UPDATED: Dairy farmers say farm closures are continuing to rise

Issue Date: August 22, 2012
By Ching Lee

UPDATE posted Aug. 22
The California Department of Food and Agriculture has denied a request for an emergency hearing to consider temporarily raising the price of milk paid to California dairy farmers and other changes to the state milk pricing formula. 

Citing the financial plight of dairy farmers and current escalating feed prices, Western United Dairymen petitioned the hearing earlier this month (see story below).

The latest petition asked the department to consider increasing the price of all five classes of milk by 50 cents per hundredweight for six months, beginning in October. WUD also asked the department to reconsider the organization's earlier proposal to permanently replace the current whey factor scale with one that caps values at $4 per cwt. instead of the current 75 cents. This time, WUD proposed a dry whey credit for cheese manufacturing plants that would exempt from the whey component the first 100,000 pounds of bulk milk processed daily.

After a hearing this spring, CDFA raised the cap on the Class 4b formula for dry whey by 10 cents—from 65 cents per cwt. to 75 cents, while keeping the floor at 25 cents. The new rate became effective this month.

In declining the latest WUD petition, CDFA said, "Current fluctuating feed costs and milk prices combined with the short period of time since our last decision makes it premature to convene a hearing at this time."

On the dry whey credit proposal, CDFA said the Food and Agriculture Code "does not provide for implementation" of such a credit. The department also said the WUD proposal to replace the whey factor sliding scale was already considered and rejected recently, and that "circumstances have not altered to the extent that requires reconsideration."

Kings County dairy farmer Joaquin Contente visits the auction yard every week to meet with fellow producers and share their perspectives. But these days he's finding that more are there to sell their entire herds because they're closing their dairies.

"What's going on down here is a wipeout," he said. "We're seeing about half of these facilities that have been around for a long time—dairy families that have been going from generation to generation—either going or they're gone already."

The explosion in feed costs, now made worse by the Midwestern drought that has ravaged corn and soybean crops, has taken a huge toll on the state's dairy farms, many of which were already in poor financial health as a result of the economic downturn that pummeled milk prices in 2009, said Michael Marsh, CEO of Western United Dairymen.

While there are no official numbers yet on dairy losses for 2012, Marsh said the anecdotal information he is hearing paints a bleak picture. Since 2008, the state has lost 283 dairies, with 1,668 remaining as of 2011, according to the California Department of Food and Agriculture.

"Unfortunately, we're probably getting close to a tipping point where the infrastructure of the producer community could be compromised," Marsh said.

Just in recent days, Contente said he learned of at least 16 dairies within five miles of his operation in Hanford that have shuttered their doors or are in the process of doing so. He noted that while a good portion of those dairies were "at the end of their financial rope," others calling it quits are just fed up with the business and want to get out before they lose all of their equity.

"They don't see any light at the end of the tunnel, and I don't blame them," Contente said.

He pointed to all the ancillary businesses that will be affected by the dairy closures, including other farmers who grow feed, other feed suppliers, processing facilities, veterinarians, trucking companies and people who sell and repair equipment.

"It's a ripple effect throughout the communities here," Marsh said. "And here in the Central Valley, where some of the counties have unemployment as high as 20 percent, it's not a good time, for sure."

Bruce Miles, a partner with Genske, Mulder & Co. in Costa Mesa, which does the accounting for about 13 percent of the nation's milk, said in the last year or two, he has seen about 10 percent of the firm's dairy clients sell out, while another 20 percent to 30 percent have filed for bankruptcy with the intention of restructuring their businesses in hopes of hanging on to them. Those cases will take a court's approval and the dairies will need to show they have a viable business plan, he said—and in today's market, with corn prices escalating, "it's about a 50-50 shot now" that those dairies will come out of bankruptcy.

Reis Soares, a dairy farmer in Madera County, said she has already used up her equity on the loan she borrowed in 2009, of which she has so far paid back only 6 percent on the principal. Now, with another year "where everything is upside down," she said, she no longer has the same financial avenues available to her. She said she keeps a steady payment going to the bank so it won't call her note, but that means not paying other people.

She said she has contacted a bankruptcy attorney to learn about options for dairy farmers.

"That might be our new way of surviving," she said. "We may have to learn another format of our business—the proper way of filing bankruptcy—because it's going to be a normal thing now; it's going to be part of doing business."

Miles said if a dairy has been assigned to special assets, meaning the bank wants to collect on the loan and end its relationship with the borrower, then the farmer will have no choice but to file for bankruptcy.

"Obviously, the dairymen need a higher milk price at this point," he said. "They're not going to get any help from the banks anymore, and the government is not really coming in, so somebody needs to push a higher milk price through so the industry can survive."

Western United Dairymen filed a petition earlier this month asking CDFA for an emergency hearing to consider a temporary price increase of 50 cents across all classes of milk and to reconsider permanent changes to the valuation of whey in the state's current pricing formula. CDFA is expected to grant or deny the hearing this week.

Meanwhile, the market is starting to respond with higher milk prices. Some Midwestern dairy herds have been liquidated due to the drought and lack of feed, Marsh noted. Coupled with recent high temperatures in California that slowed milk production, the nation's milk supply has dropped. Dairy exports also are still doing very well, he said, with more product being moved overseas at higher values.

Leslie "Bees" Butler, a dairy economist at the University of California, Davis, said higher milk prices will definitely help the state's troubled dairies, but he also warned that there's a limit to how high prices can go before the market sours.

"Export markets are inherently volatile. Back in 2009, we lost a lot of our markets because our prices were too high," he said.

Dairy groups are also urging Congress to pass some sort of emergency disaster relief package to help dairy farmers, said Lynne McBride, executive director of the California Dairy Campaign. Although a bill to aid drought-stricken livestock producers passed the House before Congress went on recess, the measure has not been approved by the Senate and does not address the issue of soaring feed prices that dairy farmers face.

"I'm not saying that Congress could pass something that's going to save these operations, but I think any sort of relief or resources at this point are welcome," she said.

(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.