2009-06-04 / Features

In Milk Downturn, Whole Farms Just Skim By In PA

By Dennis Larison

LANCASTER, Pa. (AP) - The world's got milk, and then some. And that oversupply has put Pennsylvania dairy farmers in a real squeeze.

Scott Kreider is getting far less for his milk this spring than what he needs for his family's dairy business to break even.

The break-even point for Kreider, who milks several hundred cows at his family's farm in East Drumore about 15 miles southeast of Lancaster, is $15.50 a hundredweight for Class III milk.

In January, the price took a big dive, Kreider said, bottoming out in February near $9.30 a hundredweight and recovering only slightly to about $10.45 in March and $10.75 a month later. The price is not expected to even approach his break-even point until next fall.

"We think dairying is fun. Being able to work outside with our family is fun, but it's not as much fun when you have to continue borrowing money to keep operating'' Kreider said.

"They tell us exports had a big effect on price,'' he said. Although his farm had exported cheese and many other products, "When the economy turned bad, a lot of exports went away.''

Jim Dunn, professor of agricultural economics at Pennsylvania State University, agrees that exports have had a big effect, noting that the price of milk has fallen about a third from what it was last year.

"We're sitting at support level, but that level of support is not very supportive. It's more of a Band-Aid than a treatment,'' Dunn said, referring to the price at which the government buys the milk oversupply.

Those low prices affect a lot of people. In Lancaster County, for example, nearly 110,000 dairy cows scattered across more than 1,900 farms produced about $387 million worth of milk in 2007, according to the latest agricultural census.

Much of that ends up on family tables in nearby metropolitan areas, but some of it is also exported in the form of cheese and dried milk products.

Although exports have had a big effect on price, they don't account for a large portion of U.S. milk production, peaking last year at just 4.3 percent of the total, Dunn said.

But that was during a time when the value of the U.S. dollar had dropped against foreign currencies, making American milk products more affordable than those from Australia, New Zealand and Argentina, this country's major competitors.

That 4.3 percent was a big jump from 2.9 percent in 2007 and more than double compared with previous years.

Then, last summer as the price of oil started to drop and the global economy turned sour, things began to change.

"The dollar is much stronger than it was not too long ago,'' Dunn said. "One of the effects of that is dairy exports dropped like a rock.''

That has created a big challenge for dairy farmers to stay afloat.

"There's only so much you can do,'' said Steve Hershey who, along with his brothers, owns about 275 dairy cows on a farm near Manheim, about 10 miles northwest of Lancaster and south of Lebanon.

"You start by cutting nonessential expenses,'' Hershey said, noting that the torn rubber matting on his milk parlor floor won't be replaced this year.

"You use up your cash reserves, if you have any,'' he said. "And you borrow money.''

If you have a spare tractor, you might sell it, Hershey added, or you might put some road frontage up for sale. In a worse case scenario, you might decide to sell out.

"This is a fifth-generation farm. It's been in the family 120, 130 years,'' Hershey said. "Say you sell the whole thing, take the cash and run. There's some emotional aspects of that that are not easy.''

While each farmer is searching for ways to cope with low milk prices, the long-term solution is a reduction in the overall supply of milk.

"The answer is always too much milk. The market can only absorb so much milk,'' Dunn said.

Production grew last year while the export market was good.

"It always grows a little bit,'' Dunn said, "but the population doesn't grow very fast, and (domestic) milk consumption per capita doesn't grow at all.''

Now that exports have dropped, prices will remain low until production drops too.

That has already begun to happen, according to the U.S. Department of Agriculture's Economic Research Service, which reported a drop of about 30,000 in the number of dairy cows nationwide between the fourth quarter of last year and the first quarter this year.

In that April outlook report, the USDA projected the nation's dairy herd would fall from 9.33 million cows at the end of last year to fewer than 9.04 million by the end of this year, with total milk production dropping from 190 billion pounds in 2008 to 187.8 billion pounds this year.

The drop in the number of cows means some farmers will be going out of business, while others will reduce the size of their herds.

"We've culled the more inefficient cows to make sure we're putting money in the ones that make the most milk,'' said Donald Risser, a farmer with about 700 dairy cows near Bainbridge, along the Susquehanna River about 15 miles southeast of Harrisburg.

"But we do that all the time, so there's no major adjustment there,'' Risser said. "I think what may happen, at least somewhat, is the farmer that is older and about to retire may be getting out earlier rather than waiting.''

What it will come down to, he said, is the higher cost producer will be the one forced out early.

Risser said he thinks central Pennsylvania farmers might have an advantage over dairy farmers in other parts of the country.

"We tend to raise more of our grain and forage rather than buying it,'' he said.

Although the cost of corn has dropped about in half from the record high prices of last summer, it is still higher than it was in previous years.

"We continue to make quite a bit of ethanol, and that's holding the price of corn up,'' Dunn said.

Although "the dairy industry is very clearly the hardest hit,'' high feed prices have affected other farm sectors besides dairy, said Gary Willier, agriculture services director for the Lancaster Chamber of Commerce & Industry.

"Actually, the hog cycle has been down for two years,'' said Brent Hershey, a hog producer that contracts with local farmers, and owner of Hershey Ag outside Marietta, about 10 miles northwest of Lancaster. "Everyone in the hog industry has just finished their sixth quarter of losses.''

The futures market for swine also took a big hit last week because of fears of a swine flu pandemic, and that has raised the prospect of further losses, he said, despite the fact that pork products have nothing to do with the flu's spread.

A much larger portion of the nation's hog production - about 20 percent last year - is exported compared to dairy, but the rising dollar hasn't affected hog prices as severely as it has dairy.

"The export demand is much more important for pork,'' Dunn said, "but it also can absorb more variation in product because we are always competitive. We are the low cost producer in the world.''

Hog producers' "problem is the feed prices,'' Dunn said. "Corn went from $2.50 per bushel to $8.50 and now back to $4.25, and the price of the market hogs didn't follow. They were losing $50 per hog last year.''

Despite the pressures facing local farmers, most dairy producers appear ready to ride out the low prices, said Jere High, general manager of the Lancaster Dairy Herd Information Association, a Manheim company that provides milk testing services for about 90 percent of the county's dairy farmers.

In this area, with its "strong family-knit farms,'' there's not been a drop off in herds, High said. Instead, he's been seeing growth in the local dairy industry.

Like other Americans in this economic downturn, local farmers are tightening their belts, he said, but they're still paying their bills and their checks haven't started to bounce.

Scott Kreider said he's optimistic about the prospects for his family's dairy farm to survive.

Input costs for fuel, fertilizer and feed have backed off a bit, he said, and he raises 65 to 70 percent of his own feed, including all his own forage.

Steve Hershey, on the other hand, said that although he's usually optimistic, this time around he's not.

Hershey said he thinks the projections for supply reduction and higher prices may be overblown.

"Somewhere in the process, the value of cows themselves dropped about $600 a cow in six months,'' he said.

He said that in places such as California, which have been hit harder than here, the banks are not letting the farmers sell out because most of the equity for their loans is in the cows.

Hershey said that makes him fear that supplies won't drop sufficiently until the price of cows rebounds.

Even if the supply does drop, he said, it might not last for long.

"One of the things that bothers me a great deal is there is so much young stock and empty facilities out there,'' he said.

As soon as the market recovers, that means the oversupply could quickly return.

Dunn, however, believes U.S. dairy farmers have an opportunity to increase their export market as the world's emerging economies grow.

Return to top