Dairy farms are getting hammered. Earlier this year, milk prices dipped to their lowest level since 1975 -- and we're not talking adjusted for inflation here. There's been a modest recovery recently, but the price is still hovering just over $11 per hundredweight, and it costs the average New England farm about $17 to produce it.
By way of conversion, there are about 12 gallons in a hundredweight of milk. So farmers are being paid about 92 cents per gallon and it costs about $1.42 to produce it. For several months this spring, the price was $9 per hundredweight, or just 75 cents per gallon.
There are very few ways that the cost of production can be reduced. The cost of fuel, fertilizer, imported feed, labor, taxes, insurance, and land are pretty much beyond the control of the farmer. Although he can choose to manage differently to avoid buying so much of some of those items, if you're going to produce milk on a commercial scale in the Northeast, you will have to buy or lease some of each of those items.
What this means in very real terms for dairy farmers is that they have exactly three choices. They can live off their equity -- which means emptying savings accounts, retirement plans, selling land and cattle; they can borrow against their equity, which means mortgaging land, buildings, and cattle in hopes that they'll be able to pay off the debt in better times ahead; or they can go out of business while they still have a little bit of equity left. Remember that when a business runs out of cash, it is done, and farms are businesses.
In past times of low milk prices, production in high cost areas like New England has declined, and it has shifted to low-cost areas like the Central Valley of California. When prices dipped a little bit, the small farms of the Northeast would sell cows, and the big farms (and we're talking tens of thousands of cows big) would add cows. But milking more cows when the price of milk is less than the cost of production -- even where the cost of production is very low -- is not a reasonable way forward.
Meanwhile, Dean Foods, a publicly traded milk company that controls about 70 percent of the milk market in the Northeast, recently reported a 69 percent increase in quarterly earnings and stated that the primary reason for its increase in profitability was the low farm gate price of milk. In other words, it was paying less for the material it sells, so it was making more money.
Now, I don't know how Dean Foods executives are compensated, but I'm sniffing the same sort of quarterly earnings race that brought down the banking industry. How much sense does it make for a company like Dean Foods to kill its suppliers in order to make a profit this quarter? Dean Foods is obviously playing the same game that Wall Street did -- counting on the fact that the US taxpayer is not going to allow the dairy industry to fail.
Fortunately, it looks like the USDA and Justice Department are going to get ahead of the curve and start looking at monopolistic practices in three ag industries: seed sales, beef packing, and dairy distribution. Perhaps this time, an ounce of prevention will save the taxpayers from a billion pounds of cure. Let's just hope that there are dairy farms left by the time they get it done.
Here's a story about it from National Public Radio.