Pennsylvania’s dairy farms being seriously and increasingly challenged by increases in purchased feed costs. This purchase of feed is the largest single expense on dairy farms. PFB Exhibit 3 is a graph that appears on Page 4 of 2012’s Dairy Herd Analysis (PFB Exhibit 2). This graph represents the annual average percentages of milk price received by MSC farms that was spent to purchase feed.  As the graph indicates, the portion of farmers’ milk income absorbed by feed costs has gone from being high to being extremely high. In fact, the cost of purchased feed is currently absorbing more of a dairy farm’s revenue than ever before. For decades, purchased feed costs represented approximately 23 percent of revenue. Yes, there were years when this percentage rose or fell, but it always quickly returned to the 23 percent levels. However, in 2008, the 23 percent standard began to change.

The new paradigm for dairy farmers since 2008 is that farmers will need to commit 29 to 30 percent of milk revenue to meet their feed purchase needs. Or, to put it another way, if this trend continues, farmers will lose an additional six to seven percent of revenue that they were otherwise able to use previously for other costs.

MSC Business Services is in the process of gathering and averaging of financial records of cost and income among dairy farms serviced by MSC for production and publication of the 2013Dairy Herd Analysis. Consistent with MSC’s previous publications, the 2013Dairy Herd Analysis will reflect the averages of cost and income experienced by MSC-serviced dairy farms for 2012.

Unfortunately, we have yet to receive the financial data of all farms. But financial data for approximately 300 farms have been received and consolidated in preparation for the 2013Dairy Herd Analysis. We were able to identify approximately 250 dairy farms, of the 300, where 2011 data was also available. This provided us with a farm to farm comparison for 2011 and for 2012. I then compiled the data into several tables that reflect and compare the aggregate averages of income and cost experienced by these dairy farms for 2012 with those experienced by these same farms in 2011.  PFB Exhibit 4 contains the averages of cost and income experienced in 2011.  And PFB Exhibit 5 contains the cost and income averages experienced for these same farms in 2012.

I was also able to produce a table that reflects the aggregate averages of income and cost experienced in 2011 by farms that were included in the database of farms whose benchmarks are reported in the 2012 Dairy Herd Analysis.  Those averages of cost and income are contained in PFB Exhibit 6.

PFB Exhibit 7 is a comparison of aggregate cost and income averages for 2012 of the 250 farms whose financial data is contained in PFB Exhibits 4 and 5 with the cost and income averages for 2011 of farms included in the MSC database reflected in the most current issue of the Dairy Farm Analysis. PFB Exhibit 7 shows that in terms of average number of milking cows, the characteristics of the 250 farms whose cost and income data for 2012 have been consolidated so far are comparable with the characteristics of farms in the database reported in the Dairy Herd Analysis for 2011. Other characteristics of costs incurred for these 250 farms in 2012 are comparable with the cost characteristics of farms in the database used to produce most recently published Dairy Herd Analysis.

While MSC has not fully completed the process for reporting of 2012 average cost and income of MSC-serviced dairy farms, the cost and income data of 250 dairy farms completed so far in preparation for 2013’s Dairy Herd Analysis does provide the Board with reliable insight of average costs and income that MSC dairy clients experienced as a whole in 2012.  PFB Exhibit 7 shows that 2012’s total average cost of production per hundredweight experienced by these farms did not decrease from 2011’s total average cost of production, while the average income per hundredweight from the farms’ dairy operation was below the average experienced in 2011.

Conclusion

Based on comparisons of cost and price averages for 2012 experienced by MSC-serviced farms included so far in preparation for the 2013 Dairy Herd Analysis with cost and price averages for 2011experienced by these same farms and by all farms included in the 2012 Dairy Herd Analysis, the Milk Marketing Board should conclude that the price need for Pennsylvania producers is as strong for 2013 as it was for 2012, and that the over-order premium for the remainder of 2013 should remain at current levels.

I would like to thank the Pennsylvania Milk Marketing Board (PMMB) for the opportunity to offer testimony today.