May 7, 2004

 

 

Record US Milk Price Provides Relief For Dairies

 

Dairy producers expect that record-high milk prices will help them recover from last year's depressed market, which had resulted in many California dairy farmers calling it quits.

 

The farmgate price of milk reached a record high on May 1. The California Department of Food and Agriculture raised the price of Class 1 milk to $1.85 per gallon in Southern California and $1.83 per gallon in Northern California, an increase of 47 cents from April. This followed a 13-month period of depressed prices that reached the lowest point in April 2003, when the Class 1 milk price dropped to $1 per gallon in Northern California and $1.02 in Southern California.

 

Dairy producers began sending their cows to slaughter last year, when milk prices hit a 25-year low and beef prices were high.

 

"Over the past two years, the dairy business has been in a very serious price depression," said Michael Marsh, chief executive officer of Western United Dairymen, a Modesto-based trade association.

 

"Consequently, for some dairy producers, not just here in California but around the country, it was more financially positive for them - because of the higher beef prices - to send the cattle to slaughter rather than keep them in the milking string. That reduced the American dairy herd by a pretty significant amount. Now, with the popularity of the Atkins diet and because the economy looks to finally be on the rebound, the demand has come at a time when there's not enough production available to meet the demand.

 

"In California, we lost a whole bunch of dairy producers over the past two years just because they couldn't hold on," Marsh said. "So for the dairy sector, the price recovery is very positive because that means they'll finally be able to catch up on bills and hopefully start rebuilding some of the equity that was lost in their operations over the past two years."

 

Marsh added that the price recovery would also be good for growers of alfalfa, corn, cottonseed and other feedstuffs, as well as milk-transportation and processing companies.

 

Each month, CDFA sets the price that dairy producers receive from dairy processors; it does not set retail milk prices. California's farmgate milk prices are based on an economic formula that uses prices for cheese and butter traded on the Chicago Mercantile Exchange. Those prices, which reflect national supply and demand, are "quite high," said CDFA spokesman Steve Lyle.

 

"The Class 1 whole milk price per gallon is the highest on record, and the increase from month to month is the highest on record," Lyle said.

 

The state's authority to set minimum milk prices dates back to the Depression and is intended to avoid volatility in the milk market. Hence a steady supply of milk is provided to consumers and dairy producers are able maintain their income.

 

The price of milk in other states is set by the U.S. Department of Agriculture. USDA raised the minimum farmgate milk price to $1.69 per gallon on May 1, breaking the previous record of $1.40 per gallon in February 1999.

 

In addition to national herd-reduction efforts, several other factors contributed to the tighter supply of milk.

 

One factor was a shortage of recombinant bovine somatotropin, a growth hormone that increases cows' milk production. The supply of Posilac, the rBST product manufactured by Monsanto Co., was cut in half due to problems at its Austrian production plant.

 

In addition, drought in the Midwest and Rocky Mountain regions led to shortages of high-quality alfalfa hay. There have also been tighter supplies of corn, cottonseed and soybean meal due to weather and shifts to alternative crops.

 

"As the prices of hay, corn, soybean meal increased, farmers had to make decisions as to what to put in the ration," Marsh said. "Consequently, because of low milk prices, they changed their ration to perhaps lower energy feed which won't produce as much milk."

 

Another factor in the tight supply of milk is the U.S. ban on imports of cattle from Canada. The move follows the discovery of a bovine spongiform encephalopathy-infected cow in Alberta, Canada in May 2003, as well as the December 2003 finding of a BSE-infected Holstein cow in Mabton, Wash., that had been imported from Canada.

 

Prior to the December incident, the United States had been importing a number of replacement heifers from Canada. "Those replacements that were previously coming into the United States stopped," Marsh said.

 

"Another thing that may have had some impact on our supply situation is the World Trade Organization ruling against Canada. Because of their pricing system, the Canadians were dumping excess dairy products into the United States in violation of the WTO," he said. "So Western United Dairymen complained to the WTO, along with the National Milk Producers Federation, about this dumping and the WTO found that the Canadians were indeed dumping excess dairy products into the United States and they were forced to stop that."

 

Marsh added, "Until we have a national animal identification program in the United States that will allow us to track Canadian cattle, we're very concerned about the importation of cattle from Canada. We want to protect American consumers."

 

Consumers are likely to see rising milk prices.

 

"Ten years ago the dairy farmer was getting about 70 cents per dollar on sales of milk at the retail level and today we get about a third, so there's a pretty significant disconnection on pricing between what the farmer gets paid and what the consumer pays," Marsh said. "But of course, the consumer is still getting a great value for their expenditure even at the price that the retailer sets because of the protein, calcium, vitamins and other nutrients in the milk."