Chapter 7: External Factors An Inside Look at Outside Influences

Transcription

1 Chapter 7: External Factors An Inside Look at Outside Influences 47

2 Introduction The ability of a dairy farm business and more broadly, the dairy industry, to thrive in Pennsylvania can be influenced significantly by factors that are relatively outside the control of individual dairy farm owners and even beyond the control of key influencers within the dairy industry. These external factors will shape the way dairy businesses operate in the future and could potentially change the course of Pennsylvania s dairy industry. Being aware of these issues and reaching out to those entities and individuals that influence them will be essential in dairy s ability to foster growth on Pennsylvania s dairy farms and to strengthen the viability of the broader industry. For purposes of this report, three areas of external influence identified by the analysis team as playing a key role in the future viability of dairy in Pennsylvania. Those three areas include transportation issues, access to capital, and environmental regulations. Key findings and recommendations in each area are outlined below. Access to Capital In the producer survey, 20 percent of the respondents indicated that they needed to modernize to remain profitable, as shown in Figure 7.1, while 46 percent indicated that they haven t upgraded, expanded or significantly improved their milking facilities since before In fact, on average, respondents haven t upgraded their milking facilities in the past 15 years. In the Confidence Survey conducted by the Elizabethtown College, as shown in Figure 7.2, only 12 percent of the dairy farmer respondents indicated that the availability of credit from lenders was an external challenge for their business. It was ranked eighth in the list of external challenges identified by the respondents, well behind the top three challenges identified, which included government regulations, cost of supplies and inventories, and energy prices. Still, many of Pennsylvania s dairy facilities remain outdated, according to the producer survey. The age of dairy facilities impact many performance parameters in a dairy operation, including cow comfort, milking time and efficiency, milk quality and herd longevity. Outdated facilities also limits an operation s ability to adopt new technology available in the industry. Expansion and modernization projects require significant capital investment, and that requires access to capital for Pennsylvania s dairy farm community. With regulations and lending requirements changing since the early 2000s, the analysis team interviewed numerous lenders associated with the Pennsylvania dairy industry. For many of these commercial lending organizations, dairy remains a significant portion of their total agriculture portfolio. General observations based on these interviews included: 1. Dairy business investment in Pennsylvania is largely a mature business investing in step wise facility and operational improvements. Increased pressure on feed prices and subsequent land values has increasingly determined size of dairy operation. 2. The appraisal process was reported to have remained constant from the previous decade. Loan applications require updated asset value appraisals. In calculating asset value for loan eligibility, up to 80 percent of the appraised land value is considered in capital requests. 3. Accounting practices adjusted for accrual expenses is becoming increasingly important in determining the financial health of a dairy business. Several lender organizations reported this approach is becoming increasingly more important in evaluating dairy loan applications. Tax Figure 7.1 Respondents Inclination to Modernize Government Regulations Figure 7.2 Taxes Cost of Supplies/Inventories Energy Prices Health Difficulty in Finding Workers Availability of Credit from Lenders Competition from Imported Product Domestic Competition Delinquent Accounts Payable returns and related accounting information were reported to provide inadequate information for making decisions on many loan applications. 4. Budgeting for annual, quarterly and monthly income and expenses is becoming increasingly important, based on lenders feedback. With increased volatility in both dairy markets and feed commodity markets, having realistic and accurate budgets from which to make operational and financial adjustments remains critical to a growing and financially health dairy enterprise. 48

3 Environmental Regulations In contrast, the dairy farm respondents to the Elizabethtown College s Confidence Survey Environmental Regulations listed government relations as the single most significant external challenge facing their Agricultural Regulations business. 58 percent of the respondents listed this as their most significant external challenge. When broken down, environmental regulations Employment Regulations sifted to the top of the list of regulations that the respondents considered challenging, followed by Zoning/Land use regulations agricultural, employment and zoning & land use regulations, as shown in Figure 7.3. With more than half of the state 38 Food safety regulations counties out of 67 counties located in the Chesapeake Bay watershed, complying with Clean Water Act is critical to the future of the Health/Safety regulations dairy industry. However, according to the recent study, Pennsylvania s regulatory environment is Figure 7.3 no more restrictive than most other states. A state -based Quick Reference appears in Figure 7.4 State Requirements to compare water permit requirements, water quality based PA, DE requirements, air quality based requirements, public noticing requirements, and others. Each state s requirements are compared to the CAFO rule. CA, ID, MI, MN, OH, In August 2012, the United Soybean Board TX, VA, VT, WI commissioned an audit of environmental regulations on a state-by-state basis to better understand the impact NY, NJ these regulations may have on the livestock industry. This 700-page report, prepared by CDM Smith, reflects federal regulations governing CAFOs and state regulations. The study includes 2002 estimates on the cost of regulatory compliance evaluated by the U.S. Environmental Protection Agency. Compliance costs are based on nutrient management planning, facility upgrades, land applications, and technologies for balancing onfarm nutrients. It is important to note the EPA study is from 2002 and is utilized only as a comparison. According to Figure 7.5, dairy farm businesses in Pennsylvania and across the country absorb almost half of the regulatory compliance costs associated with livestock agriculture. Dairies with more than 1,000 animal units (about 700 mature cows) spent a collective total of $128.2 million in pre-tax compliance costs in Figure 7.4: Comparison to CAFO Federal Rule Federal Requirements More Stringent than Federal Requirements Slightly Less Stringent than Federal Requirements Figures 7.5 and 7.6: Annual Pre-tax Compliance Cost of EPA compliance regulations and the distribution of the CAFO operations compared to the distribution of CAFO compliance costs by industry sector. Source: United Soybean Board 49

