If drought keeps driving feed costs up and cow prices down, dairy farmers may see earnings reduced by as much as 70 percent by 1989, according to a study by the National Milk Producers Federation.
Jim Barr, chief executive officer of the federation, said the rising costs of grain - concentrates - are at the heart of the grim outlook."At current milk and feed prices, a 15 percent increase in feed costs equates to an effective reduction to the farmer of 50 cents for each 100 pounds of milk marketed," he said in a report sent to members this week.
Spokeswoman Doni Dondero said the federation's analysts computed that there is a potential for a drop in the net cash income of dairy producers of between 50 percent and 70 percent.
For example, she said, if prices of dairy concentrates rise 30 percent, forage costs go up 10 percent and the market prices of culled cows sent to slaughter decline by 15 percent, net cash income could be around $1.33 per each 100 pounds of milk sold.
Dondero said the figures were projected for a 12-month period, July through June 1989. Income includes proceeds from the sale of animals culled from dairy herds, in addition to milk marketed.
Before the drought send feed costs higher - the Agriculture Department reported its price index for feed grains and hay rose 20 percent last month - the federation had expected dairy net cash income to average $2.51 per hundredweight of milk sold this year.
Still another factor will be government actions to reduce milk price supports again next year, Dondero said.
If feed costs keep rising, market prices of culled cows keep dropping, and the current support of $10.60 per hundredweight is reduced further on Jan. 1, 1989, by 50 cents, net cash income of producers could fall to as low as 99 cents per hundredweight, Dondero said.
Under 1985 farm law, the USDA is required to reduce milk price supports when government purchases are expected to rise above 5 billion pounds of milk equivalent during the year.
Milk price supports have undergone a succession of cuts since rising to a peak of $13.10 per hundredweight in 1983. The reductions were undertaken to help discourage surplus production and to whittle down federal costs.
As it looks now to USDA economists, dairy purchases will exceed the 5 billion pounds set by law as the trigger for further cuts in the support.
Some dairy state members of Congress have urged Agriculture Secretary Richard E. Lyng to forestall the next reduction because of the hardship imposed by the drought. Lyng, however, has said the law gives him no choice.
But last week Rep. Sherwood Boehlert, R-N.Y., said the drought and rising feed costs have "prompted a reassessment of the situation" regarding another 50-cent cut in milk supports next year.
Boehlert also said that Rep. Charles Stenholm, D-Texas, chairman of the House Agriculture subcommittee on dairy, livestock and poultry, had predicted "it's 99 percent sure" that the Jan. 1, 1989, reduction will not take place.
Joined by several colleagues, including Rep. Jim Jeffords, R-Vt., Boehlert introduced a bill last week giving the secretary of agriculture the authority to halt the Jan. 1 cut in milk supports.
The bill also would give USDA the authority to increase supports by 50 cents per hundredweight for each 15 percent increase in feed costs.
Meanwhile, dairy farmers began stepping up production again this year, at least before the drought became rampant and forced feed costs up. Based on the earlier indications, USDA economist figured 1988 milk output would rise 2 percent to 3 percent from last year's 142.5 billion pounds.
Milk output decline last year from the 1986 record level of 143.4 billion pounds as producers cut back herds under the USDA's Dairy Termination Program, or whole-herd buyout, designed to trim surplus production.