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Monday, September 22, 2014 |  Madison, WI: 63.0° F  Fair
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Dairy blues
Jim Koch and Jan Shepel struggle to maintain their Dane County farm in a volatile dairy economy
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Jim Koch's life is devoted to dairy farming: 'Basically, while I'm awake, I'm thinking about work.'
Jim Koch's life is devoted to dairy farming: 'Basically, while I'm awake, I'm thinking about work.'

April in rural Dane County should be full of promise for local dairy farmers. The fields are newly plowed, and black, rich topsoil that's the envy of much of the world stretches to the horizon. Farm animals roam and laze around pastures and paddocks that, until a few weeks back, were frozen solid. The spring sun warms the ground, and the activity that comes with cutting the first hay crop is just around the corner.

But last April, when I first visited Jim Koch at his farm in the town of Vienna, the 50-year-old Dane County native wasn't caught up in the intoxication of spring. Sitting in the neat kitchen of the pale yellow farmhouse he shares with his wife, Jan Shepel, the lifelong dairy farmer was worried.

Worried about whether the base price of raw milk would rebound. Worried whether the proceeds from the 200,000-plus pounds of milk his cows produce each month would be enough to cover his rising costs. 'I'd say I'm scared,' he said, settling a little deeper into his chair as he described his prospects for the rest of 2006. 'Fertilizer is $40 a ton higher. Fuel is 60 cents a gallon higher.'

Jim Koch likes farming. He likes managing his dairy herd, and he likes the 'tractor therapy' he gets from working his feed and cash crops. During his life, he's had just two occupations: owning and running a bar and working on a dairy farm. The bar gig lasted just six months.

In his youth, he sowed some wild oats participating in amateur tug-of-war competitions. That took him around the country and to Europe, too. But dairy farming is his life, and his family's 160-acre homestead is where he's lived it.

'Did I ever want to do anything else?' Jim asks. 'I don't know. I never did. I've never had a job. Never had a W2. Never worked anything else.'

Dairy farming and the manufacturing of dairy products are still big business in Dane County. In 2004, the UW-Extension reported that on-farm milk production and dairy processing together accounted for $770 million in annual economic activity. Products and services used by dairy operations add to that figure. The county ranks third in the state in milk production and third in the number of dairy cows. In 2005, 999.6 million pounds of milk were produced by 49,000 animals.

The local dairy economy is part of the reason the world's largest dairy confab, the World Dairy Expo, is held year after year at the Alliant Energy Center. This year's event, set for Oct. 3-7, will bring tens of thousands of dairy experts, policymakers, business representatives, entrepreneurs, farmers and others to Madison. The lifeblood of this gathering is family farmers like Jim and Jan who produce milk day after day, year after year, doing chore after chore, trying to keep their way of life alive.

Staying competitive

Jim Koch is a big man with a 24/7 work ethic, a good head for numbers and a pair of bad knees. He took over substantial management of his father Albert's farm in 1989, two years after he married Jan. But he was milking cows long before that.

He injured his knees in his early teens, when a loaded farm wagon rolled over his legs. Squatting down to attach milking apparatus to cows for nearly 35 years made the problem worse. When he walks down the steps of the deep porch that juts from the front of his house, he looks like he's in pain. He is.

Today, his younger brother and two hired farmhands milk the couple's cows, but that's about all Jim's knees prevent him from doing. He's up before 6 a.m. feeding his stock. After that, he'll run a hay chopper, attend to his corn crop or jump into a dusty pickup and charge off to one of the rented livestock facilities where he keeps additional cows. When he returns to the house at night, he switches on the computer and attends to paperwork.

'Basically while I'm awake,' he says, 'I'm thinking about work.'

And Jim doesn't cut himself a paycheck. Never has. The income the farm generates takes care of debt payments, salaries for Jim's employees and other farm-related expenses. On top of managing the couple's young heifers, his wife Jan works an outside job as an editor at an agricultural weekly. That covers household expenses and secures health insurance for the two of them.

It's taken time, but Jim has turned his father's old farm into a much larger, more efficient dairy operation. Albert originally purchased it in 1948 from an uncle, and he did a little of everything, raising hogs and steers for meat, cash-cropping and milking 60 Holsteins, the black-and-white cow emblematic of Wisconsin. When Jim took over, he dispensed with the other livestock and looked to the future.

Together with Jan, he expanded his dairy herd and worked to make the farm more competitive. At Jan's suggestion, the couple added Jersey cows to the original herd. The Jerseys are smaller than Holsteins and not as productive, but their milk has higher protein and butterfat content, which makes it more valuable for making cheese. Over time, their herd expanded to 200 milking cows split between Jerseys, Holsteins and crosses of the two breeds. (They also have 150 younger heifers that will be sold for extra income or rotated into the dairy herd as they mature.)

