Farmers see a dramatic drop in dairy prices

SALEM, Ohio — A dismal decline in milk prices during recent months has left America’s dairy farmers facing devastating circumstances. Thanks to the global economic recession and growing dairy supplies, milk prices are down more than 50 percent from last summer. The tumble comes on the heels of all-time highs in 2007 and the second-highest level on record in 2008.

Allison Specht, a dairy and regulatory economist with the American Farm Bureau Federation, said it’s not a surprise that prices have fallen from those lofty positions, but the dramatic correction that happened from the end of December through January was shocking.

Dairy prices on the futures market traded at $14.13 per hundredweight Dec. 1, $10.28 per hundredweight Dec. 31 and $9.30 per hundredweight Feb. 9, according to Specht.

“This steep drop in dairy prices will be felt by dairy farmers for several months to come,” she said.

The cost-price squeeze leaves little room for error in management and hedging decisions.

Impact

Greg Wickham, chief executive officer of Dairylea Cooperative, said milk operates in a cyclical nature, so the price is bound to improve, but dairy farmers need a plan for navigating through this difficult time.

“Ultimately, this down cycle will impact even the most efficient producers and have a ripple effect across rural communities to lenders and farm suppliers,” Wickham said.

Specht explained that domestic food consumption patterns have changed as the American economy has shifted. Although people are buying slightly more dairy products at the grocery story, losing any food service demand — which accounts for 40 percent of dairy consumption — is bad news.

In the past, the industry has relied on exports to insulate prices, but that market is starting to shrink. Higher production from New Zealand and a decision from the European Union to directly subsidize exports have contributed to stronger competition in trade markets.

Advice

While dairy farmers can make some adjustments to help weather the storm, there’s no perfect solution.

“There’s nothing that will make the low prices disappear,” said Dianne Shoemaker, an Ohio State University Extension dairy specialist.

However, there are ways to ease the pain.

Make a cash flow projection and figure out when you’ll be the shortest on funds, Shoemaker said. If you don’t have a cash reserve, now is the time to talk to a lender.

“They (farmers) really ought to know what it’s costing them to produce milk,” she added.

Also, take a critical look how many heifers you raise on the farm and determine whether or not it’s time to sell more as calves.

Feed cost control is as important as ever, although Shoemaker cautioned that feeding too cheaply can hurt your production.

Unfortunately, there’s no certain way to ensure a farm’s survival.

“There’s no one thing that will fix it and no one thing we can ignore,” Shoemaker said.

At the bottom. According to Specht, industry analysts believe the dairy market is close to the bottom and won’t fall much further. However, depressed prices are forecasted for the remainder of the U.S. recession.

She added that optimistic analysts say there could be some turnaround by the end of 2009.