4 The United Soybean Board report also compared CAFO compliance regulations in each of the states to identify those that were more restrictive than national regulations and those that were less restrictive that the national guidelines. Figure 7.7 is excerpted from that comparison to show how Pennsylvania s regulatory environment compares to the national guidelines and to the neighboring states What the report shows is that Pennsylvania s regulatory environment is no more restrictive than most other states. Figure 7.8 also shows that as a rule, Pennsylvania receives greater assistance from the EPA than other states do to support environmental protection and conservation stewardship best management practices on agricultural operations. Figure 7.7: Comparison of State Regulatory Requirements to National CAFO Requirements EQIP FISCAL YEAR 2011 ALLOCATIONS Figure 7.8: Maps showing distribution of EQIP assistance and agricultural management assistance across 50 states in fiscal year Source: United Soybean Board Transportation Pennsylvania has several intersecting highways that provide quick access up and down the East Coast and into the Midwest. The commonwealth is also bisected by a transcontinental railroad that travels East and West. Four of the five largest East Coast ocean ports, including the Port of New York and New Jersey, the Hampton Road, Va., port, the Baltimore, Md., port, and the Philadelphia port, are easily accessible from Pennsylvania. Fluid milk moves west to east and north to south by truck. An estimated trucking cost of $2.50 per loaded mile corresponds to at least $2.00 to transport 100 pounds of milk 500 miles. This can make hauling milk into the Southeast and Florida profitable in the fall when that region does not produce enough milk to supply its fluid market. By the same token, milk can come from Michigan or Indiana to Pennsylvania at certain times of excess supply or demand. One issue related to transportation is the distribution of the milk production across more farms when compared to other states. Even in Wisconsin, which has the largest number of dairy farms in the nation, the average annual production level of a dairy farm is million pounds, nearly twice that of Pennsylvania s average farm which is million pounds In Wisconsin, it only takes 5 of the average sized dairy farms to fill one tanker truck up, on every other day pick-up, while in Pennsylvania, it requires 8 farms. In contrast, the average, California dairy farm can fill a tanker load of milk up every 22 hours. This ratio does increase transportation costs in Pennsylvania, although that increased cost is offset by the close proximity of dairies to the dairy processing plants that manufacture the milk. The net impact of smaller farm sizes but shorter assembly hauls could be examined more closely in further analysis. 50

5 Another transportation-related issue in the commonwealth is truck weight limitations. Pennsylvania is one of the 26 states that maintain minimum federal gross vehicle weights (weight of truck and load) or GVM at 80,000 pounds, while New York is one of 19 states that permit trucks of 105,000 pounds or more. An overload permit for raw products is allowed in Pennsylvania, but it is not valid once the truck leaves the commonwealth. It also is not valid for manufactured goods, which means that condensed milk and cream products can not be transported in amounts above the weight limitations. These discrepancies in truck weight limitations could create disadvantages for dairy farmers and processors looking to export milk out of the state and into neighboring states, because it requires more trucks to haul the same amount of milk. According to a Cost of Hauling analysis conducted by Dr. Mark Stephenson, Director of the Center for Dairy Profitability in Wisconsin, the cost impact of increasing the GVM to 105,000 pounds would be a reduction of 24 cents per hundredweight for a milk assembly of 200 miles and 26 cents a hundredweight for distribution movements of 200 miles. As Pennsylvania s dairy industry continues to grow, it is essential that the commonwealth evaluates this cost savings to the increased costs that would accompany an increase in weight limitations (such as road maintenance issues) to capture efficiencies in transporting raw and processed dairy product. Pennsylvania s dairy industry and its individual dairy farm businesses will continue to be influenced by factors external from the industry. Environmental compliance and the regulatory environment, lending capabilities and access to capital, and the impact of transportation restrictions and limitations are three of those factors. Remaining connected with the key influencers in each of these areas and staying informed about impending changes that could affect the industry will be critical to dairy s future viability in Pennsylvania. Pennsylvania s dairy industry has already made good progress in forming relationships with key individuals involved in these areas and should continue on that path. Specifically, the following prescriptions could enhance the industry s ability to compete. While Pennsylvania s current regulatory environment is not unlike most other states, uncertainty of future regulatory costs deter business reinvestment. As the commonwealth s older dairies look to modernize, reassurance that dairy does have a future would help create business confidence needed to reinvest. Pennsylvania should identify ways to streamline permitting and regulatory requirements to simplify the process of moving through an expansion or modernization project. As the keystone state, Pennsylvania s location provides easy access to domestic and international markets by road, rail or ship. Evaluating the net cost savings captured by raising truck weight limits should be explored to transport raw milk and finished dairy products as efficiently as possible. 51