Sunday, Jun. 14, 2009

Dairy farmers suffer as recession saps demand

Dairy farming has become a sophisticated business in the 50-plus years that Pete Mensonides has been at it.

Farmers make use of advances in breeding, feeding and other practices to boost the milk output from each cow.

For all of that, one brutal truth remains: When the supply goes up and demand goes down, the farmers take a hit.

The past six months have been some of the worst on record, as the recession sapped demand for dairy products around the world.

"I have never seen it this bad," said Mensonides, who has 450 cows near Turlock. "We have always had our ups and downs, but never as steep and dire as it is today."

California farmers are getting about $1 per gallon of milk but face about $1.50 in production costs, according to the California Department of Food and Agriculture. That's the price for the fluid market. Milk bound for cheese and other processing plants goes for even less.

The crisis could force 10 percent of the state's dairy farms out of business this year, Western United Dairymen estimated.

"It is a mess," said Michael Marsh, chief executive officer of the Modesto-based group. "The market just disappeared with the global economic crisis, and unfortunately for dairy producers, they can't simply turn the cows off to reduce the supply of milk."

Milk is the top farm product in the Northern San Joaquin Valley, employing thousands of people on farms, at processing plants and in related businesses.

Tom Marchy used to be one of them, running a farm in the Waterford area. He said he saw disaster looming in the industry last fall and called it quits.

His biggest customer, Foster Farms, had just canceled his milk contract and "it was hard to find anyone else to ship to so I just got out," Marchy said.

'It's a hard life'

He sold his herd, about 1,100 black-and-white Holsteins, to a farmer starting a dairy in Oklahoma. He continues to tend some young cattle until they are milking age, then will be done with the business.

"This is a young man's game," he said. "Unless you are big enough to hire people to do the work for you, it's a hard life."

A year ago, the state's farmers enjoyed milk prices as high as $1.74 per gallon. Overseas demand was strong and drought had reduced supplies from Europe and New Zealand, said Rick Kment, a dairy analyst for DTN, an Omaha-based company that provides business information.

Farmers tend to respond to high milk prices by expanding their herds, he said. The number of milking cows on California farms went from 1.76 million in 2005 to 1.84 million last year, according to the U.S. Department of Agriculture.

Gross income to farmers shot up to $7.3 billion in 2007, when demand was strong enough to absorb the increased supply. The income dropped to $6.9 billion in 2008 as consumers tightened their spending and a surplus developed on the world market late in the year. This year looks to be much worse.

Meanwhile, many farmers have continued to milk their larger herds, trying to make what money they can but contributing to the glut.

"For many producers, reducing the cow numbers is one of the last options," Kment said.

The industry took action earlier this year to deal with the surplus -- reducing the number of cows via sales to the beef market from farms that are shutting down.

'Unbelievable career wreck'

Collectively, U.S. farmers need to slash milk production by about 5 percent to bring supplies in balance with current demand, "but we have no good mechanism to do that," said Geoffrey Vanden Heuvel, who owns dairy farms in Southern California.

"This is an unbelievable career wreck," he said. "The amount of wealth being destroyed in this industry every week is just mind-boggling. The emotional toll this is taking is just amazing."

Industry people hope that prices will rebound in the coming months. Some help could come from recently approved federal subsidies for dairy exports and increases in the use of dairy products in school meals and other nutrition programs.

Farmers have faced low prices before, but what's different this time is that their cost for feed and other expenses is high compared with their income, said Bill Schiek, an economist with the Dairy Institute of California in Sacramento.

"They are just bleeding cash," he said.

Mensonides, a board member with the Dairy Farmers of America processing cooperative, said farmers have tried to cut costs and seek help from lenders, but both have their limits.

He said righting the market is an "extremely painful" process for farmers.

"A lot of them won't survive, and that will reduce production," he said.

Bee staff writer John Holland can be reached at jholland@modbee.com or 578-2385.