What is the Appropriate Economic Policy for the Dairy Industry?

Global milk glut squeezes dairy farmers, consumers

By CHRISTOPHER LEONARD, AP Business Writer
Monday, May 25, 2009

BARNHART, Mo. – A collapse in milk prices has wiped away the profits of dairy farmers, driving many out of business while forcing others to slaughter their herds or dump milk on the ground in protest. But nine months after prices began tumbling on the farm, consumers aren't seeing the full benefits of the crash at the checkout counter.

The average price for a gallon of milk at grocery stores last month is down just 19 percent from its peak of $3.83 in July. Farmers, on the other hand, got $1.04 a gallon in April — 35 percent less than they were paid last fall. This winter, wholesale prices were down as much as 45 percent.

Price disparities are a fact of life both for farmers and anyone who shops at a supermarket, but the nature of milk — how it's stored, priced and sold around the world — makes the gap all the more dramatic. In fact, the price that farmers get has been wildly volatile for years, creating a succession of booms and busts felt from pastures to the grocery store.

With each turn, proposals are floated to end the pricing seesaw, which at one extreme squeezes the profits of farmers and the other squeezes dairy processors. Any fix that boosts the price of milk runs the risk of bumping up how much consumers pay, too.

Today, frustrations are spilling over as the price crash creates widely divergent fortunes within the milk industry, boosting profits for the middlemen like dairy processors while pushing farmers to the edge of bankruptcy.

Darrell Kraus, a dairyman in Barnhart, spends almost as much today on hay and other supplies for his herd of 160 cows as he did a year ago, but he's getting paid less for a gallon of milk than his father in the 1970s. He blames middlemen who buy the milk from the dairies, process it and sell it to grocery stores at higher prices.

"Somebody's getting a cut of this, but it's not the dairy farmer," he said. "It's sad, but they're going to see a lot of dairy farms go out of business."

At a grocery store in Fayetteville, Ark., Katherine Thacker noticed how milk prices were slowly falling — but not as drastically as last year's price hikes. She was surprised to learn that the lower wholesale milk prices were being absorbed by dairy processors.

"That's kind of criminal, isn't it?" she said.

Milk processors and supermarkets see it differently.

Last fall and summer, they swallowed losses because of high wholesale milk prices and government-mandated ceilings on what they can charge. They're now recouping some of what they lost and anticipating a rise in prices this winter, said Mike Nosewicz, vice president of dairy operations at Cincinnati-based Kroger Co., which operates its own dairy processing division and sells milk through 2,400 supermarkets.

At the heart of the problem is the nature of milk. Unlike grain farmers who can hold out for better prices by storing crops in a silo, dairymen must sell raw milk to processors or else it spoils. And cows keep producing whether the economy's expanding or in recession.

The price paid by processors to farmers is set by the U.S. Department of Agriculture based on commodity markets, which rise and fall with global demand. Some of the raw milk is processed into milk for stores as well as butter, yogurt and other products for U.S. consumption. The rest becomes powdered milk, cheese and whey for international and domestic markets.
U.S. milk exports soared last year and demand grew in countries like China while supplies dropped from Europe and Australia. U.S dairy exports jumped to $3.82 billion, or 11 percent all milk production in 2008 according to the U.S. Dairy Export Council. Wholesale prices jumped.

Dairies responded to the demand by increasing production.

But once the global recession accelerated last fall, demand, particularly exports, fell off a cliff.

U.S. farmers were suddenly faced with too much milk and too many cows. Wholesale prices crashed. Farmers found themselves spending more to maintain their herds than they were being paid for raw milk.

"It's an inequity that cries out for attention, consideration and action," said Sen. Robert Casey, a Democrat from the dairy stronghold of Pennsylvania. Casey projects that 25 percent of his state's 7,400 dairy farms could disappear because of the crisis.

Casey said most lawmakers are focused on short-term solutions — loans or subsidies — to help farmers bridge the period of depressed prices. But he said Congress should also explore why processors and retailers are keeping their prices high while wholesale prices collapse.

Farmers also are lobbying for a bill that would change the USDA pricing system for milk so that wholesale prices reflect what they pay for feed, fuel and other supplies.

If that happens, milk would be the only commodity of its kind to have a government-set price determined in part by the cost of production, said Scott Brown, dairy analyst at The University of Missouri's Food and Agricultural Policy Research Institute.
"Anytime you put in place a policy that raises farm-level prices, those are going to get passed along to the consumer," he said.
U.S. Secretary of Agriculture Tom Vilsack also said he is not eager to remake the USDA milk pricing program. Instead, he wants to see if a range of recent actions might buoy wholesale prices. USDA recently donated 500,000 pounds of excess powdered milk to needy countries to reduce U.S. supplies, and a new program will pay farmers to slaughter more than 100,000 dairy cows.

Some farmers say faster action is needed. They're dumping their milk on the ground to draw attention to the crisis.
Jan Morrow, a farmer in Cornell, Wis., dumped milk on May 4 to protest the lowest whosesale prices she's seen in 25 years of farming. If prices don't rise, she says she may have to sell her cows.

Eddy Lekkerkerk, a 42-year-old dairy farmer outside Filer, Idaho, planned to participate in another milk dump on May 31. But he fears he may not be in business that long. For five months, he hasn't made payments on the roughly $800,000 he borrows annually to buy feed for his herd of 1,000 cattle. He said his bank is forcing him to sell his herd to pay his debt.
He predicted many of his neighbors will have no choice but to follow him off the farm.

"It's going to be ugly. This is historic stuff going on," he said. "The dairymen are nervous, and they are scared."