Agriculture Today - June 2009
Special Dairy Section

Dairy prices remain low despite recent herd retirement
by John Migliazzo
Membership Coordinator

The price of milk to be paid to dairy producers remains at record-low numbers despite the recent announcement that more than 100,000 cows would be removed from U.S. milk production. In June, milk producers are expected to receive just below $9.80 per hundredweight (or nearly $1 per gallon), when the on-farm cost of production in Fresno County is estimated to be between $14 and $16 per hundredweight.

It is estimated that a 1,000-cow dairy with average production is losing more than $100,000 per month.

Cooperatives Working Together (CWT) announced it has tentatively accepted 388 bids, which includes 102,898 cows and two billion pounds of milk production in its first series of herd retirements planned for the next year. This would be considered the largest herd retirement since CWT was created in 2003.

CWT is a program funded by dairy cooperatives and dairy producers through December, 2010, in which they are assessed 10 cents per hundredweight of milk. The funds are used to strengthen and stabilize the national milk price through herd retirement.

The 388 bids were selected out of 538, representing 72 percent of the accepted bids. Herd sizes varied from as low as 50 cows to as high as 5,000 cows.

Markets took a crash in December when the dairy industry was hit hard by the global recession, leading to a drastically reduced demand for powder, butter and cheese. As a result of the recession, the strengthening U.S. dollar has foreign buyers looking to other markets for more affordable milk supplies. Both New Zealand and Australia also have increased their exports of non-fat dry milk products (milk powder) after recovering from drought conditions, competing directly with U.S. supplies.

Another major blow to export supplies came from the European Union (EU), which again is providing millions of dollars toward export subsidies, allowing EU to take over U.S. foreign markets.

The dairy industry is taking a number of measures to stabilize the market, which includes herd retirement.

Herd Retirement Announcement’s affect

Dairy producers, creditors and processors waited anxiously as they anticipated the herd retirement announcement on May 13. While the industry welcomes the latest announcement, the industry has recognized the number of cows announced to be taken off the market is not enough to stabilize supply and demand.

Shortly after the announcement was made, the futures market actually went down slightly after a brief spike. Just like when a publicly-traded company on the New York Stock Exchange fails to meet revenue projections and its stock loses value, the dairy market anticipated much more than 100,000 cows would be taken out of production.

Prior to the announcement, there were 9.3 million cows in production throughout the U.S. However, dairy producers and industry representatives feel that 9 million cows is the magic number for balancing supply and demand.

We need CWT to be successful in order to see any short-term recovery,” said Michael Marsh, CEO of Western United Dairyman. “CWT is one of the necessary tools we need to stabilize the market.”

Marsh also explains what the U.S. does through CWT will have a major impact on world markets, and is hoping that the next round of herd retirement will come sooner rather than later.

Dairy producer Brian Pacheco, of Kerman, said that while he is pleased to see that more than 100,000 cows will be retired, much more needs to happen in order for prices to recover.

We need a long summer heat wave to reduce milk supplies throughout the U.S.,” said Pacheco, who serves as FCFB First Vice President. “We also need to see a dramatic reduction in retail prices for dairy products to increase demand.” Pacheco said that while dairy producers are getting little for their milk, the retail prices have remained high, and the gap continues to widen. With dairy products remaining the biggest money-maker in the grocery store, retail chains will remain reluctant to lower prices during a recession, he said.

When looking at the possibility of a quick turnaround for another round of herd retirement, Pacheco wonders how much participation CWT will get. “If [a producer] didn’t make a bid this time around, will he make a bid one month from now? Producers didn’t go out because they are optimistic the market will recover.” In other words, there is no other explanation why a dairy producer would purposely not make a bid, just to lose money for another couple of months before the next bidding process.

On the other hand, he realizes the longer prices are stagnant, the further into bankruptcy dairy producers will go, which may leave producers with no choice but to submit a bid on the next go around.

Dairy Export Incentive Program Update

Another big step for the dairy industry took place at the end of May through the USDA Dairy Export Incentive Program (DEIP). The program will provide funds to help producers build export markets in order to reduce the impact of the recession.

The funds, made available since the 1985 Farm Bill, provides cash bonuses to exporters of non-fat dry milk products (powdered milk), butterfat and cheese, which allows U.S. dairy products to be sold at lower prices on the world market.

These funds are designed to compete with dairy products coming from other parts of the world, which includes products coming from the EU. While DEIP is not the sole path to recovery, dairy industry groups say these types of programs will allow for a quicker recovery, and is supported by a broad coalition of dairy industry groups.

In January, U.S Representatives Dennis Cardoza and Jim Costa met with USDA Secretary Tom Vilsack and House Agriculture Committee Chairman Colin Peterson. During this meeting, Vilsack committed to using DEIP. After five more months of dialogue between dairy industry representatives and federal officials, USDA announced its official implementation in May.

Unfortunately, it does not appear this will mean immediate relief for producers as marketing groups continue to look into how to utilize these funds. Even though this will help compete with overseas markets, demand is still very low throughout the world due to the global recession.

Creation of a task force

According to Chris Galen, of the National Milk Producers Federation (NMPF), NMPF will be forming a strategic task force this month to come up with ideas on how the industry can deal with the current milk prices. The group will include NMPF members as well as groups participating in CWT.

While the global recession is out of their control, the task force will look for other creative ways to stimulate the market. Some ideas include: expanding domestic product lines, reviewing the CWT program and evaluating how to utilize DEIP funds.

Support for domestic feeding programs

In March, USDA Secretary Vilsack released funds to purchase milk powder for domestic feeding programs. USDA will direct 200 million pounds of powdered milk to the federal school lunch program and to food banks. Additional quantities of powdered milk also may be directed for use in foreign food aid programs.

According to WUD’s Marsh, while the price responded a little to the announcement in March, this will be most significant when the market recovers, because these inventories will not be hanging over the market. Typically, anticipation that these supplies will be released when the market recovers slows down the rise in the milk price.

Looking forward

According to the recently published USDA Monthly World Supply and Demand Report, the first estimates of milk production will be down slightly in 2010, and prices are expected to recover slowly toward the end of 2009. However, the market can change rapidly in response to future herd retirement announcements, impeding heat waves, release of DEIP funds and overall recovery from the global recession. If the markets do not respond quickly though, it will be too late for many dairy producers to weather the storm, and further dairy losses will be inevitable.

While times are tough right now, Pacheco said dairy producers are just trying to outlast the market and hoping cows come out of production. “At this point, producers are waiting it out and watching their neighbors to see if they are going to fold it up. It’s sad, but that’s reality.”