(Flickr photo by icatus)
“It’s bad,” remarks Mike Roth, an Idaho dairy farmer who owns and manages 10,000 cows on two farms in Jerome County. “This is a 1 in 40 year event,” he says, characterizing the dramatic drop in milk prices from their peak of $21.38 per hundredweight (100 lbs) in July of 2007 to a low of $9.31 this February. “This isn’t a single year loss”—one that dairy farmers will quickly recover after a few good years—“it’s going to take decades to get back what the industry lost.”
Dairy farmers across the United States are struggling to stay afloat as the price paid by processors for their milk has fallen to record lows, far below what it costs farmers to run their dairies. Dairy cows must be milked two to three times each day, so dairy farmers are stuck milking their herds even if it means taking a loss. A hundredweight of milk can cost dairy farmers between $14 and $16 to produce, and a good milking cow can produce between 60 and 80 pounds of milk a day. Depending on the farm, dairy farmers are currently losing between $4 and $6 per hundredweight of milk produced, anywhere from around $2 to $5 per cow, per day in the current market.
In an economic climate where dairy cows are churning out deficits instead of profits, larger dairies would appear to be at a disadvantage. And yet “regardless of size,” says Mike Roth, “everyone lost.” Simply comparing big to small can be misleading, “Obviously the bigger you are the more you lose,” he says. But small dairies are suffering too, “Small farmers can only do so much. Even if you didn’t have debt, you couldn’t have made cash flow with prices that low.”
The downturn in milk prices hit larger “Western style” dairies especially hard, more so than their smaller counterparts in the Midwest and the East. The reason, says Steve Rowe, Vice President of the Northwest Dairy Association, a Seattle, Washington based dairy cooperative, is that western dairies tend to rely more heavily on feed made from corn and soy than hay or pasture to feed their cows. Typically, dairy farmers in the Midwest grow their own hay, while Western dairies buy their feed commercially. This exposes western farmers to fluctuations not only in the price of fuel used to transport feed, but food prices as well.
Trish Vieira, who along with her husband, Mike, runs a small, 30 cow dairy and bottling operation outside Spokane, Washington, has managed to avoid the direct effects of the recent collapse in milk prices in part because the farm no longer operates as a conventional dairy; they no longer participate in the conventional milk market. Instead of pooling their milk with other regional dairies as members of a cooperative, the Vieiras bottle and sell their milk locally, in and around Spokane. The dairy provides milk to a niche group of consumers willing to pay a premium for locally produced, unhomogenized milk. Milk from the Vieira’s farm retails for around $6 a gallon.
While the Vieira's new venture is not risk free—they’ve taken out a loan in order to set up a bottling operation—the couple has managed to avoid the kind of losses that result when milk prices fall short of what it costs to run a dairy.
(Flickr photo by EssjayNZ New Zealand dairy herd)
Wilson Gray, an agricultural extension agent with the University of Idaho, explains that the industry “went into expansion mode in 2005, 2006, and 2007,” in other words, a boom. And the boom, which occurred in the U.S. export market, was followed by a bust.
The increase in milk exports for the U.S. was caused in part by the fact that New Zealand, which ships over 90 percent of its milk to other countries, was unable to keep up with growing demand from consumers in Asia due to a four year drought. U.S. dairy farmers stepped up production, adding cows to their herds, and filled the gap.
The bust occurred in the fall and winter of 2008: from August 2008 to February 2009, prices fell precipitously. New Zealand’s dairy industry had recovered and “ramped up production,” Gray says—their milk was “priced to sell.” New Zealand’s re-entry into the market coincided with Wall Street’s financial collapse and the onset of the Great Recession.
For conventional dairy farmers, the effects of the recession were severe. With a freeze in financial markets worldwide, consumers in Asian markets cut back on their consumption of milk. According to Steve Rowe, U.S. milk exports, which earlier in 2008 accounted for 6 percent of all milk produced in the U.S., dropped below 2 percent. This meant that milk originally destined for markets abroad stayed in the U.S. As a result, the domestic market was flooded—“drowned in milk,” says Rowe.
