Plunging Prices Hammer Valley Dairy Farmers

BY: JIM DOWNING

Jan 19, SACRAMENTO, CALIFORNIA (BEE) — The price farmers get for their milk is plummeting - and some of the difference may show up in your pocketbook soon. The global dairy market has crashed so quickly, however, that it's backing up the industry's supply chain - all the way to Galt, where farmer Bill Van Egmond had to pour a day's worth of milk - 2,000 gallons - down the drain last weekend.

"No creamery would take it," he said Friday.

The base price that dairy farmers get for their cows' milk is set to tumble 35 percent - to 97 cents a gallon - on Feb. 1. Retail prices should follow - first milk, then other dairy products - though analysts say the drop likely won't be as quick, or as large, as the cut in farm prices.

"Retail prices will be a lot stickier," said Joel Karlin, market analyst at major San Joaquin Valley grain broker Western Milling. Few if any dairy farms can turn a profit with milk at less than a dollar a gallon, several experts said.

Industry groups are asking for federal help, even floating the idea of a taxpayer-funded buyout of 300,000 dairy cows to cut production, Karlin said. The buyout plan appears not to have gained traction.

Industry experts tie the price drop to both a bloated U.S. dairy herd and the collapse of export markets. A year ago, milk was selling at close to record levels, driven largely by success in international markets. But conditions shifted quickly, said Bill Schiek, an economist with the Dairy Institute of California, a milk processors group.

The dairy industries of Australia and New Zealand, which had been hampered by drought, recovered and began to push more milk products onto world markets. The melamine scandal in the Chinese dairy industry drove a broad decline in dairy sales in much of East Asia. The bad global economy and the stronger dollar made matters worse.

During the boom, U.S. milk production continued to grow, as it has since 2004, Karlin said. Fearful of oversupply, the dairy industry has for several years funded a roughly $60 million-a-year program to pay farmers to shrink their herds. But the buyouts haven't stopped the expansion of the nation's 9.3 million-cow dairy herd.

After spending heavily to increase culling in late 2008, the industry has little money left to fund additional cuts, said Michael Swanson, the lead agricultural economist with Wells Fargo & Co. in Minneapolis. To cull the herds, dairies sell the cattle to meatpackers.

The price U.S. farmers get for their milk is set monthly by government regulators according to international market prices for four dairy commodities: cheese, butter, milk powder and whey.

Retailers set their own prices, with the minimum store price for milk usually at least a dollar a gallon more than the farm price. Milk prices can't fall much more, said analyst Karlin, because dairy commodities are already at or near federal support levels.

As commodity prices crashed, many big cheesemakers got stuck with warehouses full of cheese made from milk bought at last fall's high prices. Because they know milk prices are dropping, processors are reluctant to keep producing more cheese, making it difficult for some dairies to find buyers for their milk.

Several experts, though, said the sort of dumping that Van Egmond had to do has been fairly rare. And Van Egmond said he doesn't blame anyone for the fact that he had to pour out his milk.

"It's just a tough situation," he said.