Farm Horizons, August 2009
Milk prices: how long can dairy farmers hold on?
By Sara Butterfass
It is a well-known fact among dairy farmers that things are not going well. For months they have been struggling to stay out of the red, while milk prices have continued to drop, feed prices remain high, and banks are less willing to make loans or refinance debt.
The biggest question facing most dairy farmer right now is “How long can I hold out?”
By mid-2007, dairy farmers were receiving more than $20 per hundred pounds of milk (cwt). Prices dropped some in 2008, but the year-end average in the US was $18.29, according to the University of Wisconsin Dairy Marketing and Risk Management (UWDMRM) web site.
What caused these record-high prices? Ed Welch, president and CEO of AMPI, explained that it began in 2007. New Zealand and Australia, the United States’ top export competitors were suffering from a drought and the US dollar was weak. This made US products more affordable abroad. During this period, the US was exporting 11 percent of its dairy products. The July 2009 issue of Hoard’s Dairyman reports that in May of 2008, US exports were at 102 million pounds of milk powder, 21 million pounds of butter, and 27 million pounds of cheese.
“For 7 years lactose had sold for around 20 cents per pound and whey sold between 25 and 30 cents per pound,” Welch illustrated. “Prices skyrocketed. Lactose jumped to $1.00 and whey to 80 cents.”
Of course, these prices were short-lived. “The US dollar began to strengthen, the world economy slowed down, and the melamine scare in China was the last straw,” Welch explained of the decrease in demand.
While prices remained high, producers increased their herds to meet demand and make a profit. However, now that prices have dropped, the US, and many other countries, have too many cattle and too much milk. “We over burdened the demand,” Welch said.
Robert Cropp, a professor at the University of Wisconsin-Madison stated “For the JanuaryApril period of this year, exports are down 51 percent.” This means that the extra milk stays in the US, and must be sold on the domestic market, further depressing prices.
Dairy farmers in other countries are facing similar situations. In Europe, dairy farmers have taken their complaints to the European Union (EU) Commission. The European Milk Board (EMB) represents 20 farmer organizations from 14 countries and is a driving force behind the protests in Europe. Dairy farmer protests have made headlines across Europe.
May 25, hundreds gathered in Brussels, Belgium to demonstrate their frustration with falling milk prices. The newspaper EUObserver quoted a Belgian farmer, who attended the protest with one of his cows, saying, “We have average production costs of €33 for 100 liters of milk and at the moment we are paid €19 for 100 liters.” He went on to explain that the production cost did not include labor costs. In order to come out ahead, “at least €44” should be paid for 100 liters of milk, he said.
This is equivalent to a US production cost of $46.31, being paid $26.66, and needing $61.74 to cover costs of producing 224.57 pounds of milk. When looking at US data, US farmers face the same situation. According to the Minnesota milk prices listed on the UWDMRM web site and the United States Department of Agriculture (USDA) calculations for monthly feed costs per cwt for May, MN farmers had a production cost (feed and operating costs), not including labor and other overhead costs, of $15.28, and were paid $11.80 per cwt. According to Cropp, farmers need a base price of $16 to $17 to cover costs.
The latest protest in Brussels took place June 18 and 19 in front of the EU Council of Ministers building while the heads of state met for a summit. More than 2,000 farmers attended; some made the five day, 900 kilometer (559.23 mile) journey by tractor to demonstrate. Over 1,000 tractors filled three lanes to back up traffic into the city for 7.5 miles. A city official said, “It wasn’t a blockade, but they were only going at 30 kilometers (18.6 miles) per hour.”
The EMB demanded a 5 percent decrease in quotas for the upcoming year. (European production is based on a quota system. Each country is given a quota and farmers purchase these individually. The system is complex, with a “super levy” to fine those individuals and countries that overproduce, trading among individuals, but not outside the country, and wholesale and direct sale quota types.) The quota system is set to be abolished in 2015, but the EMB disagrees with the decision, explaining it would create a free market and there is already too much milk on the market. Instead, they want the decrease and a flexible system in the future to balance supply and demand. This and other demands were first presented to the EU in February, but because nothing has been done, the protests have continued.
Mariann Fischer Boel, Commissioner for Agriculture and Rural Development, addressed the demonstrating farmers. Yet, her words were no comfort to demonstrators. The EUObserver quoted her saying, “The quotas are not the reason for the low prices. It’s simply a question of supply and demand from consumers. And I can guarantee it would make no difference if we discussed the quotas. What farmers need to do is produce less.”
EMB Vice President Sieta van Keimpema disclosed that the EU quotas have been increased by 6 percent in three years, already putting the quotas over consumption. She worries that the only result of the EU policy to increase quotas by 1 percent each year until the system is dismantled, will be the disappearance of thousands of milk producers and the loss of the remaining producers’ position in the world market.
Protests are still occurring in Germany, France, Belgium, Spain, Ireland, and Wales. The government is starting to listen, but so far, not much is changing.
