Released May 9, 2008
AMARILLO, Texas – High Plains lenders are familiar with the cattle feeding industry, but they need a different financial understanding with the dairy industry.
After requests from several lenders, Texas AgriLife Extension Service held a seminar to allow bankers to hear from specialists and dairy operators about the industry and its financial needs, said Steve Amosson, AgriLife Extension economist in Amarillo.
Many of the bankers came in with some understanding of dairy, but needed a broader base of knowledge regarding how the industry works, Amosson said.
“They are trying to figure out if it is a niche market,” he said. “We wanted to help them understand things like herd turnover rates, cash-flow requirements and how prices are derived.”
The dairy industry in Texas has an economic output of about $3.9 billion, said David Anderson, AgriLife Extension economist from College Station.
“It is not a small industry, and more and more of it is moving to the Panhandle,” Anderson said.
Ellen Jordan, AgriLife Extension dairy specialist, said there are currently permits for about 2 million head of dairy cows in the High Plains, but she explained to the bankers that the industry would never grow that large here.
Many of those are permits obtained by landowners trying to market their property, Jordan said.
The region has about 150,000 head of dairy cattle and that could double in the next 10 years, but the numbers won’t grow rapidly beyond that due to limited water supplies and other conditions, she said.
Some of the most pressing issues for producers, as outlined in meetings of the Southern Great Plains Dairy Consortium, are environmental quality and related regulations, product quality and safety, economics and marketing, labor (ability to attract, retain and house), water utilization and energy resources and related costs, Jordan said.
Two producers, Mike Schouten of Deaf Smith County and Harry DeWitt of Parmer County, said coming to the High Plains from the Stephenville area has meant some changes in their operations.
One of the biggest is the amount of farming they have to do to control feed costs on the dairy. That has meant different ways of dealing with their line of credit, they said.
Another is providing an education for those not familiar with the industry.
“One of the biggest faux pas you can make as a banker would be to appraise my cows and then determine the market has moved and you change your appraisal, which changes my operating ability,” Schouten said. “Try to keep from going too high in the first place, so no major changes are necessary.”
Using reclamation values and understanding there is a certain amount of risk involved is the best practice, the two said. DeWitt said when times were tough in 2006, an average-producing cow would be valued at $1,700, and six months ago, that price would have been $2,300.
Anderson told the group that while dairy cow numbers have gone down significantly across the nation, production of milk has gone up – with the High Plains as a growth region.
Feed costs for the past three years have risen from $6.70 per hundredweight of milk to more than $7.60 per hundredweight. And the cost to produce milk in the Texas north dairy area has gone from $15 per hundredweight to $17 per hundredweight, Anderson said.
“The largest cost component is feed on a dairy; it’s more than half of the operating expense and getting bigger,” he said.
Because feed prices are higher, the milk-to-feed ratio traditionally would indicate this should be a time of herd reduction, Anderson said. But it is not. Dairy production is still a profitable industry because of higher milk prices.
“Much of the price increase being seen by consumers now is being spurred by (international) trade,” he said.
Strong exports, an Australian drought and lower production in Europe has kept milk prices high, Anderson said. The exports are not of fluid milk, but rather milk-derived products such as whey and powered milk.
He explained the complicated milk pricing system, saying the price of cheese is ultimately what determines the price of milk. Class I milk goes for milk; Class II is for ice cream; Class III is for cheese and Class IV is for butter and powdered milk.
The Class I price is based on location and the value of milk in making cheese, butter and powder, he said. It takes approximately 10 pounds of milk to produce a pound of cheese. Therefore, if cheese is $1.90 per pound, it makes the price of that milk $19 per hundredweight.
Historically speaking, the cheese price is about $1.40 a pound, so the industry is experiencing some extremely high prices right now, he said. However, their costs of production have risen significantly as well.
Non-fat dry milk increased in price last year due to export trade, but is now beginning to come down, Anderson said. Butter prices went down last year. But whey, a by-product of making cheese, has seen a jump in prices because of the increasing popularity of protein drinks.
“If we ship a lot of powder over to another country, we are going to have higher milk prices here,” he said. “It changes every month, by the value of those products.”
-30-
http://agnews.tamu.edu/showstory.php?id=481
Contacts: Steve Amosson, (806) 677-5600, samosson@ag.tamu.edu
Ellen Jordan, (972) 952-9212, ejordan@ag.tamu.edu
David Anderson, (979) 845-1751, danderson@tamu.edu
Kay Ledbetter, (806) 677-5600, SKledbetter@ag.tamu.edu
