“When 50 per cent of your total cost doubles then the bottom line suffers severely.”
– CALIFORNIA DAIRYMAN JOHN FISCALINI
Illinois farmer Linnea Kooistra expects to keep her 250-cow dairy farm afloat despite a rising tide of red ink caused by a collapse in milk prices, but other U. S. dairy farmers may be forced out of business.
Many of the more than 60,000 dairy farms in the United States have cut costs, sold off cows, or left the dairy business altogether as milk prices have dropped 35 per cent in just the past two months while dairy farm operating costs remain uncomfortably high.
Some farms are losing $200 per head every month (all figures US$).
“We’ve dealt with 18 per cent interest. We’ve dealt with farm recession. We’ve dealt with droughts and floods and this is by far the worst economic situation we have ever dealt with in our years of farming,” said Kooistra, who has run Kooistra Farms in Woodstock, Ill., with her husband since 1980.
“Right now, the price of milk will barely cover our feed costs and to pay our veterinarian. I’m not even counting all the other expenses that go along with keeping a farm running, the utilities, the fuel costs,” she said.
Milk prices are down more than 50 per cent from last summer after hitting all-time highs in 2007 and notching the second-highest prices on record in 2008.
“Given the suddenness and severity of the plunge in farm-level milk prices, a significant number of farmers won’t survive the winter,” Jerry Kozak, president and chief executive of National Milk Producers Federation, said in January.
Analysts expect milk prices to remain depressed through at least the first half of the year, and prices later this year may only be high enough to cover production costs.
Benchmark Class III milk futures on the Chicago Mercantile Exchange fell to a six-year low of $9.24 per cwt in January. The U. S. Agriculture Department forecast the Class III price to average $10.60 to $11.40 in 2009, down from a $17.44 average last year.
“We could see the lowest prices here in January or February. By March or April, we could see prices come up about a dollar or so, but as we move into the second half of the year we could be moving closer to $15 or $16,” said Bob Cropp, dairy economist at the University of Wisconsin at Madison.
“It’s going to be a tough year and we’re going to get a supply response,” he said, citing an industry herd culling program known as Co-operatives Working Together (CWT).
Farmers have an opportunity to get paid for culling their herds via the farmer-funded CWT program, which was in the process of securing a line of credit to augment its efforts in 2009, according to NMPF’s Kozak.
“I suspect that the attrition may be more among large western herds than it is among the small Midwest and eastern dairy operations. The pain is greater on the West Coast,” said University of Wisconsin dairy economist Ed Jesse.
Western producers have to buy most of their feed, while in the Midwest and the East farmers normally grow most of theirs.
Corn prices have dropped from a record-high of more than $7 a bushel last summer to less than $4, but dairy farmers are still struggling. Corn has averaged about $2 to $2.50 for much of the last 25 years.
“Feed is about 50 per cent of a dairyman’s total cost every year. When 50 per cent of your total cost doubles then the bottom line suffers severely,” said dairy farmer John Fiscalini, of Fiscalini Farms in Modesto, Calif.
Industry analysts say the reason for the steep drop in milk prices is simple: too much milk and not enough demand for it.
Restaurant traffic is down in the U. S. as recession jitters have consumers reeling in their spending.
About 40 per cent of U. S. milk production is made into cheese and roughly 60 per cent of the cheese is used in the restaurant and food service sectors, according to analysts.
Fluid milk consumption was expected to increase somewhat as people tend to drink more milk at home than at restaurants, but the benefit to prices will be minimal, analysts said.
Despite the plunge in wholesale milk prices, the cost of milk at the supermarket has declined only slightly as retailers have been slow to adjust prices. Based on a USDA survey of retailers in 30 U. S. cities, the average price of a gallon of whole milk was $3.67 in December, down 25 cents from its summer peak. In December 2006, when wholesale prices were much lower, a gallon was $3.20.
Dairy product exports, which helped drive U. S. milk prices to the sky-high levels in 2007 and 2008, are also down sharply.
Importing nations are buying less amid global economic woes and a firmer dollar, which makes dollar-denominated commodities like milk more expensive for buyers holding other currencies.
Meanwhile, New Zealand and Australia, two top global suppliers, are exporting more milk products after severe drought slashed production in the past few years.
The European Union has reinstated export subsidies on a range of dairy products, essentially pricing U. S. supplies out of the market.
“U. S. commercial exports, without subsidies, are going to be much lower this year, probably a 25 or 35 per cent cut if not more,” Cropp said.
Besides switching to cheaper feed rations, culling herds and putting off big equipment purchases, dairy farmers’ options for weathering a market downturn are very limited.
“Even in the good times, you’re always looking at ways to manage better and keep the costs down. When these extremes come along, it’s pretty hard to find anything else to cut,” said dairy farmer Brad Scott, of Scott Brothers Dairy Farm in San Jacinto, Calif.
“In a factory, when things get bad you can always just turn the key off and wait until things improve. In a dairy there’s no key to turn off.”