Lower milk prices take the happy out of new year for some

The new year has just begun, but second-generation dairy operator Rob Fletcher is not in a celebrating mood.

Milk prices for farmers have plunged as a once-hot export market has cooled, milk consumption is sluggish and production costs continue to eat away at profits.

"I would feel OK if I could see the light at the end of tunnel," said Fletcher, who runs a 680-cow dairy in Tulare. "But at this point, we just don't see it -- at least not for the next 10 months." Dairy farmers have watched prices for their milk plummet in the last six months, down from about $20 for every 100 pounds to about half that recently. The overall cost to produce milk in California is estimated at $19 per 100 pounds.

"If you are making milk and selling it at $10, you are hemorrhaging cash," said Michael Marsh, CEO of the 1,100-member, Modesto-based Western United Dairymen.

Marsh said the current crisis could wipe out at least 10 percent of the state's 1,750 dairy operations, maybe more.

The last time the industry struggled was in 2006 when milk prices also plunged and California farmers -- the nation's leading milk producers -- lost thousands of cows to a devastating heat wave. But a worldwide demand for milk products in 2007, especially powdered milk, helped pull dairy farmers out of that slump.

A weak dollar and a drought in Australia, a major dairy exporter, also made U.S. milk an attractive alternative, said Leslie Butler, an agricultural economist for the University of California at Davis.

"The export market was booming, literally booming, expanding by 30 percent to 40 percent," Butler said. "But all of a sudden that market has dried up." The drought in Australia is over, the U.S. dollar has grown stronger and a global recession has clipped demand.

In the United States, while the consumption of butter and cheese remains relatively constant, the demand for milk continues to drop, Butler said.

"And it's not like we are talking huge percentage points. But it does not take a lot to change dairy prices," Butler said.

The result is too much milk for the market to handle. To help ease the glut, the federal government -- through its price-support program -- has agreed to buy about $100 million worth of milk powder that will be sold, donated or blended into other products.

The government got rid of its last price-support stockpile in 2006, having moved more than 1 billion pounds of milk products from 2002 through 2005, said Steve Gill, director of commodity operations for the U.S. Department of Agriculture.

How long the government will buy excess milk powder this time around remains to be seen.

"Depending on who you talk to, this may continue for a while or the market will work its way out of this," Gill said.

Marsh and dairy operators are not optimistic about the short term.

And their options for managing the crisis are becoming more limited.

Ray Souza, a Turlock dairy operator, said dairies are trying to trim their costs and increase their efficiency as much as possible without seriously crimping milk production.

And some dairy operators are strapped for cash or are in debt.

"Right now, people are having to go to the bank just to pay their hired help," Souza said. "We have been through these kinds of things before, but this one may take us a while to recover from." In the past, dairies have sold portions of their herds to the beef industry or to other farmers. But prices in those markets also are low. And dairy operators are reluctant to sell off cows that they may need when the market rebounds.

"Right now, we are kind of stuck," said Domenic Carinalli, a dairy farmer in Sonoma County. Carinalli, a second-generation dairy operator, was expecting to continue to operate for many more years. He took over from his father in the 1960s.

"I really wasn't in a hurry to make a decision about my future," Carinalli said. "I love this industry. I have been in it my entire life. But when you look at what is going on, you have second thoughts."