Farmers' incomes dry up as milk prices plunge about 50%

WEST GROVE, Pa. -- Milk prices have plunged by about 50% from the historic highs of last summer, pummeling producers such as Walt Moore, a fourth-generation farmer whose family has worked the rolling fields of southeastern Pennsylvania for nearly a century.

"If these prices stay low through 2009, there's going to be a lot of producers that don't make it," Moore says, noting that several nearby dairy operators have already decided to sell their herds and get out of the business.

While many producers managed to sock away profits early last year, they still might not be able to survive. "This time, the rainy day will last a lot longer than one day," Moore says.

Dairy operations across the country are taking an enormous hit as prices plummet. The number of dairy cows being sent to slaughter has risen by about 20% from last year, as desperate farmers cull their herds and sell at fire-sale prices. Adding to the problem, banks are less willing or able to extend farmers' loan payments amid the financial turmoil.

The U.S. Agriculture Department has begun providing emergency aid, though the National Milk Producers Federation (NMPF) in a recent letter to President Obama warned that thousands of farms and tens of thousands of jobs could be lost this year without more aggressive federal efforts.

"Demand really dropped off the cliff in the last quarter of last year, and things aren't looking much better this year," says Chris Galen, NMPF spokesman. "It's one more indication of how much the global economy has slowed."

Pennsylvania producers received about $11.50 per hundred pounds of milk in February, while production costs ranged from $15.50 to $18.50, says the state's Center for Dairy Excellence. The USDA is providing special payments to dairy farmers, but the program fills only a part of the gap. Payments are capped, making them of less benefit to larger farms.

Producers are reeling because of not just the size of the decline, but the speed. Futures contracts for Class III milk, a measure of wholesale prices, reached a high of $20 per hundred pounds in June on the Chicago Mercantile Exchange. By January, the price was below $10, though it has since ticked up to about $10.50.

"This is an unprecedented time," Moore says. "In the 20 years I've been in this full time, I've never seen anything like it."

Why prices are falling

There are several reasons for the implosion: oversupply, falling export demand and continued high prices for supplies such as feed. The dairy sector in the past has been less prone to huge price swings than other areas of agriculture, but that's changing as the industry relies more on the markets and less on government programs.

"Up until recently, the U.S. dairy industry was fairly isolated. It isn't anymore," says Roger Hoskin, a dairy analyst at the U.S. Agriculture Department's Economic Research Service.

"Call it globalization. ... When the export market is strong, they do well; when the export market is weak, domestic use is not enough," Hoskin says.

While the industry suffers, consumers are benefiting. Retail dairy prices haven't fallen as much as wholesale milk prices, but they have come down. Dairy prices fell 2.4% in February, according to the Labor Department's consumer price index. The average price for a gallon of milk has declined 14.7% in the past 12 months, from $3.87 to $3.32.

"Typically there are some lags in the declines in the consumer prices," says Bill Lapp, principal of Advanced Economic Solutions. "We probably face some more downward pressure on dairy prices for a couple more months at least."

Farmers are trying to reduce supply as prices plummet. The number of dairy cows being slaughtered across the country, for example, is about 20% higher than average, Lapp says. Because so many cows are coming to market, farmers are selling them at rock-bottom prices.

In addition to its price supports, the U.S. Agriculture Department has started buying surplus milk, butter and other products to clear the market and put a floor under prices. Agriculture Secretary Tom Vilsack says the USDA will donate some of the surplus dairy products to food banks and other nutrition programs, while bartering some for commodities needed for overseas food donation programs.

The International Dairy Foods Association, which represents food processors, is generally not a big proponent of federal intervention. Afraid of losing suppliers, however, Association President Connie Tipton says the industry should look for new ways to boost demand. Tipton suggested that as the USDA begins buying surplus milk and butter, for instance, it should supplement its purchases with products such as yogurt and low-fat cheese that are gaining consumer acceptance.

In Pennsylvania, Moore is looking at the markets, trying to figure out whether to lock in prices months ahead. He's also seeking opportunities amid the gloom. "If you've got room for cows, fill up ... now," Moore says. "You can probably build a barn cheaper than you could a couple years ago."