Dairy Industry in Crisis

May 15, 2009 02:00 PM

Several dozen dairy farmers rallying on the steps of the Iowa State Capitol in Des Moines in April made some observers
remember the 1980s farm crisis.

The difference: The crisis is even worse this time. While the financial recession in the U.S. is partly to blame, crashing worldwide demand for U.S. dairy products is the bigger problem.

This past year, 10% of U.S. dairy production was exported—an all-time record. In the first half of 2008, dairy exports grew at a torrid pace of 74% compared with 2007. But this past July, with world food prices soaring and oil markets crashing, all of that came to a screeching halt. By the fourth quarter, dairy exports had dived nearly 30% from the previous year.

Jump the gun. Entrepreneurial dairy producers, responding to rising price signals in late 2007 and 2008 that exceeded $18 per cwt., built barns and added cows like there was no tomorrow. When 2009 dawned, those producers were pumping out too much milk on high-priced feed.

An Iowa State University dairy budget for February suggests a 20,000-lb.-per-cow Iowa herd needs a milk price of $15.62 per cwt. to break even. Its February milk price was $10.93 per cwt.

Feed costs for the month were running $9.32 per cwt. of milk produced, based on $3.14 per bushel corn, $145 per ton hay and $300 soybean meal. The irony, of course, is that crop farmers say these grain prices aren't high enough to cover the cost of putting in the 2009 crop.

In some Western dairy states—California, Idaho, Oregon and Washington—even $10 per cwt. milk would be better than what many producers have been forced to endure.
"It costs me $1.38 to produce 1 gal. of milk, but processors are paying me 82¢ per gallon for a loss of 56¢ per gallon,” says Louie Kazemier, who milks 1,550 cows near Salem, Ore. "That's a loss of $8,400 per day for us. I just want to make a measly 20¢ per gallon.”

Help falls short. USDA offers aid through its Milk Income Loss Contract (MILC) program. The February payment was $1.51 per cwt.; March is projected at $2.05. But that's still not enough to break even.

(Because of the way the MILC payment is calculated, February payments weren't mailed until early April—and USDA computer glitches slowed those payments even more. There's also a 2,985,000-lb. annual milk production cap, meaning herds with more than 150 cows will receive MILC payments only on the first 2,985,000 lb. of milk they produce in a year.)

Significant culling begins. Dairy farmers are already culling herds, with cow slaughter up nearly 15%, compared with this past year, and cow numbers declining. Plus, dairy farmers themselves—at least two-thirds of them—are paying 10¢ per cwt. into the Cooperatives Working Together (CWT) program. The funds are used to retire entire herds of dairy cows through a bidding process and through subsidizing export sales.

The seventh such CWT herd reduction program was announced April 1. Winning bids will be announced by mid-May, and entire herds will start moving to slaughter soon after. Though no targets have been announced, it is expected that this CWT round will cull substantially more than the 50,630 cows and 1,200 bred heifers culled last year through the program.

USDA and other market analysts are expecting milk prices to recover slowly, starting in the fourth quarter of 2009. Even though cow numbers are declining, milk production is only now starting to slow, with March down an estimated 0.3% from this past year.

Low milk prices at the farm are slowly translating into lower milk prices at retail, which is increasing consumption. Fluid milk sales in December through February were up 2% compared with the same period a year ago.

With more dairy consumption and fewer cows in production, USDA expects the national all-milk price will rebound to $12.65 to $13.65 by the fourth quarter of this year.

You can e-mail Jim Dickrell at jdickrell@farmjournal.com.


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