Dairy recovery may be slow, analysts warn

The recent uptick in milk prices should be an encouraging sign for struggling dairy farmers, if only the forces of the marketplace were that simple.

The dairy business is notorious for its erratic bust-boom cycles, but this recent downturn has been particularly hard on dairy farmers. Just a year ago they were enjoying some of the highest milk prices ever, aided by a healthy domestic market and robust export demand.

But all that changed when the overall economy tanked, sending milk prices free-falling early this year. Farmers responded by culling back their herds. Some, unable to hang on to their operations, entered the producer-funded herd retirement program to exit the business and help reduce the nation's milk supply.

The U.S. Department of Agriculture also stepped in to try to bring some relief. It reopened the Dairy Export Incentive Program in July to help U.S. dairy exporters compete in foreign markets. Then in August, the department raised the dairy support price to remove millions of pounds of product from the market.

Economists agree that recent steps by farmers and USDA have helped to improve prices in the short term, with Class 1 milk prices rising $1.50 per hundredweight in September and jumping another 54 cents for October. But they also warn of potential market pitfalls because such government intervention does not address the fundamental problem that's still dogging dairy farmers: an imbalance in supply and demand.

"My sense is that in the long run, looking at late 2009-2010 prices, what these actions by USDA will have done is probably lowered the prices going out further," said Bill Schiek, an economist at the Dairy Institute of California.

He said by raising the support price in the near term, the federal government may actually be prolonging any real, market-led recovery and slowing farmers' culling rates.

"What this does is it gives producers a false hope," he said. "It keeps them in business a little longer—those who maybe were thinking about getting out. That's not necessarily a bad thing for them, but the cumulative effect is that there's going to be less contraction in the milk supply in a market that has some pretty high inventories of product."

Despite the heavy culling that individual producers have done and the recent herd reductions by the Cooperatives Working Together program—which removed some 101,000 cows and nearly 2 billion pounds of milk in its last round earlier this year—Schiek said estimates show the nation needs to reduce another 250,000 to 350,000 dairy cows to bring the milk supply down to levels of demand.

CWT is now conducting its second herd retirement of the year to remove another 86,710 cows and 1.8 billion pounds of milk.

Michael Marsh, chief executive officer of Western United Dairymen, praised U.S. Agriculture Secretary Tom Vilsack for his responsiveness in implementing relief programs, but in the same breath he also said that these programs bring additional challenges.

When the government buys dairy products above the market price, those inventories could end up filling government warehouses rather than moving to world markets. What's more, the government could later sell that product back into the market, muting any economic recovery that might be starting to occur, he said.

With the support price higher than the world price, domestic processors also would be inclined to buy lower-priced imports, displacing domestic dairy products that are moving off to the government, Marsh said.

What many farmers would like to see now is for USDA to buy about 100 million pounds of cheese starting in October, when the new federal budget takes effect, and distribute that product immediately to food banks. Such a cheese giveaway would have an instant impact on the cheese market because that cheese would be consumed, returning inventories to more normal levels, Marsh said.

He added that even a modest rise in milk prices could significantly reduce federal expenditures for dairy safety net programs such as the Milk Income Loss Contract, which compensates dairy farmers when domestic milk prices fall below a certain level.

"If we could get 100 million pounds of cheese off the market, that would help more than anything else we could do today," said Domenic Carinalli, a dairy farmer in Sonoma County. "Until we get rid of that inventory, the market is not going to turn around."

But Jack Hamm, a dairy farmer in San Joaquin County, said while he's all for certain government programs such as the Dairy Export Incentive Program, which helps to level the playing field for U.S. exporters, he's not particularly a fan of other forms of government involvement, which he fears could drag the markets down even further.

"I think it's too late in this go-around for the government to help us anymore," he said. "I honestly think we're working our way out. I'm looking to the future—to how we're going to keep from getting into this horrible position again."

For years, farmers, processors and others in the dairy business have looked into implementing a supply-management program to prevent wild swings in milk prices, and there are currently a number of proposals out there to control milk production. While many in the dairy sector agree with the concept, Carinalli said they have never been able to come to any kind of consensus on the details and how to carry out such a plan.

(Ching Lee is an assistant editor of Ag Alert. She may be contacted at clee@cfbf.com.)

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