Milk Prices Going Sour
By Bernice Hurst, Contributing Editor, RetailWire
A combination of retail and manufacturer pressure as well as market deregulation
is causing crisis conditions for dairy farms across the globe. As Dean Best
of just-food explained, the global economic downturn has been "sapping
consumer demand for dairy products and forcing dairy commodity prices down." Small
herds and inefficiencies have also been cited by some who believe that imported
milk offers better value.
Smaller farmers have been particularly challenged in competing with so-called
super-dairies, according to Stephen Oldfield of PriceWaterhouseCoopers (PwC).
PwC was recently appointed as receiver to cooperative Dairy Farmers of Britain
(DFB) which supplied some 10 percent of the country’s milk. DFB’s 1,800 farmer
members won’t be paid for their May deliveries; June payments are also in
doubt.
Individually, the cooperative’s members stand to lose their initial investment
as well as current and future revenue streams. Hayley Campbell-Gibbons, chief
dairy adviser to the National Farmers’ Union (NFU), told the Financial
Times, "The average farmer with 200 cows will lose at least £14,000
on milk and about £50,000 in investment."
Just-food also reports that France’s farmers federation, the FNSEA, "has
called on its members in all areas of the farming sector to ‘make a stand’
against market deregulation and the system of price margins, which it says
heavily favors food processing groups and retailers." Industrial action
planned for June 11-13 was "aimed at retailers’ distribution platforms
as well as hypermarket and supermarket outlets," just-food went
on. Blockades at several distribution centers were blamed on dairy farmers
who were unhappy about a previously negotiated price agreement.
American dairies are also suffering. The Scranton Times Tribune reported
on similar problems for dairy farmers in the region. As one said, "There
were times before when the prices were low, but the costs were never so high." In
Pennsylvania, average prices dropped 33 percent in the last year but production
costs were only down by 8 percent. Expenses exceed payments for many.
Efforts by both the E.U. and the U.S. to support dairy farmers with export
subsidies have irritated Australia and New Zealand, however. As major exporters
themselves, ministers from the two countries joined several others in Bali
to protest against protectionism.
As for DFB, while large suppliers and other cooperatives continue supplying
retailers, consumers may not even notice any difference. Several large dairies
are already in negotiation to buy DFB which means that as its members either
find new customers or go out of business, further consolidation may result.
This could also be seamless as far as the general public is concerned.
Discussion questions: What, if anything, can or should be done about
the plight of dairy farmers? What ramifications might it have for dairy
prices in the future? What’s the root of the dairy industry’s problems?
[Authors commentary] On Friday, June 12, just-food reported that
French government ministers had called a meeting with the farmers’ union
following blockages at distribution centers. The dispute is by no means settled,
however, as retailers’ initial offer would be funded by increasing the price
to consumers, something one union representative described as "too easy."
- The demise of Dairy Farmers of Britain leaves sour taste – just-food.com
(subs. required) - Farmers federation calls for "robust action" – just-food.com
(subs. required) - Australia hits out at dairy subsidies – just-food.com (subs. required)
- Small dairy producers face skimmed payments – Financial Times
- Dairy Farmers of Britain succumbs to price pressures – foodanddrinkeurope.com
- Dairy farmers suffering through worldwide milk glut – The Scranton Times
Tribune
Seems to me if you are in a business that continues to lose money then you need to get into another business. Maybe there are just too many dairy farms, with too many cows, producing too much milk. If you operate a dairy farm that continues to lose money, then you are either nuts or you are actually making money and just saying you aren’t. I work with several supermarket retailers who have never shown a profit yet are millionaires because they have a positive cash flow.
My guess is these dairy farmers are making money. Otherwise, they would redirect their capital elsewhere.
Recently I visited a dairy farm with 80,000 cows. They employ the latest technological advances in milk production. Each cow is monitored like a patient in a hospital. They seem to be doing just fine and I heard no complaining about milk prices. They continue to grow and expand. Now how could they do that if they were losing money?
Dairy farming–the family type–is quickly taking its place among other family farming operations: Extinction. The fundamental challenge family dairy farming presents is that it buys products and services at retail prices and sells its milk at wholesale prices.
Whereas, the corporate dairy farm David references probably controls its products from cow to consumer. They enjoy greater purchasing power, financial investors and efficiencies of operations much like any other large-scale business. Furthermore, their scale allows for the capture of byproducts that are employed to decrease expenses; an example is converting gas from the cows’ waste into energy used in lighting and heating calf barns.
“The average farmer with 200 cows will lose at least 14,000 on milk and about 50,000 in investment.” Obviously not the same scale as the 80,000 cow farm noted above. But this begs the point made above as to why these smaller farms stay in business. It seems the perception is many don’t and are folding. But as a society, is that desirable? It seems there are other costs to consider regarding corporate farming, from the treatment of the animals, to the safety of the product. The best way we have of answering that is through the markets.
