Dairy Crisis

Published on Wed, 07/29/2009 - 11:15am

Woody Bryant has been milking cows a long time, and he says conditions for dairy producers are the worst he’s seen since the early 70s. “The things that we buy are so high compared to the price of the milk,” says Bryant, a former National Dairy Board chairman whose farm is in Lonoke County, Ark. “And of course our biggest expenditure is feed, and it’s extremely high.” Government statistics tell the grim story. From the record highs dairymen enjoyed just two years ago, farm gate prices for milk have fallen by more than half; in March, the average for Class I milk was just $9.43/cwt. 

That’s less than 60% of the cost of production, and coops, federal and state lawmakers and USDA are scrambling to keep farmers propped up while they mull a long-range solution.
“We’re sort of in a perfect storm,” says Jackie Klippenstein, vice president of industry and legislative affairs for Dairy Farmers of America. “With the financial crisis; with the decreased demand; with lower prices. So we’re seeking ways to make sure that things don’t happen like this again in the future.”
Pennsylvania's two U.S. Senators are trying to step in right now. Democrats Arlen Specter and Robert Casey have introduced a bill that would base the support price for manufacturing grade milk on a national average of the cost of production. The bill has been referred to the Senate Agriculture Committee, and Sen. Chuck Grassley (R-Iowa) bluntly predicts that it won’t get out.
“I know that the price of milk is very, very low,” Grassley says, “and people are losing their shirt because the cost of production is low. And I wouldn't want to say that there's not some chance for help, but the Specter-Casey Bill will go nowhere because it is government enforcement—kind of a commodity-type government decision-making, that is contrary to the principles of free market.” Grassley says supply-management has been out of the farm program debate for 40 years, “and I don’t think we’re going to go back there.”
The National Milk Producers Federation, while not endorsing the Specter-Casey Bill, isn’t ruling anything out. The producer group has named a strategic planning task force; beginning in July, according to spokesman Christopher Galen, “We’re going to be having some sit down meetings with proponents of a variety of programs, most of which have some supply-management element to them—some sort of either voluntary or mandatory government control over milk production.”
Galen says the lack of profitability in dairy production is a worldwide phenomenon, exacerbated by the worst recession in decades. “If this were just within the borders of the U.S.,” he says, “you could say well, there’s something wrong with how we price our milk. But farmers in New Zealand and Australia are complaining; they’ve got riots going on by dairy farmers in France and Germany and other countries over there; there was a collapse of a major dairy cooperative over in England. This is not just a U.S. situation.”
Klippenstein predicts Congress will sit tight while NMPF discusses a long-term solution. “Dairy policy is very complicated,” she says. “Folks in Congress are reluctant to act on anything regarding dairy policy unless they know that they’ve got strong support across a wide variety of sizes and across regions.” In the meantime, Galen says NMPF will keep searching for ways to give producers short-term relief. “There aren’t going to be any quick ways that we can all of a sudden restore prosperity to the dairy business,” he says.
One step NMPF has been able to take is reactivation of its Cooperatives Working Together program. Participating coops and individual dairy producers pay 10 cents/cwt of milk into a fund that’s used to compensate producers who bid to retire their herds. This spring’s signup was the most ambitious in the program’s six-year history; enough bids were accepted to cull 103,000 cows, the equivalent of 2 billion pounds of annual milk production.
In the past, the government has taken the lead in initiating large-scale culls; the Dairy Diversion and Whole-Herd Buy-Out programs of the 80s were classic examples. Galen says it would be tough to get something similar through Washington again. “We’d run into a real storm in the form of opposition from the cattle industry,” he says, “and perhaps others as well. So again, any time you’re involving the government, it’s not going to be done quickly, it’s going to cost taxpayer money, and you’re going to have more organized political opposition, and that’s why we’ve always felt that having self-help is the best option.” 
NMPF also persuaded USDA to bring back the Dairy Export Incentive Program; the government will subsidize overseas sales of 68,000 tons of dry defatted milk, 21,000 tons of butterfat, 3,000 tons of cheese and 34 tons of other dairy products. Export competitors complained, but Agriculture Secretary Tom Vilsack says the allotments are within Washington's World Trade Organization commitments, and are needed to counter dairy subsidies introduced earlier this year by the European Union. NMPF is pushing USDA to offer another traunch of DEIP subsidies with the start of the new program year July 1.
USDA is also using the time-honored approach of removing product from the market via the human nutrition programs it manages. In March, the department announced it would distribute 200 million lbs of surplus nonfat dry milk through government feeding programs and some overseas donations. “The reason that’s important,” says Galen, “is by getting that product out of government warehouses in a way that doesn’t compete with commercial sales, you remove that large stock of milk solids from the marketplace so it doesn’t compete and help extend the price trough that we’re in right now.” But while these accumulated actions are all helping to remove milk from the market,” he concedes, “obviously, none of it’s happening as fast as we would like. And given the extent of the price depression that we’re facing, it’s going to have to be coupled with some additional actions in the future.”
One could argue national dairy policy is already moving in the direction of supply-management. The Milk Income Loss Contract program was again included in the 2008 Farm Bill, and this time there’s an adjuster for the cost of feed. Because the program caps payments at annual production of 2.985 million pounds, it favors smaller producers; Joe Horner, University of Missouri Extension dairy economist, says smaller operators also have more flexibility to cut costs, defraying capital expenses and substituting unpaid family members for paid labor. “Those things are helping,” he says, “but I will also tell you that all dairymen are feeling financial stress right now.”
Ironically, organic dairying—seen as the solution a few years ago for smaller producers who were willing to trade a little more labor-intensive management for a locked-in price—has backfired in Missouri. Horner says “organic” has become a fighting word. “We’ve had a number of dairy producers go through the expensive routine of transferring to organic and right now, we’ve lost all of our markets for organic. So organic producers are looking at what options they have other than selling commodity milk with a high cost structure.”
With the federal support program failing to keep up with the record cost increases, there have been several efforts by the states to make up the difference to their own producers. In Missouri, there have been several failed attempts to get a price support program through the state legislature. Smaller dairy states have been more successful; Arkansas adopted a program this year, based on recommendations from a task force headed by Bryant. The payments kick in when prices received by farmers fall below two-thirds of the cost of production; the program is capped at no more than $2/cwt on an annual basis, but Bryant says it “will be enough to make a big difference as to whether I stay in or get out” of the business.
Ultimately, he believes a national, mandatory supply-management program is what’s needed to synchronize dairy production with consumption. “There’s a lot of different possibilities out there,” Bryant says, “and a lot of people don’t like those, but for us to have a stable price that we can work with—we know what we’re going to get, month after month after month—we have to have some type of government plan.”