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Thursday, September 17, 2009 12:22 AM

Don't Cry Over Spilled Milk

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Milk prices have plunged in recent weeks. Farmers in big dairy states like Wisconsin, Minnesota, and New York are hopping mad. Is there a conspiracy underway to suppress milk prices? Some must think so because Dairy Farmers Want Industry Probe.

Dairy farmers, stung by a price-depressing glut of milk, are pressing federal antitrust regulators to investigate competition in the industry.

A group of dairy farmers is slated to meet with antitrust enforcers Thursday in Washington, and Christine Varney, chief of the Justice Department's antitrust division, is scheduled to appear Saturday at a Vermont hearing of the Senate Judiciary Committee, which is populated with several Democrats from big dairy states such as Wisconsin, Minnesota and New York.

The price of milk began a historic run-up in 2007, and dairy farmers raced to cash in by expanding their herds. Then, the global recession doused foreign demand for milk in 2008, contributed to an oversupply.

In the past year the price farmers get for their milk has dropped 36%, to the lowest level in three decades.

Between early 2007 and December 2008, U.S. farmers added about 190,000 milk cows, an increase of 2%, according to industry economists. In August, farmers on average were paid $11.80 for every hundred pounds of milk, down from $18.40 in August of last year.

Dairy farmers have long complained that they have too few buyers and too little competition for their milk. The industry is dominated by two players: Dean Foods Co. of Dallas, which is creating a national brand in what had been a fragmented industry, and Dairy Farmers of America Inc., a Kansas City, Mo., cooperative that buys milk from farmers and sells some of it to Dean Foods.

In a statement, Dean said it "does not control dairy prices or the dairy market. The numbers that have been reported by various media are grossly inaccurate. We buy less than 15% of [the] nation's raw fluid milk supply."

Dairy Farmers of America said in a statement: "The national scope and size of our cooperative brings about scrutiny. We understand that and we invite open dialogue with those who want to understand our business better."

Andy Gilbert, a third-generation farmer in Potsdam, N.Y., who owns 800 milk cows, said farmers are struggling and he is borrowing to pay his bills. "I don't know any dairymen who are covering their cost of production," he said. "It's a stress on all of us. You sweat blood over it."

Consumers are benefiting. The federal Bureau of Labor Statistics said in its monthly Consumer Price Index report released Wednesday that retail dairy prices in August were 10.4% lower than they were a year ago.
White Heat Over Spilled Milk

Inquiring minds are reading EU farmers in white heat over milk prices.
Belgian farmers sprayed 3 million liters (790,000 gallons) of fresh milk onto their fields Wednesday, furious over the low milk prices they say are bankrupting farmers. Milk farmers' groups said world prices had sunk so much they are having to sell milk at half their production costs, leaving more and more farmers unable to pay their bills.

To highlight their desperation, about 300 tractors dragged milk containers through plowed fields in southern Belgium, dumping a day's worth of milk production in that region. "It is a scandal to dump this, but we have to realize what the situation is," said Belgian farm leader Erwin Schoepges. "We need a farm revolt."

Agriculture is still one of the most shielded economic sectors in the EU, but it has not been able to protect farmers from the global financial crisis that caused demand to crash. "If we go on for another three months like this, 40 percent of French milk producers will be condemned to bankruptcy," said Pascal Massol, a Breton farmer who leads the French protests.
Belgian Farmer Protest

Farmers spray milk onto a field in Ciney, Belgium, Wednesday Sept. 16, 2009. Farmers turned the Belgian highway and nearby fields white on Wednesday by spilling 3 million liters (3.2 million quarts) of milk to protest low prices which are pushing them toward financial ruin. Growing frustration with the economic downturn has led to widening protests across the European Union in recent weeks. (AP Photo/Yves Logghe)

Let's Consult The Authority

In high school, I had a geometry teacher, who when a dispute arose, was very fond of the saying "Let's consult the authority". The authority of course was the geometry text book. In this case "the authority" is a simple price chart.

Milk Futures

If Dean foods could manipulate the price of milk then why did milk prices sit at record or near-record highs for close to two years?

The chart clearly shows milk is subject to spikes and crashes and the price now is far closer to the historic trend than it is most of the time.

Nonetheless, the dairy farmers of America are asking for an "open dialogue with those who want to understand our business better."

Business Facts

1) No one owes farmers a profit anymore than anyone owes real estate agents, brick layers, computer programmers, insurance salesmen, or anyone else a guaranteed profit.

2) Overproduction killed housing. Overproduction relative to falling demand for dairy products in conjunction with a very painful recession is hurting farmers.

3) Milk prices are down worldwide. Dean Foods is clearly not responsible.

4) There is no need to "probe" milk prices. In fact, we have too many "probers" and we should probably get rid of most of them.

5) I am quite certain the "union of paid probers" needing to probe for a living disagree just as farmers in demand of a probe disagree.

6) Those in demand of needless probes as well as those doing needless probes have succeeded to drive up the price of probes to the detriment of everyone else.

Why should US or EU consumers pay extra to support unprofitable businesses or ridiculous probes? The answer is they shouldn't.

The problem in Europe and the US is falling demand and oversupply. Price supports contribute to the problem by subsidizing marginal producers.

The solution is not more price supports that will further drive up unwarranted production. The solution is a free market. If "40 percent of French [or US] milk producers will be condemned to bankruptcy" then so be it. Bankruptcy is a cure for overproduction. Price supports are a cure for nothing.

Mike "Mish" Shedlock
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