Farm Progress

Why are U.S. dairies in trouble?

David Bennett 1, Associate Editor

June 4, 2010

7 Min Read

Across the nation, dairy operations are going bankrupt as under-pressure farmers point to price manipulation and poorly designed government programs as chief culprits.

A steep drop in milk prices has left the U.S. dairy industry in precarious shape.

Across the nation, dairy operations are going bankrupt as under-pressure farmers point to price manipulation and poorly designed government programs as chief culprits.

Minnesota Rep. Collin Peterson, chairman of the House Agriculture Committee, has promised to address the increasingly precarious situation in the next farm bill. After hearing from many dairy operators during a recent spate of farm bill-related field hearings, Peterson and colleagues have plenty to chew on.

Also in the mix: Scott Brown, program director with the Food and Agricultural Policy Research Institute (FAPRI), who testified before the House Agriculture Committee during a May 13 hearing. Brown, who studies the dairy industry and related policies (for more, see, spoke with Farm Press. Among his comments:

A quick sketch of what’s happened in the last few years that’s led to the situation the dairy industry is currently in?

“There are two major events that led to 2009 probably being the worst year ever experienced by the industry.

“First, there’s the demand side. Back in 2007-08, we had a situation where U.S. producers were being encouraged to produce for world dairy markets. It appeared that for the foreseeable future we’d be major players in world markets. Our prices were certainly being pulled higher as a result of that international demand.

“So, the industry geared up with more production. As a result, we had stronger than average annual growth in milk production.

“Fast forward to 2009 and there was not only a strong downturn in the U.S. economy but also strong downturns in many global economies. We went from a situation where the United States was commercially exporting (dairy products) to one where we weren’t. That sent milk prices from record highs to near-record lows in a short period of time.

“For much of the same period, a rise in feed costs — actually, the rise in total production costs — were sort of masked. In 2007-08, dairy producers were in a position where higher milk prices largely offset those higher production costs. At the same time, other livestock industries were adjusting to higher feed and other production-related expenses more quickly.

“Milk prices were high enough that dairy producers continued to expand. That delayed the needed adjustment on the supply side.”

Did H1N1 or BSE have any bearing on this?

“Not on the dairy industry.

“When you look at dairy from the demand standpoint, one of the things that happened with such strong international demand (from around mid-2007 through mid-2008) is domestic prices were running very high, as well. Consumers were looking for substitutes to some of the dairy products they traditionally consumed.

“Is it really a surprise that Pizza Hut features chicken wings when there’s $2-plus cheese? High prices do affect things. And those markets, although they’re starting to come back, have been slow to return.”

How did the 2008 farm bill address dairy? Did the policy decisions make things worse?

“The important thing done in the 2008 farm bill for dairy was the feed cost adjuster to the Milk Income Loss Contract (MILC) program. It certainly gave us the opportunity to provide payments to dairy producers during periods of high feed costs.

“I think we all know that one of the criticisms of MILC is very large producers don’t see much of their production covered under the program. The production cap of 2.985 million pounds doesn’t provide them with as much protection as it does small counterparts.”

What about the debate for the next farm bill? What’s being proposed so far by politicians and dairymen? And where does FAPRI see that shaking out?

“It does seem it’s very early to be thinking about the next farm bill. But it will be here quickly.

“Almost every supply management proposal I’ve ever heard and discussed in the past 20 or 30 years seems to be on the table. There’s a segment of the industry that has gone through such tough times and is ready for a lot less volatility. That segment is willing to consider supply management proposals to help with that.

“There is another set of proposals — of which the National Milk Producers Federation has been out in front of — that are more insurance-related. How can we help protect a producer’s margin? Those have a lot of interest, at this point.

“Of course, when writing a farm bill, the details matter in terms of exactly how these different programs might operate. We’ll have to wait and see on all the proposals because, quite honestly, I haven’t seen the detail needed for almost any proposal.

“There’s also still a camp that thinks MILC should continue along with current programs.

“So there are some very diverse ideas out there. Trying to pick among them is hard because it’s early in the game. A lot will hinge on where dairy markets move in the next 12 to 18 months. Lower prices would, in my mind, mean greater potential for new policy to be enacted.”

Dairy farmers are worried about losing their operations. Can action wait until the new farm bill is passed? Many of them say they needed help three years ago. Do current conditions foreshadow an earlier action by Congress?

“That’s a very good question. There are a lot of producers who feel something needs to change sooner rather than later.

“However, I think finding a vehicle to pass dairy legislation in advance of the farm bill, although not impossible, will be difficult. If we start seeing a large exodus of producers or milk prices move lower than they are today, that might push the process more quickly. But most of the read I get from D.C. at present is it will be the 2012 farm bill before we see much change.

“I know the pain out there. I’ve spoken with a lot of producers who have described their situations.

“But the monthly production reports say this April is 1.5 percent higher than one year ago. I struggle with how to take that data on milk production, the growth being seen, and reconcile it with what I know are very tough financial times.”

State versus federal actions? Anything that can be done quickly at the state level? “We’re in a situation where for many state budgets it’s tough to find dollars to do much.

“I do think there are opportunities to help farmers use tools currently available to them to reduce risk: local cooperatives, better use of risk management tools, working straight on the futures market. Education in how to use those tools might help some producers.”

Quick run-down of the livestock industry compared to dairy? Are they being hit in many of the same ways?

“The cattle industry certainly saw very high feed prices. Other energy-related inputs were also affected. But cattle producers haven’t seen the decline in output prices that dairy has. That’s the big difference between what’s happened with dairy and cattle.

“The good thing for cattle producers is we’ve seen some nice price recovery in the last few months. At least temporarily, they’ve come out the other side. Things look better for the industry than they did nine months ago.

“The pork industry is most like the dairy industry. That isn’t so much due to loss of international demand, although that didn’t help.

“We’ve seen productivity gains in the hog industry in the past few years as things have come on-line like vaccines for certain viruses. Supplies were much larger than we ever imagined based on sow inventories.

“Since then, pork producers have been correcting, getting rid of sows and putting themselves in a better situation.”

On the next farm bill…

“Everyone should understand the 2012 farm bill debate will take place in a very different budget environment from the 2002 or 2008 farm bills. That will certainly put additional constraints on the kinds of programs and amount of dollars available for them. It will be an interesting and tough 2012 farm bill debate.”

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About the Author(s)

David Bennett 1

Associate Editor, Delta Farm Press

David Bennett, associate editor for Delta Farm Press, is an Arkansan. He worked with a daily newspaper before joining Farm Press in 1994. Bennett writes about legislative and crop related issues in the Mid-South states.

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