For the small scale farmer, they need to carve out a niche. Not everyone is OK with buying their dairy products from corporate cow farms, where the animal’s treatment is questionable. Many are willing to pay a premium for premium product, or even for a product that is sourced under more humane conditions.
Dairy farmers worldwide are having to send their dairy cows to slaughter because they can’t afford to feed and house them and gather raw milk without losing money. Farmers are used to market ups and downs and most are prepared to go for periods of time with flat revenues or no profit because they know that building up and maintaining a quality dairy herd is not like raising chickens. Nor is it a switch that can be easily turned off and on such as deciding which, and how much crop to plant yearly.
The low, low prices for dairy in the stores right now is lovely for consumers, but we should all be prepared for major price increases in not just milk, but also butter, cheese and ice cream as more herds are culled and supplies tighten.
This should not be allowed to go off the cliff. The world’s population continues to grow and dairy is an important nutrition element–especially shelf stable dried milk for third world countries and war zones. Retailers might temporarily support dairy production during the recession by offering dairy ingredient recipe suggestions to shore up the market, and also by offering in-store ice cream socials this summer.
It’s very easy for the management gurus to tell the dairy farmer how to run his business. The consuming public needs to decide if they want low cost milk from overseas–with the attendant quality issues–or if they are willing to pay American farmers to produce quality milk.
To really understand the dairy farmer, you need to know the basics of this industry.
The full time dairy farmer of 30 years ago milked approximately 100 cows, and pretty much raised all his own feed for those 100 cows and their replacements. He bred his own cows using bulls with high producer pedigrees via AI. He was tied to the farm because he had to be there for milking every 8-12 hours–either twice or three times a day. The milk is generally shipped out to a processing plant and from there to the retail store. There are few remaining processing plants on-farm.
The capital investment for this sort of operation is huge–barns, milking parlors, farm equipment and LAND. The New England rule of thumb is an acre of crop land for a cow and her replacement. That land is planted to corn and hay. The farmer does not purchase his cattle feed–he grows it. He doesn’t purchase his new dairy cows–he breeds his own.
A profitable dairy cow must “freshen” or give birth every 13 months–and there’s a 9 month gestation. Being sure that the cow is rebred at the optimal point in time to maximize milk production is key to making a profit.
There is a very high cost of entry to this business, that is normally hugely labor dependent on the farmer and his family and a minimal amount of paid help.
Over the past few decades, dairies have become larger and larger; some are measured in thousands of cows, not hundreds.
Of course, one farmer, or farm family, cannot manage this sort of scale and the dairy farm is becoming more of a business, with individuals specializing in milking, or repro, or nutrition, or feed production.
As consumers and retailers, we must decide if home grown milk is important to us. If it is, we must support our farmers. If the farmland is sold off and converted to other uses it will not be available in the future for farming. It’s a bit difficult to reclaim farmland from a climax crop of townhouses or shopping malls.
Small farmers like small grocery stores are on their way out. We have a lot of small dairy farmers in my community, and they come in and wonder why we sell milk for such low prices. I told them we don’t make money on gallons, because Aldi’s and Walmart sell milk below raw cost. $1.49 a gallon for all 3 varieties of milk is now the price at Aldi’s every day. Insanity rules the retail world, and there is nothing any of us can do about it.
With the government support prices as a floor, the price of milk in the U.S. depends on supply and demand. Dairy farmers should be happy to see retailers selling milk at a loss because that boosts demand thereby increasing the price the farmers get. However, a more common compliant I hear from farm organizations is that retailers are not passing on to consumers the low cost of milk.
Canada has a production quota system that limits the supply of milk, thereby raising the price the farmer gets so most operate at a profit. But that causes consumer prices for milk and dairy products to be quite expensive in Canada. Do we want that in the U.S.? A great many families cannot afford $4 a gallon milk anymore than $4 a gallon gasoline. (Canadians living near the border often shop for milk and dairy products in the U.S.)
Some farmer groups blame imports but we have international trade obligations to allow a certain amount of imported milk and dairy products. These farmers were not so quick to criticize international trade not long ago when U.S. was a net exporter of dairy products. Part of the current low price for milk is the lack of demand worldwide due to the recession here and abroad.
In the long run, smaller less efficient dairy farms will have to go out of business unless they are subsidized either directly via government payments or indirectly via artificially high consumer prices. I never added up the numbers, but I’d bet the taxpayer-funded farm subsidies over the past 50 years total a lot more than the recent bank and automobile bailouts.
Small farmers have been crying the blues for 100 years. All farmers want subsidies, same as all trucking companies, all airlines, all auto manufacturers, and all energy producers. And the smallest folks in every industry always complain about the biggest folks. And no one wants to pay top dollar for anything. And all the folks who want subsidies want low taxes, too. None of this is news, if “news” has to be “new.”