By DAVID GUTMAN
COLLEGE PARK, Md. - You cant turn these cows on and off, said Bill Kilby, whose family has owned a dairy farm in Cecil County since 1961. You cannot stop feeding the cows, youve got to take care of them.
Thats the simple rationale for why the federal government has continuously, since the Great Depression, passed some sort of agricultural support legislation.
Farmers, unlike say computer companies or automakers, cant ramp up production when demand spikes and they cant easily decrease their expenses when prices for their products drop. The crops need to be planted and tended to, the animals need to be fed, regardless of what the market is currently paying for their goods. The U.S. is currently without a Farm Bill, a massive legislative package that includes financial support programs for farmers. The last one expired on Sept. 30, and has not been renewed by Congress.
Most farmers are not yet feeling the pinch, as most provisions of the expired Farm Bill remain in place until 2013. But a key Farm Bill program for small dairy farmers expired on Sept. 30, leaving them at the mercy of the volatile milk market.
The Milk Income Loss Contract (MILC, conveniently) program guaranteed small farmers a minimum price for their milk, no matter how low wholesale prices dropped. That program has expired and has not been replaced.
The program established a target price for milk, by taking into account things like the cost of feed for cows. If wholesale prices fell below that target price, the program reimbursed farmers a fraction of the difference.
A farm could collect payments only on its first 3 million pounds of milk produced each year (the approximate amount produced by 150 cows), so small farms, as opposed to large agribusinesses, were reaping most of the benefits. Because his farm has 500 cows, Kilby was only eligible for MILC benefits a few months out of the year, but he still called the program extremely valuable. Kilby said that MILC functioned as an insurance blanket for farmers in case prices dropped unsustainably low.
Speculators have gotten into the milk business, milk was the most speculated commodity last year, Kilby said. We have to take out insurance because were not eligible for MILC. Last year it cost us $40,000 to basically buy insurance for low milk prices. We feel we need to do that to protect our investment.
"So it, Kilby said, sighing dejectedly, it seems like one thing after another. The Dodd-Frank financial reform bill contained a provision that limited speculation on 28 commodities, including milk, but the provision was thrown out in September after a court challenge by a group representing Goldman Sachs, JPMorgan Chase, Morgan Stanley, and other banks.
For smaller farmers, the end of MILC poses an even bigger burden.
Jason Myers owns Windsor Manor Farm in New Windsor, Md. where he has a herd of 36 Holstein cows.
It helped us a lot, being a small producer, we were able to use it on all our production, Myers said. If theres no new Farm Bill to give us any help as far as pricing, especially with the high corn prices, well just be at the mercy of hoping that the price of milk goes up.
The expiration of MILC comes at an especially inopportune time, just as feed prices are near historic highs.
In 2011, feed costs accounted for 80 percent of the operating costs of dairy farms, according to USDA data.
Feed that we get for our cows used to be $6,700 a load, its now $13,000 a load, and thats every two weeks, Kilby said.
From 1970 to 2005, feed corn prices averaged $2.27 per bushel. In 2012, they have averaged $7.90 per bushel, driven upwards by the emergence of the ethanol industry, and more recently, by the severe drought that hit the Midwest.
Im not quite sure whether the federal government has come to terms with this drought situation in the Midwest, Kilby said. Its really going to cause a lot of misery for everyone.
While feed prices have been soaring, milk prices have gone in the other direction. Average wholesale milk prices were two dollars less per hundredweight (a hundred pounds of milk) in September than they were one year ago, according to USDA data.
Bob Miller owns 45 Holsteins and operates Nice Farms Creamery in American Corner, Md. He sees the same problems as Kilby, but isnt sure that MILC was a good solution.
Youve got farmers that are being paid prices for a hundredweight that just arent sustainable with feed and these things. The last time the dairy business was profitable was in the 70s and 80s, Miller said. We dont need legislation, we just need fair prices. The actual problem (with MILC) is that its just pennies.
Feed prices have slowly come down and milk prices have crept up since the depths of the summer drought. Whether that will be enough for small farmers without the help of MILC is in doubt.
Farmers have been pretty much underwater since the beginning of 2012, said Andrew Novakovic, a professor of agricultural economics at Cornell. They hit their low point in July, and since July theyve been moving up, but theyre actually still below water.
The situation may remain difficult, however, for Maryland dairy farmers with less acreage who are forced to buy a lot of feed.
If youre in the Northeast or Northern Wisconsin youre probably doing alright, Novakovic said. Youve got a corn crop that you can harvest, youve got hay that you can cut, the price of milk is getting better, so youre not in too bad shape. But if youre in the part of the country where there was a bad drought or if you buy all your feed, youre going into this fall in pretty rough shape.
The irony is that if Congress does nothing, things will get much, much better for dairy farmers on Jan. 1. If theres no Farm Bill legislation by then, agriculture policy will revert to an obscure 1949 law that sets prices for basic commodities at parity levels.
Prices for milk, wheat, and rice would double.
Its hard to imagine Congress would let something like that happen because it would just not be a good thing, but you know, who knows, maybe they will, Novakovic said.
Pending versions of the Farm Bill contain two new programs that would replace MILC. One would attempt to limit the supply of milk on the market when prices get too low, and the other would function like crop insurance, providing payments to farmers when profit margins are unsustainably low.
But no one is quite sure when Congress may pass a Farm Bill or what programs will end up in the final version.
Matt Hoff owns Coldsprings Farm in Windsor, Md., where he has 800 cows. Because he has a fairly large farm, he only relied on MILC for a month or two every year. But he still worries about the void created by its absence.I just hope they get something in place before milk prices go back down, Hoff said. Congress has got to do some kind of Farm Bill by Jan. 1 or they go back to parity pricing which means we would get a huge amount of money for our milk, but then everything else would go through the roof too.