With 85% of Wisconsin's milk going to cheesemaking, diversifying the herd was a smart move. Alto Dairy Cooperative, the Wisconsin-based cheesemaker that buys milk from Jim and Jan, pays a premium for their high-quality product.

The couple have also tried to bring their dairy operation in line with modern attitudes toward food production. When Monsanto worked to get dairy farmers to use bovine growth hormone, Jim and Jan refused to go along. Determined to pursue a healthier, more humane approach to dairying, they moved their herd from enclosed concrete-floored stalls to dirt-floored 'free stall' structures and let them wander and laze in a large dirt paddock. They also economized by recycling their now empty cow barn into a milking parlor.

They knew the farm economy was changing, and they did their best to change along with it. Jan's ag journalism job brought her in contact with new, at times jarring ideas about farming, and they tried to make use of them on their own place.

In 2001, after years of expansion and streamlining of their operation, Jim and Jan finally were able to purchase the 160-acre farmstead from Albert, who figured his son's sweat equity into the purchase price. (Together with rented fields, the couple actually farms a total of 464 acres.)

Buying the farm meant taking out a mortgage. But the couple had plenty of prior experience with going into debt to leverage a brighter future. Many of the changes they'd made in farm operations required loans, made possible in large part by Jan's outside job.

'With the volatility in the ag industry,' says Jim, 'a lender wants to have something that has a steady, positive cash flow and that is an off-farm job.'

Roller coaster

Even with all those improvements, Jim and Jan remain slaves to the fluctuating price of raw milk. It's what determines the amount they receive for the 200,000-plus pounds of milk their herd produces each month.

And they don't have any control over it.

Neither, for the most part, do the unfettered laws of supply and demand. Rather, a Byzantine tangle of federal rules, regulations and pricing systems, some of which have their roots in Depression-era agricultural policy, influence both the national supply of dairy products and what farmers in different regions of the country are paid for their milk.

Prices are also shaped by the trading of cheese on the Chicago Mercantile Exchange, which has been dogged by allegations that a handful of major players manipulate prices. (Complaints about rigged trades shut down the influential Green Bay Cheese Exchange in 1995, which moved the price-setting focus to the CME.)

Ed Jesse, a UW-Madison dairy economist, thinks much of the current system that influences milk pricing should be modified or scrapped. But he doesn't see much chance of that happening, at least not in the short term.

'I've been around in the dairy industry for a long time,' he says flatly, 'and I've been a real cynic about the power to change things.'

In any event, the way the milk marketplace is currently run, Jim and Jan are on a never-ending financial roller-coaster.

In 2004, when the average milk price moved above $15 per hundredweight (11.63 gallons) and remained strong in 2005, things looked pretty good. Jim and Jan, who had weathered historically low prices and rising costs the previous year, felt secure enough about their finances to remodel their house. 'We'd been waiting to do it for 10 years,' Jan says with a smile. Adds Jim, 'That's when farmers went out and bought new trucks.'

But those high prices didn't hold. By April 2006, they'd fallen to $10.90, which explained Jim's unease when I spoke to him this spring. Less income meant more belt tightening and more debt. At the time, Jim didn't mince words about how the roller-coaster was wearing on him: 'This year, with [milk] prices going down, I've been paying the highest prices I've ever paid for fuel, fertilizer and equipment. My lender says, 'Batten down the hatches and try to ride it out. Because it's going to be a rough ride to see who can survive this.''

Sadly, the summer wasn't any kinder to Jim and Jan's dairy operation. The milk price kept dropping. In July, the price paid for a hundredweight went down another 37 cents. That was a big loss when applied to a couple hundred thousand pounds of milk.

Adding to the strain, sweltering August temperatures took the lives of four of the couple's mature milk cows. And uneasiness in the oil market meant fuel and fertilizer prices kept rising, too.

Uncertainty

This August, when I visited the farm again, Jim's farmhands were cutting the third hay crop of the season and filling the huge white plastic silage bags that creep across scrubby pastureland like a troop of bloated caterpillars. Back behind the old barn, a couple dozen cows were feeding at the long trough that runs in front of their hoop-shaped free stalls. Closer to the house, the handful of horses Jan keeps nudged and sniffed each other in the pasture next to the farm's separate horse stable.

It was a serene, bountiful scene, but it masked an underlying bleakness. Inside the farmhouse, Jim and Jan were waiting for the animal disposal guy to haul away one of the cows that had succumbed to the August heat. Thanks to the price of fuel, what had been a free service paid for by the leather the dead bovine would provide was now costing $20.

Jim's worries from the spring had evolved into resignation and stoicism. He'd wisely booked his fuel contract through November, but that arrangement would end soon, and with outbuildings full of diesel-powered equipment, he could already feel the bite in his balance sheet. In April, he'd said his debt was 'manageable.' Looking to the future, he's no longer sure.

