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Testimony Offered for Pennsylvania Farm Bureau
Before the Pennsylvania Milk Marketing Board
Regarding the Level and Duration of
the Class I Over Order Premium

September 3, 2014

Presented by
Michael Evanish, Manager, MSC Business Services
PFB Members’ Service Corporation


Introduction
This testimony is offered at the request of Pennsylvania Farm Bureau, which represents over 55,000 farm and rural family members in 63 counties. Dairy farmers comprise the largest segment of agricultural producers who are members of Farm Bureau.


I am Michael Evanish. I currently serve as manager of MSC Business Services, a division of PFB Members’ Service Corporation (an affiliate company of Pennsylvania Farm Bureau), and have served in this position since 1997. MSC Business Services provides an array of business services to assist farmers economically manage their farm operations. The services provided include income tax planning and preparation, business and tax accounting, payroll services and recordkeeping, business analysis and benchmarking, and business consultation.

I am responsible for overseeing the operation of the division and the 35 accountants, known as Account Supervisors, and 25 support staff. I have been employed by MSC Business Services since 1976. Until January 1989, I served as Account Supervisor, working with members in Butler, Beaver and Lawrence Counties. From 1989 through 1997, I served as Director of Training. In this capacity, I was responsible for educating and training all staff, including Account Supervisors who work with MSC’s clients.

During my tenure with MSC Business Services, I have been directly involved, usually as project leader, in the development and upgrade of programs used by MSC and MSC clients. Each program is specifically designed to meet the business and financial needs of staff and clients, including development of electronic recordkeeping and a modern business analysis.

In my capacity as Manager of MSC Business Services, it is imperative that I have a working knowledge and understanding of existing economic and financial conditions that exist in Pennsylvania’s dairy industry and the likely financial impacts these conditions will have on the current and future operation of Pennsylvania dairy farms.

MSC Business Services has approximately 4,400 contracts with PFB members, with the largest enterprise being dairy farms representing over 800 contracts.
As I mentioned earlier, an important service that MSC Business Services provides is business consultations. As part of this service, we are often asked to develop budgets and make cost of production projections. I personally review and approve all consulting reports produced by MSC Business Services. At present, I am co-chairman of the Economic Development, Finance and Infrastructure Committee of the PA Dairy Leadership Council. Other features of my work experience and educational background are contained in PFB Exhibit 1.

In our effort to provide our clients with insight on the relative financial health of their dairy operations and how their operations compare with other MSC dairy clients of similar size and make-up, MSC analyzes and calculates each year the annual averages of income and cost data for specific clients. From this analysis, MSC prepares and produces for each client a comparison analysis of the client’s farming operation with other individual clients serviced by MSC by size. Each Dairy Profitability Comparison generated provides a side-by-side comparison of the individual client’s income and costs with the average income and costs experienced by “comparable size” dairy farms and by the “top 10% farms” serviced by MSC for that year.

The methodology and formulas used in calculating the annual average income and costs reflected in the individual Dairy Profitability Comparison publications are the same as were used in the production of annual averages reflected in the annual Dairy Herd Analyses previously published byMSC.

PFB Exhibit 2 is an illustration of the type of document that each MSC client is individually receiving through MSC’s generation and publication of the client’s Dairy Profitability Comparison.

PFB Exhibit 3 is a document that contains the aggregate averages of annual costs and incomes incurred for the six-year period of 2008 through 2013 by dairy farms operated by MSC clients. In order to provide a more reasonable and accurate picture of the financial condition of MSC-client dairy farms for the most recent period in which analysis has been fully completed, it seemed more appropriate to include the last six years, which begins with a “profitable” initial year, than to include the last five years, which begins in 2009.

Most persons associated with dairy farming know that 2009 was a horrible financial year for Pennsylvania dairy farms, and 2010 continued to be financially bleak. But the effect of the prolonged period of unprofitability in 2009-2010 on the financial status of MSC-client dairy farms cannot be ignored.

In 2009, these dairy farms lost, on average, <$2.53> for every hundredweight of milk produced that year. While not as drastic as 2009, MSC-client farms in 2010 incurred losses for a second consecutive year. On average, MSC-client farms lost <$0.12> per hundredweight.

MSC-client farms made modest recoveries during years 2011 and 2013, with average annual profits of $1.04 per hundredweight in 2011 and $1.41 per hundredweight in 2013. In 2012, MSC-client farms barely broke even, averaging a profit of $0.01 per hundredweight. Much higher input costs and lower price receipts were significant contributors in the lackluster financial year experienced by MSC-client farms. The average price received by MSC-client farms in 2012 was the third lowest for the six-year period ($19.77 per hundredweight), while the average cost of purchased feed and crop expense was the second highest for the period ($9.45 per hundredweight).

The financial drain of the two-year period of losses on the financial status of MSC-client dairy farms is reflected in Exhibit 3’s annual average net margin of income over costs for the six-year period. The financial recovery experienced by MSC-client farms in 2011 and 2013 provided little more than an offset to the period of unprofitability MSC-client farms incurred in 2009-2010. For the six-year period of 2008 through 2013, the net margin realized on MSC-client farms averaged $0.06 per hundredweight per year.

Keep in mind that the level of premium established by the Milk Marketing Board for this six-year period was at or above the level of over-order premium mandated in the Board’s current order.

At past hearings, I have offered testimony on the increasing percentage of income from milk sales that producers must dedicate for feed. I noted that beginning in 2008, the percentage of income that must be devoted in purchase feed costs was six to seven percent above the percentage of income that farmers previously had to devote to feed costs. The increasing trend in percentage of income needed for costs in purchase and production of animal feed continues to be a drain on dairy farm operations. PFB Exhibit 4, shows the annual averages of cost per hundredweight that MSC-client farms have incurred for purchased feed and crop production and relative percentage of average costs for purchased feed and crop expenses to prices received. During the six-year period, the percentage of income that must be dedicated for feed purchase and feed crop production continues to be well above percentages of cost to income that farmers have traditionally experienced prior to 2008. Even with the reduction in cost percentage that occurred that occurred in 2013, the percentage of milk price that MSC-client farms have devoted for purchase feed and crop expenses was above 40 percent, and was consistently above 40 percent throughout the six-year period. A greater portion of farmers’ income must now be dedicated to meet farmers’ feed needs that were previously able to be used for other costs.
We have conducted no comprehensive analysis of MSC-client farms for 2014. But a very preliminary analysis conducted without adjustment for accruals would indicate that MSC-client dairy farms for the first six months of 2014 will likely average a level of net profit for the first six months of that is significantly above the level of profit experienced in 2013.

Conclusion
Based on the experience of MSC-client farms, I must recognize that the financial status of Pennsylvania’s dairy farmers has been very positive in recent months. Input costs have stabilized, while producer prices have been among the highest ever received. But when considering recent gains in a broader context, the
financial status of Pennsylvania dairy farms is not robust, especially for those farms that incurred significant debt to weather the economic storm of 2009 and 2010. Recent gains have allowed farmers to catch up on accounts payable and other debt, restore equity, and hopefully put some money aside to invest in needed capital improvements and withstand the next economic downturn in milk prices, which may already be happening. Recent events, such as the downward trend in dairy futures markets, a significant reduction in cow culling, and strengthening of the dollar on world markets, raise serious concerns about the future sustainability of current producer prices.

On the basis of the testimony I offer today, I would recommend that the over-order premium be continued at the current levels at least for another six months.
I would like to thank the Pennsylvania Milk Marketing Board (PMMB) for the opportunity to offer testimony today.