Drought could edge livestock producers out of business

Aug 27, 2012

Brandt Dairy sits on Swan Creek at the end of a meandering gravel road in Linn, Missouri. The farm is bucolic with its twin silos, red barn and black-and-white Holstein cows. But the brown pastures, dry river bed and burnt corn fields are a reminder that there have been less than two inches of rain here in the last two months.

“We’re used to it but not to this extreme,” said Alfred Brandt, who bought his parents out of the business in 2009. The 45-year-old dairyman is walking through grey stubbly pasture that during a normal year would have 10-inch-high fescue grasses. “You can see there’s nothing left of this. There’s been pretty much zero growth since early June.”

Since he can no longer count on the land to provide any nutritional value for his 150-cow herd, Brandt will have to buy feed to keep them healthy through the spring, which is the next time he expects there will be green pasture. That means purchasing eight months worth of silage, cottonseed and soybean meal, along with more hay and corn than he was able to harvest from his 500 acres.

“I will probably spend at least $100,000 more this year than what I would in a normal year,” Brandt said. “And milk won’t go up nearly enough to offset that.”

Supermarket shoppers everywhere could soon feel the consequences of the drought ravaging the Midwest. The Department of Agriculture expects the prices of beef, pork, poultry and dairy to be up to five percent higher next year than they are now.

Higher prices will return some profitability to the livestock and dairy sectors. But there’s no guarantee it will offset the debt farmers have taken on during the drought. Brandt's $100,000 out-of-pocket feed costs will put a serious strain on his operation. A few nights ago, he even had a conversation with his wife about whether to stay in the dairy business.

“There are just a lot of dairymen who are not hanging on. They are giving up now,” he said. “And [there are] a lot of banks who are not letting them hang on. A lot of banks are pulling the plugs.”

Brandt was able to get a bank loan and so he will try to stick out the drought. He’ll have to cull his herd pretty severely this winter though. Selling cows that aren’t making a profit will help stretch out his feed in the short term but after the drought subsides, it may be harder to ramp up production since many have a lifetime of breeding ahead of them. It could take years for Brandt to repay his debt.

“I’m a pretty positive person but this has got me stressed,” he said. “I’ve never been this gloomy about the future of the dairy business or livestock business before.”

Brandt’s one of a growing number of livestock producers in the Midwest in trouble thanks to the drought. This summer’s searing heat and lack of precipitation has not been good for anyone working in agriculture. But most farmers harvesting grain, like corn or soybeans, have crop insurance subsidized by the federal government that helps them get through rougher years. There’s no comparable program in the livestock or dairy industries, although Juan Garcia, the administrator for the USDA’s Farm Services Agency, said Wednesday he expected to see a spike in emergency loan applications from livestock producers this fall.

Joe Horner, an economist with the University of Missouri Extension’s commercial agriculture program, says extremely expensive feed due to national forage and hay shortages caused by the drought has put livestock producers in an extremely tough spot.  According to the Department of Agriculture, a ton of hay costs $184, up $1 from the previous month and $14 more than this time last year. The current price of a bushel of corn -- $7.36 -- is also up about a dollar. That’s if you can find anyone willing to sell them.

“If you were to interview beef producers or dairy producers across Missouri right now, you’d see most of them go to bed at night thinking, ‘How am I going to feed [my herd]?’” said Horner. “'When am I going to pull the trigger on getting rid of these animals? How deep am I going to cull into the herd? If I had to sell off everything how am I going to make my payments? How am I going to live to next year?'”

Producers just starting out in the business are especially vulnerable because they’ve never seen a drought like this before.

“A farmer that’s been at it for 40 years, 50 years has seen the cycles come and go,” said Horner. “And as an older gentleman told me. ‘I’ve lost lots of money farming and I usually found that money the same place I lost it. And that’s the best place to find it.’”

But will farmers just starting out be around next year to look?

When they started Honey Creek Farm on 50 acres of land in Hallsville, Missouri last year, Dan and Laura Pugh knew their first year farming and keeping livestock would be a lean one. They had hoped their four pastures, which are divided by a tree-lined creek that has long been dry, would be suitable for their five new sheep to graze on.

“We brush hogged the grass really high and it was green underneath,” said Dan, a 48-year-old soft spoken man with long sunburned arms. He quit a job working in medical equipment after 17 years in the business to follow his true love -- farming. “But they’re not interested. It’s too brown and not enough nutrition … I was able to buy a little bit of alfalfa from a neighbor but we need to buy some hay soon because they’re just not going to have enough.”

Dan Pugh’s been scanning CraigsList for a good deal for a bushel of hay but prices keep going up.

Laura Pugh’s a year older than her husband. She was a student advisor at the University of Missouri before quitting the job last year to farm. She says it’s been really hard to know how much and what kind of food to give their sheep. Experimenting to find the right combination is even tougher when feed’s not cheap.

“We’ve never owned livestock before and we’re trying to figure it all out,” she said. “It’s really scary to look at them and realize they need some supplement. They’re looking pretty good but there was a period of time where they looked hungry.”

The Pughs also buy roughly 30 pounds of feed a week for their 30 chickens and three Berkshire hogs. They’ve had to use savings to make ends meet.

“What we’ve been making this year is strictly at the farmers market and that’s been pretty minimal,” Dan said. “We’ll probably make, like, $10,000 this year.”

He added that it was helpful that Laura had just gone back to work for the University of Missouri part-time.

Although you’d expect starting a farm during some of the hottest and driest weather the Midwest has seen in decades would make new farmers head for the hills, the Pughs are optimistic they’ll make it through this rough year. But starting a farm during a drought has given them major insight into how hard it is to get a profitable livestock operation going.

“I have an ambition of having a larger scale dairy with sheep,” Dan said. “But when you look at this situation, you see the challenges … There are opportunities but nature challenges you.”

Joe Glauber, chief economist for the Department of Agriculture, says it’s too soon to say how many producers will be forced to go out of business because of the drought.

“But we do know that feed costs are a very large part of the operating costs for livestock and dairy producers. As much as 70 percent or more of their operating costs are feed,” Glauber said. “And when you see price increases like we’ve seen, that means it’s very tough for these operations -- particularly smaller operations -- to make a go of it.”

He says for small producers without savings it will be especially hard to sustain negative margins over a long time.

“So obviously for some, the decision may be to get out of the business altogether,” he said.

Down the road, fewer producers could mean fewer choices and higher prices at the supermarket.