Dairy Farm Crisis; Milk Prices Turn Sour

A perfect storm of bad farm policy in conjunction with a global slowdown is pressuring dairy farmers. Here is an interesting story about a dairy farm close to where I live: U.S. dairy farms in crisis as milk prices turn sour.

Many of the more than 60,000 dairy farms in the United States have been cutting costs, selling off their cows, or leaving the dairy business altogether as milk prices plummet 35 percent in just the past two months while dairy farm operating costs remain uncomfortably high.

Some farms are losing $200 per head every month.

"We've dealt with 18 percent interest. We've dealt with farm recession. We've dealt with droughts and floods and this is by far the worst economic situation we have ever dealt with in our years of farming," said Kooistra, who has run Kooistra Farms in Woodstock, Illinois, with her husband since 1980.

"Right now, the price of milk will barely cover our feed costs and to pay our veterinarian. I'm not even counting all the other expenses that go along with keeping a farm running, the utilities, the fuel costs," she said.

"Given the suddenness and severity of the plunge in farm-level milk prices, a significant number of farmers won't survive the winter," Jerry Kozak, president and chief executive of National Milk Producers Federation, said last month.

Farmers have an opportunity to get paid for culling their herds via the farmer-funded CWT program, which was in the process of securing a line of credit to augment its efforts in 2009, according to NMPF's Kozak.

Industry analysts say the reason for the steep drop in milk prices is simple-- too much milk and not enough demand for it. Restaurant traffic is down in the United States as recession jitters have consumers reeling in their spending. About 40 percent of U.S. milk production is made into cheese and roughly 60 percent of the cheese is used in the restaurant and food-service sectors, according to analysts.

Dairy exports, which helped drive U.S. milk prices to the sky-high levels in 2007 and 2008, are also down sharply.

Meanwhile, New Zealand and Australia, two top global suppliers, are exporting more milk products after severe drought slashed production in the past few years.

The European Union has reinstated export subsidies on a range of dairy products, essentially pricing U.S. supplies out of the market.

"Even in the good times, you're always looking at ways to manage better and keep the costs down. When these extremes come along, it's pretty hard to find anything else to cut," said dairy farmer Brad Scott, of Scott Brothers Dairy Farm in San Jacinto, California.

"In a factory, when things get bad you can always just turn the key off and wait until things improve. In a dairy there's no key to turn off."

Kooistra Farms in Woodstock, Illinois is about 20 miles from where I live.

Milk Monthly Chart



click on chart for sharper image

The above describes our insane farm policy.Farmers ramp up production when prices are high and are paid to kill cows when prices are low. It is time to end this madness.

EU to Reactivate Dairy Export Subsidies

However, as bad as the US is with farm policy, the Eurozone is worse. Inquiring minds are reading EU to Reactivate Dairy Export Subsidies.

Brussels, Jan 15 - The European Union will reactivate export subsidies for a series of dairy products to help struggling exporters compete better on the depressed world market, Europe's farm chief said on Thursday.

Suspended since 2007, export subsidies would now be reinstated for butter, cheese and skimmed milk powder (SMP) via a series of regular tenders and trade bids, EU Agriculture Commissioner Mariann Fischer Boel said in Berlin. In June 2007, during a period of sustained high prices, the EU set export subsidies for all dairy products at zero for the first time, aiming to make EU dairy exports less attractive for producers and thereby ensure adequate domestic supply.

As part of its negotiating position for the Doha round of world trade talks, the European Union -- the main user of farm handouts and the top payer of export aids -- had pledged to eliminate export subsidies provided that others did the same.

Under the intervention system, a commodity is "bought in" to stores, either private or public, until prices rise again to a level attractive enough for it to be sold into local EU markets.

EU May Hand Out Farm Cash for Dairy, Rural Internet

Please consider a third article on the plight of dairy farmers, this from the point of view of small European farmers: EU May Hand Out Farm Cash for Dairy, Rural Internet.

Brussels, Jan 20 - Europe's farm chief will propose spending part of the unused EU agriculture budget to help countries finance rural development projects, including support for dairy industries and improved internet access.

Speaking to bloc farm ministers, EU Agriculture Commissioner Mariann Fischer Boel said up to 1.5 billion euros ($2 billion) could be handed out for certain schemes this year since policy reforms due to finance them would not kick in until 2010.

"In some regions of the European Union, the dairy sector is really under pressure. My main concern is ... the small and vulnerable dairy producers," Fischer Boel told a news conference after Monday's meeting in Brussels.

"My fear is that if they are pushed out of the market by low prices, they will probably not survive -- and sell their animals. And that's the end for production. We should give them a chance to stay in business," she said.

Under the final 'health check' deal, however, that extra cash will not be available for rural development projects until 2010. With EU dairy farmers struggling with weak market prices and poor export opportunities, Fischer Boel has said she would rather take action to help them sooner rather than later.

Farm Hypocrisy In Action

1. The EU pledges to eliminate export subsidies provided other do the same.
2. The US agrees to change its farm policy provided others do the same.
3. Some small agricultural country somewhere refuses to cut subsidies so nothing gets done.
4. Everyone points the finger at everyone else as to being the problem.
5. Trade talks fail every year as they have for the past 15.

Dairy Crisis Perfect Storm

1. Bad farm policy in US and EU.
2. Bad farm decisions to ramp up production ahead of global slowdown.
3. Global slowdown reduces demand for cheese and dairy products.
4. US dollar strengthens weakening demand for US exports
5. EU reinstates export subsidies. This should be a trade violation. It also compounds the problem of the strengthening dollar.
6. A drought ends in some export countries, contributing to dairy glut and further pressuring prices.
7. US consumers are eating out far less often because of the recession. This reduces internal demand for dairy products.

With a toxic brew of bad farm policy and bad economic policy in conjunction with the worst recession since the great depression, expect to see many farmers go out of business. It's a bad situation. That said, small farms have no more right to handouts than anyone else, which is to say none. However, what farmers do have a right to is fair economic and farm policy and that we certainly have not seen either in the US or EU.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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