May 28, 2009

The collapse of milk prices, surplus inventory and reduced global demand have dealt a heavy blow to dairy farmer profits, driving many to the brink and forcing others to slaughter their cows to cut costs and milk supply.

 

The dairy industry is very much in peril and dairy farmers have been losing money on every pound of milk they produce, according to Rob VandenHeuvel, general manager of the Chino-based Milk Producers Council.

 

The global recession has kicked down consumer demand for milk, while modern advances in agriculture has led to an overproduction, VandenHeuvel said.

 

While domestic consumption has held up well, exports have dropped to nearly five percent from 11 to 12 percent last year, he said.

 

US milk exports surged last year thanks to growing demand in countries such as China and the drop of supplies from Europe and Australia. US dairy exports jumped to US$3.82 billion, or 11 percent of milk production in 2008, according to the US Dairy Export Council.

 

Wholesale prices jumped and dairies increased production in response but the move has backfired as the recession kicked exports off the cliff. Farmers suddenly find themselves with too much milk and too many cows, reminiscent of what happened to the hog sector last year.

 

Then wholesale prices crashed and farmers started spending more to maintain their herds than they were receiving for raw milk. VandenHeuvel said the industry is now going for the short-term solution of reducing milk supply by culling or slaughtering cows.

 

The price drop seen by dairy farmers is not seen by consumers at the supermarket, he said.

 

Farmers said they were paid as much as 50-percent less as when times were good two years ago. In comparison, the average price for a gallon of milk at grocery stores last month is down just 19 percent from its peak of US$3.83 in July.

 

Yet farmers received US$1.04 per gallon last month, 35-percent less than they were paid last autumn. This winter, wholesale prices dropped as much as 45 percent.

 

The price crash is creating a gigantic wealth gap in the milk industry, boosting profits for the middlemen such as dairy processors while pushing farmers to the edge of bankruptcy.

 

Unlike grain farmers who can wait for better prices by storing crops in a silo, raw milk spoils quickly and have to be sold, and cows will keep producing regardless of the economy's state.

 

The price paid by processors to farmers is based on commodity prices which rise and fall with global demand. Farmers are now lobbying for a bill that would change the USDA pricing system for milk so that wholesale prices reflect the prices of feed, fuel and other inputs.