Domestically, prices sank 40 and 50 percent from their 2008 levels and remained low for months, pushing once solvent dairies into the red or out of business all together.
Like the Vieiras, Jon Bamsen, a dairy farmer from Monmouth, Oregon, has managed to avoid the vicissitudes of the conventional dairy market. Ten years ago he and his wife, Julie, transitioned their 165-cow dairy to organic, joining the Organic Valley cooperative. And, as he puts it, “stepped off the rollercoaster.”
Despite fluctuations in the supply and demand for organic milk, Organic Valley has attempted for the past 20 years to keep the price per hundredweight it pays its dairy farmers consistent. Bamsen, who is also a western region representative for the co-op, says Organic Valley “sets a reasonable pay price,” and that the co-op is democratic in its decision-making process. For the first nine years as a dairy farmer Bamsen shipped to the Northwest Dairy Association, which sells non-organic milk under the Darigold brand. With NDA Bamsen says, “Prices were dictated from the top down. You got what they were willing to pay.”
While organic milk prices are generally well above the price for conventional milk—organic milk costs significantly more to produce—the two markets do not function in isolation from one another. George Siemon, Organic Valley’s CEO, writes on his blog that the record drop in conventional milk prices has increased the price consumers pay for organic milk to nearly three times that of conventional milk. Siemon estimates that the greater than usual disparity in retail prices between conventional and organic milk will reduce sales of organic milk by as much as 5 percent.
Organic milk producers are looking at a situation similar to that faced by conventional dairy farmers earlier this year, an oversupply of milk, although for different reasons.
As a co-op, Organic Valley’s course of action, which Bamsen says was driven largely by its member farmers, is to reduce the supply of organic milk by 7 percent. For Organic Valley, the move—which means asking all its member dairy farmers to make mandatory cuts—is unprecedented. In order for the co-op to keep the price it pays its dairy farmers stable, “it’s necessary to drop production,” notes Bamsen. By bringing the supply of organic milk in line with demand, Organic Valley's dairy farmers will presumably avoid milking their cows at a loss.
Comparing Organic Valley’s decision to the actions of other co-ops—for instance the Northwest Dairy Association—is difficult. Steve Rowe mentions that in the case of NDA, the co-op could not have imposed volume restrictions like Organic Valley's even if it wanted to, because “we didn’t have too much milk.” In fact he says, “we could have used more milk.”
The reason for this Rowe explains, is that NDA faced a milk shortage within the co-op relative to its processing capacity. Unlike Organic Valley, which does not process its own milk, NDA owns its own processing plants. And for reasons unique to NDA—a number of large NDA dairies from Idaho decided to process milk on their own—the co-op fell short. So for NDA, asking its members to cut their milk supply would not have made sense.
In an effort to mitigate the losses sustained by its dairy farmers, NDA recently distributed $13 million among its 500 members. That comes to about “$2 per hundredweight,” says Rowe. The move, part of a “producer retention” program initiated by the co-op, is intended to help NDA’s dairy farmers better weather the downturn. Rowe says he has, “yet to hear of anybody that has done as much to help their members.”
In contrast, Dairy Farmers of America, the largest dairy co-op in the nation, which markets around 1/3 of all milk in the U.S., and includes 10,600 members, has offered significantly less. Mike Roth, the dairy farmer from Jerome County, Idaho, belongs to DFA. He mentioned that the co-op was able to give back about $8.8 million to its members in a recent special payment. This comes to about 30 cents per hundredweight, and is in addition to an earlier special payment of 9.5 million dollars in July. While it can’t cover his loses, “DFA can only do so much,” Roth says.
Roth, despite the downturn, is hopeful about the future, although he admits, “We don’t have a milk price yet that pays the bills.” The price of conventional milk has risen in the past few months from $12.82 per hundredweight of milk in October to just above $14 in November. At its peak the U.S. dairy herd was 9.4 million cows; now it’s 9.1 Roth notes, and he predicts that it will soon be down below 9 million. With these reductions, the market should bring supply in line with demand, raise prices, and hopefully, generate positive returns for dairy farmers.
--Andrew Mulkey
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