The same can be said in the US. Although the US has not conducted large-scale protests, the government is beginning to listen to dairy farmers’ concerns. The House Agriculture Subcommittee conducted a series of three hearings in July to discuss the economic challenges facing dairy farmers with producers, processors, and state representatives. Ed Welch president and CEO of AMPI and Scott Hoese, president of the Carver County Farmer’s Union, of Mayer both testified at the July 21st hearing.
Welch said that dairy prices fell below USDA support prices “repeatedly since January of this year.” He then told the panel, “Consistent anecdotal evidence suggests that dairy farmers are losing about $100 per cow, per month” which forces them to borrow more money or “bleed their equity.”
To further illustrate the dire situation, Welch declared that “the price dairy farmers are receiving for their milk is so far below the cost of production that they are losing thousands of dollars a month, even with MILC (Milk Income Loss Contract) program assistance.”
The MILC program was reauthorized by the 2008 Farm Bill and pays producers 45 percent when the “Boston Federal Milk Marketing Order Class I price for fluid milk falls below the benchmark of $16.94 per hundred weight (cwt).” The reauthorization added that “variations in feed costs above $7.35 per cwt of a 16 percent protein feed ration” may be considered for monthly adjustments.
Welch gave several ideas to fix the problems, including increasing the Commodity Credit Corporation (CCC) purchase prices for butter, milk powder, and cheese; and that the CCC become an active buyer on the Chicago Mercantile Exchange (CME) at the established support prices.
Hoese discussed Minnesota’s economy, telling the panel, “For every dollar from dairy production and processing, about $2 is generated in statewide economic activity. The multiplier effect of the dairy industry on Minnesota’s economy is a total economic output of nearly $9 billion and almost 40,000 jobs.” He explained that the milk price crash has affected rural communities too, not just dairy farmers.
Kenny Bangasser, a breeder with Cooperative Resources International (CRI), services the farms in this area. He said that CRI has cut back on staff and said of the dairy farmers he sees on a daily basis, “everybody’s attitude is in the tank.” He also said that farmers are “cutting costs and operating in survival mode,” a trend that is seen across the nation.
Hoese also illustrated that farmers receive only a small share for each retail food dollar. The National Farmers Union’s “latest data shows consumers paying $4.99 for a pound of cheddar cheese while the farmer receives less than $1.00; farmers receive 97 cents out of the $2.99 consumers pay for a gallon of fat free milk.” Despite these low returns, food companies are reporting increasing profits. “Dean Foods Company reported its first quarter profits for 2009 more than doubled from the same period in 2008” ($76.2 million versus $30.8 million).
Hoese’s suggestions included establishing a Class III floor price of $18 per cwt, continuing the MILC payments, removing the financial burden of transportation from producers, and passing the Federal Milk Marketing Improvement Act of 2009, which is being reviewed by the Senate and would, according to the bill’s description on washingtonwatch.com, “direct the Secretary of Agriculture to base the minimum Class II milk price on the average production cost of producing all milk in the 48 contiguous states.”
The final hearing took place July 28, and the seven panel members were split, 4-3, opposing supply management which would adjust production with supply and demand. This split displays a common theme in the industry; it is hard to agree on the possible solutions.
Many of the suggested solutions to fix the industry have downfalls, as well. The Cooperatives Working Together (CWT) program of herd retirement has already taken 101,000 milking cows and bred heifers out of the market in 2009, and closed bidding for this year’s second round of retirement on July 24. Although lessening the number of cows in the US will eventually help by dropping production, it takes time. While the CWT takes bids, reviews them, and carries the retirement out, many other farmers quit culling cows and wait to see how the market will adjust after the retirement is complete, hoping that they can survive.
The CCC buying more dairy products to store could prolong the depressed prices because it would keep the products until the prices begin to recover and then release them onto the domestic market, again oversupplying it. Jim Dickrell, editor of Dairy Today, said, “If we do nothing, the markets might recover by early 2010. If we raise support prices, and it would depend on how much, we could see depressed prices well into 2010.” Dickrell summed up the situation well saying, “There are no easy answers.”
The CME does show slight recovery in 2009; as of July 29, the Class III milk futures were trading at $12.90 in October and $14.20 in December. In 2010, futures were trading at $15. 40 in March, and $15.70 in July. Sixteen-dollar milk isn’t seen until January 2011.
Australia’s June commodity report, released by their government, states that global prices in 2009-2010 are expected to decline from average prices in 2007-2008 as follows: butter, 63 percent; skim and whole milk powder, 60 percent; and cheese, 56 percent.
The report also forecasts that the demand for dairy products will continue to decline as countries in Asia reduce their imports due to their citizens having less disposable income for the products. However, in the Middle East and north Africa, imports are expected to remain stable in 2009-2010.
Dairy farmers have struggled with and overcome low prices before, and they will continue to do so. But this situation has gone on longer than anyone expected, and although recovery is happening, it will be a slow climb out of the red for many farmers.
The question remains, how long can farmers hold on?