Dairy farms: Got hope?

For dairy farms the good times of 2008, when global demand pushed exports of cheese and milk powder to record highs, already seem like a distant memory.

Exports have plunged. Prices followed this month, and now dairy experts say 2009 could see farms across the country shutter as they struggle to find profits.

"Prices have fallen off a cliff here in the last four to six weeks," said Chris Galen, spokesperson for the National Milk Producers Federation, an Arlington, Va., trade group representing farmers.

Consumers haven't seen the price drop significantly yet, a fact dairy farmers hope is quickly reversed to help speed the industry's recovery. As the economy has worsened, Americans are buying less milk, particularly since November, according to industry figures.

Milk futures traded at $9.30 per hundredweight on the Chicago Mercantile Exchange on Monday, down from a high of more than $20 last summer. And the government's federal milk marketing order, a system used to ensure fair prices for dairy farmers, saw a 32 percent drop in milk prices from January to February.

"Will retail prices drop as quickly as they rose? The jury's still out on that," said Galen. "Milk is one of those products that, like gasoline, people continue to keep buying it regardless of the price."

A spokeswoman for retail giant Supervalu said the company prices milk according to several factors, hinting that a big drop in the price of milk on the Chicago futures market may not translate into price drops at the supermarket.

"A change in a single pricing input is not always a determining factor in the price consumers pay for a given product," spokeswoman Haley Meyer wrote in an e-mail. "That said, we always strive to pass savings on to our customers and understand that our business is built on our ability to provide the best available value."

Government reports show that the price of a gallon of whole milk fell about 7 percent from July's high of $3.96 a gallon to $3.68 in December.

And don't look for a drop in organic milk prices. Organic dairy farmers set their own prices, and rising demand through last year means prices will remain where they are.

"Prices are holding up," said David Minar, owner of Cedar Summit Dairy near New Prague. His 150-cow farm supplies organic milk to numerous outlets in the Twin Cities. "We've got a diehard clientele that likes what we're doing and likes our milk, and so far we haven't seen any decrease in sales."

Cows produce for boom times

The milk crash shouldn't surprise many close followers of the dairy industry, said one observer.

"If you haven't heard, we're in a recession," deadpanned David Weinand, a state government dairy expert.

Retail sales have fallen since Thanksgiving, and dairy farms continue to produce as if it were still 2007, with production up about 1 to 1.5 percent since last year, according to Weinand.

"When you're on that teeter totter, 1 percent gets some pretty drastic results quickly," he said.

The strengthening dollar has added to the pain, said Tom Wegner, the director of dairy economics at Land O' Lakes, the Arden Hills-based producer of butter, cheese, sour cream, milk and other products.

Some 10 percent of U.S. dairy production went to exports last year. That might be 5 percent this year, he said, as overseas buyers back away from the suddenly more expensive U.S. dairy products.

"The big tail of the financial and credit and housing crisis is spreading out across the globe," said Wegner. "The U.S. economy has to get rolling first. As that rolls, we'd have to see the national economy come back," he added.

Some farms won't survive

The retail and export picture means some farms won't survive this year, said several dairy industry experts. Feed costs are still higher than usual, despite being lower than last summer's record highs, and the sudden drop in the price of milk means that a key economic ratio for dairy farmers, that of feed costs to milk prices, is at its worst since at least 1993, according to the Dairy Profit Weekly, a trade newsletter.

The outlook for farms may brighten near the end of the year, but only because some farms will collapse, said Neil Broadwater, an extension educator with the University of Minnesota Extension Service.

Milk now sells for below the cost of production, which for Minnesota dairy farmers has hovered between $12.77 and $15.74 per hundredweight, according to FINBIN, a University of Minnesota agriculture economics database.

Those prices look even worse compared with what preceded them. The average price paid to farmers was $18.04 per hundredweight in 2007; in 2008 it was $17.44, according to Broadwater.

"Those two years were the highest average price since, well, forever," he said.

"It's ugly," said Pat Lunemann, president of the Minnesota Milk Producers Association. Lunemann, who runs a 500-cow dairy farm near Alexandria, predicted farm closures by this summer if prices don't rebound in time.

"There's so much uncertainty in our market just like there is in everything else right now. So much hinges on are people going to eat out at a restaurant? Will they go out or will they buy something else?"

"There's a very high percentage of producers right now who are having friendly talks with their bankers," he said.

Matt McKinney • 612-673-7329