Jan talked about how the farm was probably as self-sufficient as it could be, with the cows providing manure for fertilizer and Jim growing enough feed to maintain their herd. Some Wisconsin farmers have pursued economies of scale by continuing to expand their herds. But Jan didn't think that was the answer. It was hard enough taking care of 200 cows.

'You just keep going on and hope that it's going to get better,' said Jan. 'You try to be as efficient as you can for as long as you can.'

When the formal part of our interview was over, I asked to see a little more of the farm. As the three of us strolled past the rustic outbuildings and farm equipment of various vintage, Jim squinted at a calf peering from behind a wooden fence and seemed to calculate something in his head. He's a serious guy, and the thick, dog-eared notebook that always bulges from the breast pocket of his shirt never stays sheathed for very long.

But as the sun broke through some passing clouds, his pace quickened and he relaxed. He gestured proudly at the hoop-shaped free stalls and described how much more efficient they were than the picturesque red barns that city types normally associate with farming.

Then Jim turned to a towering cylindrical corn dryer that suffered wind damage a couple years ago and now lay idle. He'd have it cut up for scrap soon and salvage the heater. He wouldn't need a replacement: The farm's feeding system had been modernized to the point where another old symbol of Wisconsin dairying had become obsolete.

Hard times were hard times, and working the farm could be a struggle. But the ceaseless planning and endless activity weren't simply chores. They were what energized him. As he hustled off to his pickup to get a firsthand look at the hay cutting, all the worries he'd expressed earlier about rising costs and impending losses fell away. He was in his element. He was in charge, and he was working.

MILC money

Whether Jim and Jan can survive depends in large part on things they can't control. For one, their farm receives payments from a government subsidy program called the Milk Income Loss Contract, or MILC. This program is currently configured to make payments on the output of a 120-cow herd, which helps states like Wisconsin, where most farms are small.

In western states ' particularly California, where family-owned factory farms often milk 8,000 or more cows ' the subsidy is criticized as favoring farmers in the Midwest and New England. Politicians also see MILC as an example of the dairy lobby's self-serving, protectionist agenda and government waste. Whether it's reauthorized in next year's new federal farm bill remains up in the air.

Jim says that while the MILC payments don't cover the losses he incurs from a depressed milk price, they do help. (He won't reveal the amount; according to the UW's Jesse, the average Wisconsin dairy farmer will get about $8,000 from the program this year.)

Frankly, Jim would rather not take any government subsidies. But he's in a bind. He and Jan have built something on their farm and, although the couple have no children, they want to see it continue.

Jim also knows that a much wider community depends on his survival, from his many suppliers to the people who turn his milk into cheese.

'People think farmers are whiners and are always complaining about having it so tough,' he says, the exasperation rising in his voice. 'We don't need inflation-adjusted prices for our commodities. We would like a fair price. I've stated lately that if we don't all work together on this as far as giving us some money to spread around and invest in the community, everybody else doesn't benefit from us either.'

Should the milk price rise in 2007, Jim and Jan could once again find themselves on the upside of the roller-coaster. Robert Cropp, another nationally recognized UW-Madison dairy economist, thinks that may happen, and that tweaks to MILC and other federal milk programs could make a 200-head dairy herd like Jim and Jan's economically stable.

'I think there's a real bright future for them,' he says of dairy farmers with herds of this size. 'But you need to keep the capitalization costs down. If they want to have all the bells and whistles and all-new machinery, it may not be. But if they're reasonable on that, they can be damn competitive.'

Jim and Jan have other options. One might be to go organic, a move that's helped some farmers connect with a growing niche of consumers who are willing to pay a higher price for a purer, chemical-free product. Jim has his doubts, in part because of the start-up costs involved, but he is keeping an eye on neighbors and farmers who are trying this and other new approaches.

Jeanne Carpenter of the Dairy Business Innovation Center, a nonprofit group associated with the Wisconsin Department of Agriculture, says there are other ways for small farmers to up the bottom line and get off the milk-price roller-coaster. In Dane County and elsewhere, the center helps facilitate the creation of small farmstead processing facilities for bottling milk, culturing yogurt and making specialty cheese.

These new on-farm businesses give dairy farmers another source of income and allow them to connect with a growing niche market. 'The cool thing, too, is that revenue stream stays much more steady than, say, your milk check,' notes Carpenter. 'If you're just milking cows, you're dependent on that milk check, which fluctuates. But generally those products that you're making, the cheese or the bottled milk, those price points stay pretty constant.'

Whatever route Jim and Jan take in the future, it's plain it won't include giving up. The milk price is tough on them right now, but Jim still likes farming and steering clear of a W2. In fact, his mood brightens when I ask if he ever thinks about selling out and moving on. 'For $500,000 an acre, I'd sell it to 'em,' he says, laughing at his own joke.

Jan smiles along with him.

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