Angry dairy farmers struggle with crashing milk prices

Consumers have been enjoying the lowest supermarket prices for milk in years, but dairy farmers are so frustrated that some have urged their colleagues to pour out millions of gallons of their product.

Plans floated by a group of California dairies to dump the milk from 2 million cows last weekend fizzled. But there's growing support in the milk business for strong intervention to calm the industry's increasingly steep cycles of boom and bust.

"Each wreck has gotten more violent," said Geoffrey Vanden Heuvel, a Chino-area dairyman and vice president of the Milk Producers Council, a farmers group.

A run of high prices in 2007 and much of 2008 set up today's crash. For a while, a booming export market guzzled all the milk America's cows could make. Farmers expanded, swelling the national dairy herd to 9.3 million cows and yielding a record 22 billion gallons of milk in 2008.

When the economy faltered, though, so did dairy demand. Overseas markets for milk powder dried up. Pizza chains bought less mozzarella.

U.S. consumers are drinking slightly more milk than a year ago, but it hasn't been enough to offset the slowdown in other products. A record 914 million pounds of cheese filled the nation's cold storage warehouses at the end of April.

The nation's cows, meanwhile, kept making milk. Oversupply drove the California farm price of bottling milk down 35 percent in one month. Since February, California dairies have been losing 50 cents or more on every gallon of milk they produce, according to state figures.

Wholesale milk prices in California are tied more closely to commodity markets than prices elsewhere in the nation, so dairy farmers here were the first hit by the collapse.

The dairy industry is by far the biggest agricultural sector in the state, with farm sales last year of roughly $7 billion.

Milk prices are only a few pennies a gallon lower than in 2006. But the cost of corn and hay for feed – a dairy's biggest expense – has gone up substantially since then, making the current crash more painful.

"I've seen the ups and downs, but I've never seen it like this," said George Simoes, 57, a second-generation dairy farmer south of Elk Grove.

Some say consolidation in the industry in recent decades has made the market more volatile. Bigger farms tend to have the money and ambition to grow rapidly in good times.

National dairy groups and the federal government have tried to ease the current oversupply. A farmer-funded herd-reduction program launched this month is sending 103,000 dairy cows to slaughter. Most will become hamburger.

Many dairy processors are paying farmers a reduced amount for milk above a set volume. The U.S. Department of Agriculture has been buying large amounts of milk powder at taxpayer-supported prices since December. Last week, the agency said it would subsidize bulk exports of milk powder, butter and cheese.

So far, though, nothing's having much effect on prices.

The crisis is pushing the fractious dairy sector into discussions about ways to avert this sort of glut in the future.

One plan, pushed by Vanden Heuvel's group and others, would fine dairies that grew faster than a set rate – 2 percent or 3 percent annually – and give the proceeds to farms that grew less, or not at all.

"It can knock down the peaks and fill in the valleys" of the price cycle, said Mark Stephenson, a Cornell University dairy market expert.

Average retail prices for milk, in theory, would rise only slightly – a few cents a gallon – he said.

Stephenson said nothing like it has been tried for an ag giant like dairy.

For now, the odds of such a plan being adopted nationally appear low. Congress would likely have to approve it, and experts doubt the industry can reach and hold a consensus long enough to sustain a bill.

Many farmers don't want to handicap their long-term expansion plans, said Leslie Butler, a dairy economist at the University of California, Davis. Others worry that some farmers would cheat the system.

Furthermore, Butler said, California dairies tend to be among the most efficient and best-capitalized in the nation. That means they have a better chance to survive until prices rebound – and less incentive to push for change.

Simoes, who with his son and six employees milks about 500 cows, expects to outlast the downturn. He didn't expand and take on new debt in the last boom. And he has kept his herd small enough that he can grow 85 percent of the alfalfa and corn his cows eat, insulating him from feed-price swings.

Still, Simoes said he'd support a policy to level out the milk market's cycles.

"I'd be 100 percent for something like that," he said. "I don't want to grow."

And he doesn't like the strain yo-yo prices put on the industry.

"We're losing good dairymen, good folks that have been working in this business all their lives," he said.