Dairy farmers try to balance milk supply, demand

Issue Date: April 18, 2012
By Ching Lee
Tulare County dairy farmer Tom Barcellos says he has reduced his herd’s milk production 6 percent by changing feed rations, drying some cows earlier and culling more than he normally would.
Photo/Cecilia Parsons

California's mild winter weather this year has been a boon for milk production, but that has not necessarily been a blessing for the state's dairy farmers.

With huge supplies of milk on the market, producers have seen milk prices fall for four consecutive months as they continue to struggle with high feed costs.

Lack of adequate plant capacity to process the flood of milk has led at least one dairy cooperative in the state, Land O' Lakes, to implement a program this month for dairies in the central San Joaquin Valley to cut production.

Members had three options: Reduce their production by 6 percent and be eligible for a 30-cent premium per hundredweight on their base milk for three months; surrender their base and offer their herds to a buy-out in exchange for 30 days of paid milk production; or do nothing and be subject to a penalty of $10 per cwt. on milk produced over their base volume until June 30.

Tulare County dairy farmer Tom Barcellos, who ships to Land O' Lakes, said he chose to reduce his production by 6 percent by changing his feed rations, drying some of his cows earlier and culling a few more cows than he normally would. Still, he said conditions have been so favorable for production that his cows "are just milking like crazy."

"Basically, it came down to: You've got to cut production or else," he said.

Michael Marsh, CEO of Western United Dairymen, noted that not only are the state's cows producing more milk but cow numbers have also increased, adding to the oversupply problem. Dairy farmers are also taking advantage of current strong beef prices by culling their least productive animals and bringing in replacements, and that typically results in higher milk production.

Barcellos estimated about 50 percent of Land O' Lakes dairies have chosen to reduce production, while 17 producers have opted to sell their herds and exit the business. He noted the program has managed to reduce some 1.1 million pounds of milk a day.

He said milk prices "seem to be stabilizing, but until the full pipeline actually shrinks a little bit more, there's still plenty of supply in cold storage of butter and cheese and powder. Until there's a balance in the supply and demand, which we're getting pretty close to, (prices) still have a risk of falling."

Charlie DeGroot, a Fresno County dairy farmer who ships to California Dairies Inc., said the cooperative hasn't imposed any over-base penalties on its members yet, but producers have been warned of the possibility and will know by the end of the month.

What has helped him during times of low milk prices and high production costs is that he's been able to grow most of his own roughage feeds, which include alfalfa hay, corn silage and wheat silage.

"We farm 2,000 acres, and owning that ground is probably the most important thing that could keep a dairy going in tough times," he said.

Meanwhile, California dairy farmers are seeking higher prices for their milk. The California Department of Food and Agriculture, which sets the minimum price dairy processors must pay producers for their milk, has agreed to hold a hearing on May 31 and June 1 to consider amending the state's milk pricing formula.

Dairy farmers contend that the current formula does not accurately capture the value of whey, or Class 4b, resulting in a huge discrepancy between the whey value contribution in the state's formula and the value in the federal milk marketing orders.

CDFA first added an allowance for whey in the state's milk pricing formula in 2003 that was variable and adjusted each month as the market for dry whey products fluctuated. The variable factor was then replaced in 2007 with a fixed factor of 25 cents per cwt. Last summer, after a two-day hearing, CDFA changed the whey valuation again to an adjustable factor between 25 cents and 65 cents, which was implemented in September and resulted in a 40 cent per cwt. increase in the Class 4b minimum price.

"But it still fell short of what we really needed, which was essentially something that was more in tune with what was going on with regard to the market for the product itself," Marsh said.

That's because at about that time, demand for U.S. dry whey, particularly in overseas markets, rose dramatically, causing a runup in dry whey prices that the California pricing formula was not capturing, due to the 65-cent cap in the whey valuation. Marsh noted that since implementation of the new formula, the state's whey value averaged $1.93 per cwt. lower than in federal orders.

Whey used to be a low-value byproduct of the cheese manufacturing process that was usually disposed, Marsh said. But with research and development, new uses have been created for the product, driving up demand and its value, he added.

He said although the whey market has softened in recent months due to the oversupply of milk, he still sees "phenomenal opportunity in the marketplace for these types of proteins."

Barcellos and DeGroot agreed that if there's an increase in the value of whey, dairy producers should receive a higher share of that.

"It's definitely about getting more for our milk," DeGroot said. "What's fair is fair. If there is a value there, then let's see if we can get our dairymen some income from the value of that product."

Marsh said dairy producers are proposing a new sliding scale that would take the cap up to about 95 percent of the whey value in the federal orders.

Dairy processors oppose the idea. In a letter to CDFA, Rachel Kaldor, executive director of the Dairy Institute of California, said, "While we understand producers' desire for higher prices, we believe that increasing the Class 4b price … would be detrimental to the industry."

Leslie "Bees" Butler, a dairy economist at the University of California, Davis, said that whey is undervalued in the state's milk pricing formula, but that "processors also have to take into consideration their costs."

"There are no good answers to this thing," he said. "In fact, it'll be difficult for (CDFA) to try and figure out exactly how they're going to split the various decisions and make it fair for the processors as well as the producers."

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

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.