economics of dairy farming: Milk prices, The

Vermont Business Magazine, Nov 01, 2003 by Marcel, Joyce

Milk is priced by the hundredweight (cwt) nationally by the United States Department of Agriculture. In 2003, farmers received an average price of $12.50 per cwt, or $1.08 per gallon before expenses. Next year, preliminary estimates indicate that the price will rise to $1.14 per gallon.

That seems like a good thing, but the bad news is most dairy farmers need $1.30 to $1.40 just to break even, said Doug DiMento, director of communications for Agri-Mark, Ltd which is owned by 1,470 New England and New York dairy farm families. In Vermont, it has about 430 farmer-members, including the Robb Family Farm in West Brattleboro.

Prices are starting to go back up, but they're not going up enough to make up for two years of low prices. That's the difficult part, DiMento said. "The most important fact about milk is that it is perishable."

Milk is not like sugar beets or potatoes or corn, where, if you don't like the market price, you can put it in the warehouse and wait, DiMento said. Milk has to be in a processing plant 12 to 24 hours after it leaves the farm. Because of the perishability of the product, the farmers have no bargaining position. That's why the federal government intervened in the early 1900s. To establish minimum prices for farmers and maintain what's called 'orderly marketing'."

For the last two years, the price of milk has been on a roller coaster ride; it hit its lowest levels in 25 years.

Nationally, demand has slackened, and supply has outpaced demand, DiMento said. Unfortunately for Vermont dairy farmers, the price is based on the national supply/demand situation for milk. No regional considerations are taken into account.

A big problem for New England dairy farmers is the consolidation of the processing industry specifically with Dean Foods Co, the nation's leading processor and distributor of milk and other dairy products. Dean Foods has bought just about every bottling company in New England except for Hood. It used to be that these smaller processors competed for milk, and would offered premiums above the USDA-set price. These premiums are now disappearing.

Every time we've tried to increase farm prices, Dean Foods has fought us, DiMento said. They fought us on the dairy compact. We've met with opposition from many of the processors, but Dean Foods in particular has always been against our efforts to increase prices. When they bought everybody out, how much competition was there in the market for farmer's milk? Very little.

Another issue that troubles dairy farmers is that milk in stores is priced far higher than what they get for it in bulk.

The fluid bottlers take the farmer's milk, put it in a bottle, have a quick turnaround and the highest level of profit DiMento said. If you get $3 a gallon, which is what milk is going for on the shelves now, you get over $34.80 cwt. In other words, the farmer's getting paid $12.50, but the guy who's bottling it is getting $30 for it. What upsets farmers like the Robbs is that the farm price has gone down, but in many cases the retail price has gone down, but in many cases it hasn't. The farmer has no control over that, but it upsets him.

Competition

While Vermont is certainly the premiere dairy state in New England, according to Byron Moyer, chief of the dairy section of the Vermont Department of Agriculture, it is ranked only 14th in milk production.

We produce only about 1.75 percent of the nation's milk, Moyer said. The price of milk is based on supply and demand.

If milk is in short supply nationally, prices rise, Moyer said. And if it's not flush nationally, prices plunge.

Because the government's base price drives the industry; and because that price is set nationally, states are pitted against each other. Vermont has to compete with Western states like New Mexico, Idaho, California and Arizona, where there has been significant growth in dairy farming.

I think the largest farm in Vermont is milking about 1,400 cows, and we think that's huge almost beyond imagination, Moyer said. And it is, when it's compared to typical Northeast dairy farms. But out west, they have 2,500-, 4,000-, and even 5,000-cow dairies.

To make it even more cliff difficult, other regions of the country have better climate and better soils than Vermont.

Take alfalfa, Moyer said. If we've got a nice alfalfa field, we'll get two cuts off it, or maybe three. They can get six or seven out in

California, because they don't have frost on Oct. 1 and snow on the ground in April. Because they can grow more crops on a peracre basis, they can maintain more cows on a peracre basis.

The water supply out West is the monkey wrench that basically screws things up, and has for several years, Moyer said. If the Western states are in a drought, that inversely effects milk production. if they are being inundated with rain, that adversely affects crop production, which then effects milk production.

How can milk produced in California affect Vermont?

As a liquid, milk is generally sold regionally. The value-added end products of milk, like ice cream, cheese, butter and dried milk powder, have a longer shelf life and can be sold nationally. Because California is the nation's largest milk-producing state, producing 20 percent of the nation's milk supply, an increase in milk production there can cause a domino effect across the country, Moyer said.