Dairy cow numbers in the US are at their highest level since 1994 at 9.5m cows. This positivity in the US dairy scene is hard to figure out, as milk prices there have been more or less on or below the cost of production for the last five or six years.
As previously reported, dairy farm numbers continue to decline as the industry consolidates into fewer but much larger farms.
Traditionally, milk supply on US farms was governed by the price of milk and the price of feed.
However, since 2014, government aid has been geared towards maintaining margins, with insurance payments kicking in when margin (income minus costs) is threatened.
This means that the traditional response of reducing output when prices are low or feed is high no longer hold as much sway.
While the Biden administration is unlikely to be as pro-farmer as Trump’s was, there are growing signs of a new factor in dairy farm economics – methane
Furthermore, the huge amounts of cash injected into farms in the last year of the Trump administration are still slushing around, so farms are in a much better cash position than the market is justifying.
While the Biden administration is unlikely to be as pro-farmer as Trump’s was, there are growing signs of a new factor in dairy farm economics – methane.
According to dairy market analyst Mike McCully of the McCully Group, anaerobic digestion (AD) plants are springing up on many of the large dairy farms along the west coast.
He estimates that up to 10% of all cows in the US are now on farms where their manure is used to generate renewable natural gas (RNG) from AD plants.
These AD plants will bring in an extra source of income for these farms and may even be more profitable than the milk itself.
The reason for the surge of interest in RNG is that the state of California has introduced new incentives for low carbon fuel, which RNG benefits from.
The western US, and California in particular, is home to the mega dairy farms of many thousands of cows per farm
It’s not just AD plants in California that will benefit from the incentive, but gas produced on farms outside of the state and where gas pipelines feed into California are also able to claim the incentive.
The western US, and California in particular, is home to the mega dairy farms of many thousands of cows per farm.
Writing in Cheese Market News, McCully says many of these large farms are signing deals with corporations for the AD plants to be built on their farms.
“The profit generated by manure and energy is a new dynamic for dairy farms. A common arrangement is for a third party to invest in the digester and form an agreement with one or more dairy farms for a supply of manure. These contracts can be for 10 to 15 years or longer and pay $80 to $100 per cow per year, or more.
If the profits are $2 to $3 per hundredweight, they could likely exceed the profit from milk
“For a 3,500-cow dairy, that means $350,000 per year or $0.40 per hundredweight at 80 pounds [of milk] per cow/day.
“Some farms own the digesters, taking on the risk but reaping potentially large rewards.
“If the profits are $2 to $3 per hundredweight, they could likely exceed the profit from milk. At that point, milk has become the byproduct of manure production,” according to McCully.
It can be argued that the US is late to the AD party, with dairy farmers in Germany using AD to bolster farm incomes since the mid-2000s. There are now over 9,000 AD plants in Germany – the majority of which are on dairy farms.
The success of AD in Germany has largely been down to generous feed-in tariffs, with guaranteed income for up to 20 years.
The majority of the AD plants in Germany produce biogas, which is then burned to generate electricity and sometimes heat.
These plants are generally much smaller in scale than the plants being built in the US and require other feed stocks to produce sufficient energy.
The methane can then be pumped directly into the gas grid, as a replacement for fossil gas
This diverts feed away from food production, increases the cost of feed and land and is only economically viable because of massive government supports.
The AD plants being constructed in the US tend to be bio-methane plants, which use an extra process to separate the methane from the carbon dioxide and other biogas.
The methane can then be pumped directly into the gas grid, as a replacement for fossil gas. This bio-methane has a much lower carbon footprint compared with fossil gas, as it is generated from renewable sources – cattle manure.
The key point from all of this is the long-term impact on milk price. If dairy farmers rely less on milk and feed price for generating profit, will their responses to price fluctuations alter?
If farmers will be relying on cows to produce a significant part of their income then they will be less likely to take action based on dairy market signals alone
Traditionally, US farmers culled more cows and fed less concentrates when prices were bad. These reactions tended to have a positive effect on milk price, because, as milk supply drops, demand increases and prices increase and vice versa.
If farmers will be relying on cows to produce a significant part of their income then they will be less likely to take action based on dairy market signals alone.
Equally, they will be less exposed to higher feed costs as the milk-producing side of the business will no longer be the main source of income.
If this leads to increased supply in the US, what will be the impact on world markets?
There are only a handful of AD plants in Ireland, but a new company is hoping to change that.
The primary output of the plant will be hydrogen, which is converted from methane gas
Genos Resources plc is a company formed in April of this year with the objective of setting up a biogas plant in Tipperary.
The primary output of the plant will be hydrogen, which is converted from methane gas. This hydrogen will then be used to fuel trucks and trains and other forms of transport. Electricity may also be sold to the grid.
According to Leon Mekitarian from Genos, farmers will be paid market rates for their slurry based on Teagasc prices for nitrogen, phosphorus and potassium, currently €41 per 1,000 gallons of 8% dry matter slurry.
Transport costs will be paid by the biogas company. Digestate, the byproduct of AD, will be dried and pelleted and sold as a low-carbon fertiliser, both to farmers who supply slurry and others.
Again, the cost of the digestate will be governed by market prices, but those who supply slurry will have preferential access and at a 10% discount.
He says that the typical composition of the digestate pellets is 8:6:5 on an NPK basis for 1,000 gallons of slurry.
Another way digestate differs from unprocessed slurry is with regards to the organic matter content of the digestate
This may differ from the slurry supplied from the farm, as the digestate is an amalgam of all the manure supplied to the plant at the time the digestate is created. This includes pig, poultry and solid manure.
Another way digestate differs from unprocessed slurry is with regards to the organic matter content of the digestate.
While the N, P and K content in the digestate will be the exact same as that in the feedstock, its organic matter will be lower, as the gases are released from the organic matter in the feedstock.
What the long-term effects on soil organic matter and carbon of applying digestate as opposed to unprocessed slurry on farmland remains to be seen.
This is particularly important if, as proposed, farmers will be paid for increasing soil carbon levels.
All farmers approached by a renewable energy company should ensure that they get sound legal advice before signing any contract.
In the case of Genos, its contract for supplying slurry is for a 15-year term, although Leon Mekitarian says farmers can opt out if they wish. Exact details would need to be worked out and agreed in the contract.
In some cases, the company that signs farmers up to renewable energy projects is not the company that ends up developing the project, so, again, it’s important that the terms of the contract will be honoured by whatever entity takes over the project, if any.
Biomethane from cattle slurry is a relatively new and exciting concept for Irish farmers. Farmers are trading some of the carbon produced on the farm (organic matter content of the slurry) for money.
My concern is the long-term implications of spreading low or zero organic matter fertilisers on soil carbon content and soil microbiology
It’s putting a monetary value on something that didn’t previously have one, but that’s not to say that it hasn’t always had a value.
My concern is the long-term implications of spreading low or zero organic matter fertilisers on soil carbon content and soil microbiology.
You cannot produce something from thin air - biomethane comes at a cost and it’s important that farmers are adequately rewarded for selling some of their carbon. Just getting N, P and K back in return may not be enough.