Ten months into the worst dairy crisis in memory, Justin Gioletti hopes to tough it out.
Employees keep milking the 1,800 cows on his family's farm twice a day, even though every gallon goes out at a loss.
Prices that farmers get for their milk have finally started to head back up, but they still fall short of production costs.
"I think we're going to make it through, but there's some serious damage here and it will take a while to get back," said Gioletti, 34, a fourth-generation producer west of Turlock.
The state's dairy farmers have been cutting expenses and borrowing money to survive the crisis, brought on by a sudden drop in global demand as the recession took hold last year.
They lost an average of $85 per cow per month in the first six months of the year, according to the California Department of Food and Agriculture. For a 700-cow farm, roughly the average in Stanislaus County, that's $59,500 a month.
Farmers are counting on a somewhat stronger 2010 thanks to an uptick in demand and a drop in supply — the latter resulting in part from farmers going out of business.
Dairy will likely remain the No. 1 farm sector in the Northern San Joaquin Valley and statewide, but it will be a wounded giant for a while at least.
"Dairymen have really leveraged themselves over the last year just to stay in business, so there's a big hole to fill in," said Ray Souza, a Turlock-area farmer and president of Western United Dairymen.
Group says 10% to be gone
The Modesto-based group estimates that the crisis will force out 10 percent of the state's dairy farmers. Some of them already have sold their cows to the beef market through a national program aimed at shrinking the oversupply of milk.
The federal government has tried to help by increasing export subsidies and dairy purchases for school lunch and other nutrition programs. It will soon send $290 million in direct aid to farmers, which Souza said will help with short-term costs, mainly on small farms in the East.
The U.S. Department of Agriculture on Tuesday projected a continued rise in milk prices toward the break-even point in 2010.
Meanwhile, farmers try to hang on, keeping herds intact even at a loss so they can take advantage of higher prices later.
"There are not many businesses where people do back-breaking labor seven days a week and come out financially worse for their trouble," said Sen. Kirsten Gillibrand, D-N.Y., at a hearing on the issue last month.
Exports might help
Industry people say export markets are promising, thanks in part to promotion efforts. The Modesto-based California Milk Advisory Board has sponsored trade missions to China and put on pizza seminars for chefs around Asia.
"It's a supply-and-demand thing," Gioletti said, "and I think more focus should be placed on developing new markets."
A year and a half ago, milk prices were riding high, thanks to strong global demand and drought in Australia's dairy regions.
The average California cow brought a $28 monthly profit to its owner in the second quarter of 2008, the state Department of Food and Agriculture said.
Farmers boosted their output to take advantage of the prices, but this contributed to the surplus when demand dropped late in the year.
They got an average of $1.48 per gallon over all of 2008. In the first half of this year, they got 97 cents.
"I've talked to some guys who have been in the business a long time, and they have never seen anything this drastic," Gioletti said.
Some farmers have advantages that help them endure the low prices: Strong relationships with lenders and enough equity to borrow against. Plenty of land to grow feed so they do not have to purchase much of it. Ventures into other kinds of farming, such as the Giolettis' almond orchard.
But overall, dairy farmers are subject to the whims of the agricultural economy, especially feed prices. The ethanol boom of recent years increased demand for corn. Drought in California reduced the supply of alfalfa.
Souza said that even in the recent years of high milk prices, the production costs rose, too.
Feed is the biggest cost by far, but it's hard to reduce without endangering the cows' long-term productivity, said Mich Etchebarne, a private animal nutritionist in Modesto.
Dairy people had hoped that milk prices would rebound by June, but that didn't happen, said Etchebarne, president of the Stanislaus County Farm Bureau.
"It's been a really incredible strain on all of us," he said. "The last 10 months have not been 'how do we make a profit?' It's 'how do we minimize our losses?' "
Processors also affected
The year has been tough as well on dairy processors, said Bill Schiek, an economist with the Dairy Institute of California, which looks out for the industry's interests. Sluggish demand has forced marketers to discount prices for dairy products, he said.
Farm milk prices have started to rise in part because of the usual increase in consumer demand at Thanksgiving and Christmas, Schiek said.
Demand also is starting to perk up at recession-battered restaurants, which are key buyers of cheese and butter.
The weak dollar has kept U.S. dairy products cheap for foreign buyers. These include nonfat dry milk left over from butter processing and whey from cheese plants — both of which end up in many foods.
Faced with the boom-and-bust cycles, dairy industry representatives have talked about revamping the complex systems for setting farm milk prices at the state and federal levels.
It is a delicate subject because processors need an affordable price for the raw milk they turn into cheese, ice cream and other products.
"We can't simply set a price and say, 'Take it or leave it,' because we can't compete in the global market that way," Schiek said.
Gioletti, whose milk is made into butter and powder at a California Dairies plant, said he is hoping for recovery by middle or late 2010.
As he walked through his milking barn and out to the stalls where the cows eat, he looked out even farther.
"I have two young kids and one on the way," he said, "and hopefully they'll grow up to do this, too."