Long road to recovery

Written by Marjie Knust and Christine Bush
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In 2008, Joe Macedo was enjoying his life as a dairy farmer, milking about 3,200 cows on four dairies in Tipton, Calif. A year later, things took a drastic turn.
Milk prices dropped while feed costs skyrocketed. The negative margins lasted for months, making cash flow an ongoing struggle. Macedo took the advice of his banker to cut feed costs by 10 percent in an attempt to save money.

“Cutting feed costs was a negative,” he says.

The lower quality feed affected milk quality and production. So, Macedo culled his low-producing cows and increased the quality of his feed. He also sold one of his dairies and stopped renting another. Down to two dairies, and about 2,000 cows, Macedo says at the time, his future in the industry looked bleak.

“It was scary times,” he says. “We didn’t know if we were going to lose it all.”

Five years ago, Macedo was not alone. Producers throughout the country struggled with cash flow, and many lost generations of equity in their operations. Others exited the business completely.

“2009 was unlike any time that we’ve experienced for decades,” says John Wilson, DFA’s senior vice president and chief fluid marketing officer.

In fall 2009, Leader published a special issue focusing on how producers were working to survive and their hopes for emerging from the grasp of economic hardship. Of the members featured in the issue, all made it through the downturn and remain in the dairy industry.

While each producer battled different challenges and used different strategies to protect the livelihood they love, all agree that 2009 changed the dairy industry in more ways than one.

Today, Macedo has changed the way he manages his dairies, growing three-fourths of his own feed and working with a nutritionist to make sure his herd is getting the right nutrients for the least amount of money. Although he milks one-third fewer cows than he did five years ago, Macedo says he’s getting higher milk production and increased quality. He also switched banks and hired a dairy financial adviser.

“A lot of stress was lifted June 1, 2013, when I switched banks,” he says. “With my old bank, I was under a microscope. They did inventory on my operation every month. It was very stressful. Now, I can do business as usual.”

During the financial downturn of 2009, the banking industry was taking its own hit. Denis Burke, a DFA member in Ruth, Mich., was in the middle of a $1.9 million expansion when the low milk price cycle hit.

“I had to go to the bankers two times to get it finished,” he says. “They gave me what I needed. They were short-term loans with more interest, but I had a smaller bank and they were in the same financial place as I was.”

Burke increased his herd from 600 cows to 1,100, built three freestall barns and converted his parlor from a double-eight to a double-24 parabone.

“If I hadn’t done the expansion, I don’t think I would have made it,” he says. “I was too small to survive. I was running too many cows through. The parlor was old and couldn’t keep up.”

Today, Burke milks 1,500 cows and continues to build equity in his operation.

Gerald Hoekman, a fifth-generation dairy producer in Dublin, Texas, says he was lucky to have significant equity in his operation when the low price cycle hit.
“I was never deep in debt,” he says. “That’s why I’m here today. I keep plenty of equity, and I stayed with that plan.”

Milking about 1,400 cows, Hoekman says he grows more of his own feed today, farming about 2,000 acres of corn and oats — 500 more than five years ago.

“The downturn caused me to want to grow more of my own feed,” he says. “Feed got out of control. I have always used manure as fertilizer. Now I use more of it.”

Not all dairy producers were fortunate enough to survive the industry’s downturn. John Traweek from Stephenville, Texas, says family members, including his father and brother, were losing roughly $30,000 a month on their 1,500-cow dairy.

“We started selling down in 2010 and reduced the herd size,” he says. “We were cannibalizing everything to make it work.”

The Traweeks sold their last dairy cow in 2012 after operating for three years without help from a bank.

“We sold things to pay bills and keep the feed coming in,” he says. “It’s hard. After all of the time we spent milking cows, all you can think of is the four or five years of stress.”
Fortunately, the family had diversified before the downturn, investing in a country club. Today, John manages the club’s golf course, restaurant and bar. His father retired and his brother found a job outside of the dairy industry. The family still farms crops.

The industry — from producers and processors to legislators — rallied for change using the lessons learned in 2009, especially those of producers like the Traweeks, who saw family dairying legacies come to an end in just a few short years.

“The one good thing that came out of the 2009 downturn was it unified dairy farmers and forced change,” Wilson says. “We now have a new dairy policy that gives dairy families the opportunity to protect themselves against future economic disasters.”

The focus in dairy policy quickly shifted from milk prices to on-farm margins.

“We used to talk about dairy prices as the end all, be all,” says Jackie Klippenstein, DFA’s vice president of industry and legislative affairs. “2009 changed that. We learned that prices are not what we measure success by. It’s margin. While as a Cooperative, we are still working for the best price, there are other factors we have to also focus on for our members.”

While work on dairy policy reform began in 2009, reform didn’t become a reality until just this year. The hard-fought battle for a Farm Bill was filled with frustration and delays. But, DFA members played a critical role in achieving the new legislation.

“Our push for the Farm Bill reaffirmed what we already knew,” Klippenstein says. “Which is that farmer engagement is the single most important factor in passing legislation that benefits dairy producers.”

While the dairy business environment changed five years ago, so did the legislative environment, Klippenstein points out. Shrinking population in rural areas resulted in a greater disconnect between legislators’ constituents and agriculture, which meant fewer votes for agriculture-friendly legislation.

“We are now also dealing with entities not directly related to our industry engaging in lobbying against dairy policy,” Klippenstein says. “The political environment has changed drastically. We used to depend on members of the Agriculture Committees in the House and Senate. Now, we also need members of the Ways and Means Committee, the Appropriations Committees and others.”

DFA began its work on the current Farm Bill five years ago when then-chairman, the late Tom Camerlo, established a Price Stabilization Study Committee, which was tasked with focusing on long-term dairy policy reform that would reduce volatility and try to prevent such a severe down price cycle in the future. The committee developed the Dairy Growth Management Initiative, which contained proposals to address extreme volatility in the industry and provide tools to help producers in times of low margins. Many of those ideas were incorporated into the Margin Protection Program found in the current Farm Bill.

“While we didn’t get everything we wanted from Congress with the new Farm Bill, we are pleased that the general structure of the Margin Protection Program is similar to what dairy farmers proposed going back to 2009,” Wilson says.

For those who remain in the dairy business, things are looking up. In addition to improved policy, on-farm margins look to be positive for much of 2014.

“There is a tremendous amount of optimism on the price side, largely due to strong global demand, and feed costs are not showing significant signs of going up,” Wilson says. “Hopefully, this will be the long-awaited recovery period we’ve been waiting for.”