As was the case with most Americans, dairy farmers were blindsided by the financial crisis and the recession. Although operating costs rose sharply in 2008, milk production was still profitable; USDA’s Economic Research Service estimates U.S. producers returned an average of $4.71/cwt after operating expenses last year, compared to nearly $8/cwt in the record price year of 2007. When overhead costs are included, producers still netted 25 cents/cwt in 2007, and the net loss of $3.29/cwt is comparable to the returns throughout most of the decade.
 

 
But 2009 has been an unmitigated disaster. Although costs have dipped slightly as the year has progressed, they haven’t kept up with the plunge in returns. The National Ag Statistics Service says the average farm gate price for milk in June was $11/40/cwt—a fearful 41% decline in just one year. Nearly the entire drop has come since September when the stock market crashed and leading U.S. employers began laying off hundreds of thousands of worker.
 
 
 
The result for dairy farmers, according to Iowa State University Extension farm management specialist Ron Hook, has been “a lot of stress. The cost of producing milk has been way above the price of milk for most of the last year and better so it’s a drain on the equity for all of our operations; I don’t think there’s anybody that’s escaping that.” “Even with the support program and the Milk Income Loss Contact program,” says Hook, “they’re still losing money every day that they’re milking cows.”
 
Some are increasing their debts. “I’ve talked to some FSA loan people, and they’re talking about the restructuring of loans. What that means is spreading out that debt into the future, and probably for operating money they’re going further into debt,” Hook says, and adds the biggest strain has been on newer producers, those who have just gotten into the business within the last couple of years: “They’re been struggling since they started milking, and that’s really difficult.”
William Edwards, agricultural economics professor at Iowa State University, adds although MILC helps, it’s targeted; producers only get 45% of the deficiency between their price and the target and then only up to 2.985 million lbs. of annual production. Larger producers can benefit from the economies of scale—“They would hope to keep their unit cost down; that’s one of the reasons why they would try to be larger scale,” he says. “But certainly not enough to show a profit at current prices.” 
 
Producers would have had the opportunity to protect their returns before the low prices came either by locking in a position in the Chicago Mercantile Exchange’s milk futures market or by forward contracting with a processor. Hook guesses a producer will typically lock in no more than 80% of his production. One of the changes in the 2008 Farm Bill allows individual producers to enter into option contracts with processors; that way they can take advantage of higher prices and don’t have to execute the contract.“
 
Hook says futures contracts work for farmers, but “on a limited basis; most of them are not really comfortable with that mechanism so they prefer to go the processor route which basically does the same thing, but the processor does the mechanics of locking in with the Mercantile Exchange.” Edwards notes the processor contracts have their limits, as well: “Typically, they won’t go out too many months.”
In addition to the targeted benefits of MILC, smaller dairy producers are further insulated from the downturn because many of them produce their own feed. That’s becoming increasingly important—feed has always represented the majority of operating expenses, but that share has risen from 69% in 2001 to 78% last year.   In fact with the recent softness in the corn and soybean markets Edwards says, “If you’re selling some off the farm, maybe you’d be better off to feed some of that as well.”
He says there are other places smaller operators can look for savings: “They probably won’t be replacing any equipment or machinery this year and will be trying to cut living expenses as much as they can—maybe looking for some sources of outside income if possible; maybe on the labor side, getting by with as minimal a workforce as they can.”
 
Edwards expects larger operators to pull in their horns as well. “I certainly don’t think it’s a time to be aggressively expanding,” he says. “That just tends to exacerbate the cash flow problems in the short run, and I think some producers may look at liquidating, simply because that’s a way of raising cash—maybe getting rid of cows or laying off some labor in the short run would be a more likely response.” That could create opportunities for a few dairymen who are in strong financial positions and have access to credit—they can get cows and equipment cheaper, and local construction crews may be looking for work. Labor rates might be a little softer as well, but he notes, “Whether it’s the kind of labor that you really want to employ or not or experienced labor, that’d be difficult to say.”
Although he doesn’t feel the credit situation has reached crisis mode yet, Edwards says dairy producers need to develop a plan. “Look at cash-flow budgeting by month or bimonthly periods, and don’t wait until things are in dire straits to go in and communicate with the lender,” he says. “You really need to plan ahead here for the next 6-12 months.”
 
And Hook says, “The real answer is to encourage the demand for milk and get it back up to where it’s more equal to the supply. We’ve lost a lot of exports; domestic demand is down. So, those things recovering would certainly help. I don’t really think there is a marked change in that; it’s pretty much been the same for about the last six months or so…The hope is that within a year, year and a half, if they can make it that long, things will turn around.”