Farmers cope as milk prices decrease


Issue Date: January 28, 2015
By Ching Lee
Stanislaus County dairy farmer Ray Souza stands next to a bale of alfalfa hay at his dairy in Turlock. With milk prices falling, the high cost of hay, silage and other forages remains a big concern for California dairy farmers.
Photo/Ching Lee
Stanislaus County dairy farmer Ray Souza takes notes as he walks through his dairy.
Photo/Ching Lee

After earning record-high milk prices last year, California dairy farmers say they've been preparing for the inevitable: a period of falling prices as the market adjusts to weakening export demand and a growing U.S. milk supply.

The cyclical market pattern is a familiar one to dairy farmers, who've endured years of roller-coaster pricing and a catastrophic price collapse in 2009 from which many are still trying to recover.

Unlike the downturn of 2009, when low milk prices were made worse by soaring feed costs, record U.S. production of corn and soybeans last year has softened those markets. Months of higher milk prices have also improved cash flow for many of the state's dairies.

But this time, "the biggest cloud hanging over California's dairy industry" is the continuing drought, said Tulare County dairy farmer Joey Airoso.

"Dairymen in the San Joaquin Valley, particularly the southern part of it, probably didn't enjoy quite as great of a year (in 2014) as the people in the Midwest and the rest of the country because of the drought," he said, noting the added costs of pumping water and maintaining wells.

Hay and silage prices also remain high, as water shortages reduce production of forage crops. Airoso, who normally grows all of his own silage and hay, said he was forced to idle 18 percent of his ground last year due to a lack of water. Unless the weather outlook changes, he said, he expects more land will be fallowed this year, forcing him to buy high-cost forage.

Concerns about drought have also changed dairy farmers' mentality, said Ray Souza, a dairy farmer in Stanislaus County.

"Dairymen have been very cautious," he said. "They've been very conservative, even though prices were strong."

Joel Karlin, a market analyst for Western Milling in Goshen, said he thinks California dairy farmers learned valuable lessons from 2009 and are now better prepared. Rather than buying more cows and increasing production, they've been trying to rebuild their equity and keep their expenditures low. A number of them, with prodding of their banks, decided to exit the business, he added.

After experiencing the price crash of 2009, San Diego County dairy farmer Dave Van Ommering said his strategy has been to "stay a steady course": saving his earnings and keeping his production costs down.

"We knew this was coming," Van Ommering said of declining milk prices. "You can't do the expansion when times are good; you have to pay for the bad times."

Milk prices began their descent after peaking in October at more than $26 per hundredweight—an all-time high—for Class 1 milk. The February Class 1 price is $17.08 for Northern California and $17.36 for Southern California.

Karlin said record farmgate prices and lower-cost feed had led dairies in other states and countries to rapidly expand milk production. Meanwhile, U.S. dairy exports to China—which has become a huge market—have declined precipitously the last few months, as the country's own milk production recovered and its economy slowed, he added. Russia's ban on European imports has also left more dairy products to back up in the world market, depressing global prices, he said.

Lower milk prices, Karlin said, will likely persist at least through the first half of this year, as it will take some time for dairy farmers to respond by slowing production, moving to cheaper feed and culling cows.

One silver lining is that the beef market remains strong, allowing dairy farmers to sell their cull cows at higher prices, Souza said. Cheaper fuel has also helped, he added.

"We're still going to be in a negative cash-flow situation, but it's not going to be as dramatic as it was (in 2009), and hopefully it won't last as long," he said.

What's unclear is how well the new Dairy Margin Protection Program will help California producers during this downturn. A feature of the new farm bill, the voluntary program provides financial assistance to producers when the difference between their milk price and feed costs falls below the coverage level they have selected.

Sixty-nine percent of the state's dairy operations enrolled in the program, according to the U.S. Department of Agriculture. Of that total, 35 percent also bought higher levels of coverage beyond the free, basic margin coverage of $4 per cwt. Nationally, 50.4 percent of dairies signed up for the program.

Karlin said while enrollment in the state was high, he's unsure how effective the program will be at protecting California producers, as the majority of them signed up only for the minimum coverage, which is "like putting on your life jacket when you're already in the water."

He said producers should be using more risk-management tools, such as taking advantage of the forward contracts that were being offered by cooperatives and creameries when milk prices were high, and doing exchange-traded options and futures. He said while more producers are now forward-contracting their feed, they seem less willing to do so on their milk.

Rob Van Ommering, who partners with his brother Dave, said he bought up to the $5 per cwt. margin level on the government program but acknowledged he does not use any other risk-management strategies such as forward-contracting.

"In talking to our accountant, his experience with clients who did (risk management) was: Not many of them came out ahead," he said.

Because he and his brother run a small dairy—one of only three left in San Diego County—Van Ommering said they have opted instead to diversify their operation, such as through agritourism, and are also trying to build a small cheese plant, a move that he said would help to stabilize the price they earn for their milk.

(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.