USDA Economist Addresses Milk Pricing at Dairy Hearing

Steve Taylor
New England Correspondent

ST. ALBANS, Vt. — The top economist for the U.S. Department of Agriculture sees gradual improvement in the current dreary national farm milk price picture, with 2010 posting an all-milk price of around $15 a hundredweight.

Dr. Joseph Glauber heads up forecasting for USDA, but his assessment of what's happened in the dairy sector for a special hearing held last weekend by Vermont's U.S. Sens. Patrick Leahy and Bernie Sanders was a grim recitation of developments that have shaken the industry in the Northeast to its roots.

A panel of three dairy farmers and a cooperative economist followed Glauber's commentary with real-life observations of the economic and emotional devastation being visited on dairy farms everywhere and the feelings of desperation and betrayal that infect the entire producer community.

Dairy has been the hardest hit sector of U.S. agriculture this year, Glauber said, and it will be a long slow process getting the industry back to some semblance of stability.

Farm milk prices are at 1979 levels because of a perfect storm of negative developments over the past year, he said. Australia and New Zealand dairy output has rebounded sharply after bad weather curtailed production in 2006 and 2007; the global recession that set in in 2008 choked off demand for U.S. dairy exports and negatively impacted domestic consumption of milk, cheese and other dairy products; the European Union boosted subsidies to its dairy producers; and U.S. dairy operators were expanding milk output in response to favorable prices received in 2007 and 2008.

Glauber predicts 2010 will see a 1-percent decline in milk production in the U.S., and that the all-milk price for the year will be about $15, what he terms a "gradual improvement."

He ran through a list of things USDA has done to try to help the beleaguered dairy sector: expanded Farm Service Agency loan authorities; increased prices the Commodity Credit Corporation pays for non-fat dried milk and cheese as well as increasing the volume of purchases; boosted shipments overseas under foreign food aid programs; disbursed over $700 million in Milk Income Loss Contract (MILC) payments to producers so far this year; and reactivated dairy product export incentives.

Sen. Sanders asked Glauber if he thought the federal milk marketing system is broken, and Glauber pointed out that large volumes of milk are being marketed outside the federal milk marketing orders currently. A lot of very contentious changes were made to the marketing order system in 1996, but there are still areas that need revision today, he contended.

With support price authority set to expire next month, Sen. Leahy wondered what will happen if no action is taken to reauthorize and extend supports. Glauber stuck to his earlier prediction-"I believe prices will still rise."

The federal milk marketing order system needs reevaluation, agreed Bill Rowell, a dairyman from Vermont's Franklin County, but what is really needed is a "budget-neutral system to manage supply." Rowell's herd of 900 cows produces 23 million pounds of milk a year.

"No dairy farm in the United States is profitable right now. Fifty percent of the milk we're making we're making for nothing," Rowell said, adding later that if a way isn't found to manage supply the cycle of crisis after crisis is going to continue.

Paul Doton, operator of a 60-cow dairy in Vermont's Windsor County, gave graphic testimony about the hard times on his and other family dairy farms, and rued the fact that all the other players in the dairy supply chain make sure to cover their costs of production and make a profit on their investment.

Travis Forgues, an organic dairy operator in Grand Isle County, echoed Doton's comments, and argued that the Northeastern dairy industry as it's currently functioning is not sustainable.

"Farmers are bearing all the risk, and without reform the system will break. The moment is now. Farmers are being forced to produce a surplus. We must have supply management," he concluded.

Forgues is a director the Organic Valley Cooperative, which he said has recently imposed a seven percent production cutback on its members in order to align supply with demand and protect a pay price in the $27 range.

Bob Wellington, an economist with Agri-Mark, a dairy cooperative covering New England and New York, zeroed in on proposals that the wild swings in farm milk prices be managed through some type of farm revenue insurance.

"While this might help, one must keep in mind that insurance premiums are usually affordable because that what one is insuring against is rare. If one out of every 1,000 houses burns down each year, the premium rate can be low.

"However, if every house burned down every three years, the premiums would be huge and likely unaffordable. Milk prices have been burning down every three years for all farmers," Wellington said.

Federal order reform is needed to raise Class I differentials and floor those prices so that volatility in cheese markets doesn't produce volatility in the markets for fresh milk for drinking, Wellington said.

He, too, endorsed supply management.

"The U.S. produces about 190 billion pounds of milk. At $12 per cwt., that milk is worth $22.8 billion. If U.S. farmers produced five percent less, or 180.5 billion pounds, it is estimated their milk price would be $18 per cwt. That price would produce $32.5 billion even though less milk was sold.

"If you took the revenue difference and divided it by the extra milk produced you would get a value of minus-$102 for every surplus hundredweight produced.

"If farmer income was reduced by $102 per cwt.-which effectively is what has happened in the past year-for that five percent of their production, I am sure they would find a way not to produce or market it," Wellington concluded.

Asked for a show of hands in favor of a supply management approach to solving the milk price problem, nearly every hand in the audience of 200 went up. Asked for hands of those opposed, none went up.