Cost collapse has dairy farmers in a pinch

From staff and wire reports

In Walker Township, a small family farm is nearing century status.

\In this March 16, 2009 photo, Darrell Kraus tries to coax his heard of dairy cows in the right direction to be milked in Barnhart, Mo.

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But with a collapse in milk prices during the past six months, Diane Heckman said she doesn’t know if the farm will make it to 100.

“I just keep hoping we can keep hanging on and become a century farm,” she said.

Heckman and her husband have about 28 cows on the farm. It’s one of the smallest dairy farms in the region, but the challenges it’s facing are the same as those faced by much larger operations — a precipitous drop in the price paid to farmers for the milk they produce.

In January, the price per hundred weight, or about 11.5 gallons, was about $16.

Heckman said her farm’s most recent payment was about $12 per hundred weight, far below the cost of production.

“It still isn’t enough to even pay the bills,” she said.

A collapse in milk prices has wiped away the profits of dairy farmers across the United States, driving many out of business while forcing others to slaughter their herds or dump milk on the ground in protest. But nine months after prices began tumbling on the farm, consumers aren’t seeing the full benefits of the crash at the checkout counter.

The average price for a gallon of milk at grocery stores last month is down just 19 percent from its peak of $3.83 in July. Farmers, on the other hand, got $1.04 a gallon in April — 35 percent less than they were paid last fall. This winter, wholesale prices were down as much as 45 percent.

After falling to a dramatic low in February, the price per hundred weight paid to farmers has edged higher but is still lower than the cost of production at many dairy farms in Pennsylvania.

Mark O’Neill, with the Pennsylvania Farm Bureau, said that at the same time milk prices have dropped, feed and other production costs remain high, creating a losing proposition for producers.

“Even in April when we had that slight increase, it’s still well below the costs of production and certainly our farmers continue to struggle,” he said. “Across the board it doesn’t mater what size — no matter how many cows you’re milking —dairy is in a tough time.”

Price disparities are a fact of life both for farmers and anyone who shops at a supermarket, but the nature of milk — how it’s stored, priced and sold around the world — makes the gap all the more dramatic. In fact, the price that farmers get has been wildly volatile for years, creating a succession of booms and busts felt from pastures to the grocery store.

“The prices have always fluctuated,” O’Neill said. “You have your highs and your lows ... and that’s the cycle we keep going through.”

With each turn, proposals are floated to end the pricing seesaw, which at one extreme squeezes the profits of farmers and the other squeezes dairy processors. Any fix that boosts the price of milk runs the risk of bumping up how much consumers pay, too.

Today, frustrations are spilling over as the price crash creates widely divergent fortunes within the milk industry, boosting profits for the middlemen like dairy processors while pushing farmers to the edge of bankruptcy.

Darrell Kraus, a dairyman in Barnhart, Mo., spends almost as much today on hay and other supplies for his herd of 160 cows as he did a year ago, but he’s getting paid less for a gallon of milk than his father in the 1970s. He blames middlemen who buy the milk from the dairies, process it and sell it to grocery stores at higher prices.

“Somebody’s getting a cut of this, but it’s not the dairy farmer,” he said. “It’s sad, but they’re going to see a lot of dairy farms go out of business.”

At a grocery store in Fayetteville, Ark., Katherine Thacker noticed how milk prices were slowly falling — but not as drastically as last year’s price increases. She was surprised to learn that the lower wholesale milk prices were being absorbed by dairy processors.

“That’s kind of criminal, isn’t it?” she said.

Milk processors and supermarkets see it differently.

Last fall and summer, they swallowed losses because of high wholesale milk prices and government-mandated ceilings on what they can charge.

They’re now recouping some of what they lost and anticipating a rise in prices this winter, said Mike Nosewicz, vice president of dairy operations at Cincinnati- based Kroger Co., which operates its own dairy processing division and sells milk through 2,400 supermarkets.

At the heart of the problem is the nature of milk. Unlike grain farmers who can hold out for better prices by storing crops in a silo, dairymen must sell raw milk to processors or else it spoils. And cows keep producing whether the economy’s expanding or in recession.

The price paid by processors to farmers is set by the U.S. Department of Agriculture based on commodity markets, which rise and fall with global demand. Some of the raw milk is processed into milk for stores as well as butter, yogurt and other products for U.S. consumption. The rest becomes powdered milk, cheese and whey for international and domestic markets.

U.S. milk exports soared last year and demand grew in countries such as China while supplies dropped from Europe and Australia. U.S dairy exports jumped to $3.82 billion, or 11 percent all milk production in 2008 according to the U.S. Dairy Export Council. Wholesale prices jumped.