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

Regarding the Level of Over-Order Premium

May 22, 2013

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 55,000 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. We milk approximately 80 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 $1.85 for at least six months. We also support continuation of the fuel adjuster.

The Need for the Requested Premium

As I’ve stated before, Pennsylvania’s dairy farmers have been living through a drastic and difficult economic roller coaster. For the last seven or so years in particular, the dairy industry has seen high levels of volatility. From sharp upswings in input costs in 2007 to extremely low milk prices in 2009 to skyrocketing feed costs in 2012 to a series of weather challenges, I feel like dairy farmers have seen it all in a relatively short period of time.

What I said in the last hearing is certainly valid today: dairy farmers are facing serious challenges that have placed considerable stress on already tight margins. I readily admit that milk prices have improved considerably, and some key feed costs have dropped. However, as you will hear in my testimony, the majority of my input costs have continued to rise, with some costs nearly double the cost level of 2009. Despite our efforts to efficiently manage our farm, our cost of production is significantly higher than it was just a few short years ago.

The forces of price and cost that have occurred in recent years continue to subject Pennsylvania dairy farmers to tight profit margins. Dairy farmers need every penny they can get to help ease those tight margins. And, though I carry a very low debt load, I do too.

In my testimony today, I will offer a snapshot of the price and cost conditions that we have experienced on Will-Mar-Re farms, in terms of income over feed costs, cost of production and individual input costs.

Conditions on Will-Mar-Re Farms

I’ve talked previously about the importance of margins in helping to measure the strength of economic conditions on farms. I believe income over feed costs (IOFC) provides a good snapshot of the conditions on Will-Mar-Re Farms and, today, I’ll offer a March to March comparison for 2011 through 2013.

As you can see on Table 1, my IOFC for March 2011 was $9.75; in March 2012, it dropped to $6.86; and, in March 2013, it rebounded slightly to $7.26. While the six percent change from March 2012 was certainly positive for our farm, this IOFC still represents a decrease of 26 percent from March two years ago.

If we look at the months of January through March of 2013, my IOFC also provides another example of that volatility I spoke about earlier. Over the course of three months, my IOFC dropped by $1.83.

If I may set aside the discussion of finances for a moment, Will-Mar-Re has been going through an exciting, yet challenging, period as we are preparing to potentially bring my son, Josh, into the business. This is exciting because I am so proud to have my son join in this family business, but at the same time, it is challenging because of the conditions I have described above and the impact on our farm’s bottom line. As we have undertaken these preparations, we have been preparing more detailed analysis of financial data at Will-Mar-Re and I’d like to share some of those findings with you.

As I mentioned earlier, milk prices may be higher, some feed costs have dropped and/or stabilized, but input costs have stayed high and even continue to increase. This is evident in our cost of production numbers. We have been able to reduce our overall costs of production for 2012, compared to 2011. But our primary way to achieve these cost reductions has been through extending the period between routine maintenance of farm machinery and by delaying needed capital improvements around the farm. The efforts we used to bring about “cost reduction” on our farm in 2012 are manageable for now. But continuation of these efforts long-term greatly increases the risk of mechanical failures and operational disruptions that will seriously hurt our farm’s profitability.  Even with this reduction in cost of production, our cost per hundredweight for 2012 was 22 percent above our cost of production in 2009. Overall, however, we’ve seen a 22 percent increase in our cost of production from 2009 to 2012.

On our farm, I estimate that our costs are fairly evenly split between feed costs and other costs. While, on the whole, our feed costs have dropped – largely because of moderating corn and soybean prices – some of our other feed supplements, such as cottonseed, canola meal and blood meal, have remained the same. Regardless of the drop, we’re continuing to pay careful attention to our feed costs and the rations we feed our cows. My son, Josh, in particular, has been trying to find the right balance of feed – dry matter especially – in an effort to get the most production out of each cow. If we short a cow just a little, we see a corresponding drop in milk production and that negatively impacts our bottom line.

Moreover, last year’s high feed prices certainly took a toll on us. Despite the fact that last year experts had said corn prices would drop because of the number of acres planted and the potential for a record harvest, the drought had a detrimental effect on prices. I’ve heard the experts offer similar forecasts based upon projected plantings, however adverse weather has meant that there is very little corn in the ground. On our farm, we still haven’t been able to plant and, at the time of preparing this testimony, we are looking at being at least a week behind.

This delay is of particular concern for our farm since this year, we’ve decided to forgo crop insurance because of the significant increase in the cost of our policy (see Table 3). When we requested our crop insurance quote for 2013 – for the same level of coverage we had in 2012 – we were shocked to see a bill for $6,000, an increase of fifty percent. And, as a result of our tight margins, we decided it was one “luxury” we just couldn’t afford.

We’ve also seen astronomical increases in crop expenses between 2009 and 2012 even though we’ve had the same number of acres between 2009 and 2011, and a decrease of acreage in 2012. Based upon the information provided in Table 4, our crop expenses (this includes seed, fertilizer, chemicals and crop insurance) show a 97 percent increase, from $36,300 in 2009 to $71,600 in 2012.

Another area where we’ve seen high increases in expenses is in the prices we pay for machinery maintenance and repairs. From 2009 to 2012, machinery maintenance and repair costs increased from $13,700 to $24,800, a jump of 81 percent (Table 5). In my efforts to constrain my debt load, we choose to repair our existing equipment instead of buying new.

Our farm insurance costs have also risen significantly – despite the fact that we’ve had no claims or major coverage changes in the years cited in Table 6. Between 2009 and 2012, our insurance costs increased from $8,200 to $11,600 – a 41 percent jump.

In addition, earlier I mentioned the need for continuation of the fuel adjuster. I believe the information provided in Table 7 more than justifies this need. Between 2009 and 2012, our fuel costs changed by 91 percent, increasing from $9,000 in 2009 to $17,200 in 2012.

Conclusion

As I mentioned earlier, much of the economic analysis we’ve done on our farm recently is so that we can bring my son, Josh, onto our farm. We’ve had to take a hard look at our numbers. And, frankly, I’m shocked. I knew our costs have gone up over the years, but I didn’t fully appreciate the magnitude of those increases until I saw the numbers spread before me. I don’t know many businesses who could stay in business with expenses changing by as much as 97 percent, especially such businesses that, like dairy farms, have limited ability to impact the final pay price. When looking at my numbers, I also can’t imagine how a farm with a high debt load can continue dairying.

As Will-Mar-Re looks to the future, we are trying hard to picture a future with my son on board as a partner. Should this new reality happen, we’ll have to work even harder to sustain cash flow, particularly if current conditions remain the same. However, it is incredibly difficult to set a budget with such swings in prices. We’ll continue to budget conservatively, act proactively and “milk” every penny out of each facet of our operation. But at the back of my mind, and that of my brother’s and soon to be my son’s, is the very real worry that we are just one low price swing away from disaster.

I hope that my testimony today has illustrated that Pennsylvania’s dairy farmers need the premium. As a result, Pennsylvania Farm Bureau strongly recommends that the Board adopt an order that sustains the current level of over-order premium at $1.85 per hundredweight for the next six months, as well as continuing the fuel adjuster.

Accompanying Charts

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