Milk glut, low prices push Utah dairy farmers to brink

A steep, prolonged decline in prices they're paid for their milk is forcing dairy farmers from Utah to Pennsylvania to send herds to slaughter or put up land and equipment as collateral to hang on in an industry teetering on financial collapse.

But even as farmers get far less for their milk than it costs to produce it, consumers at checkout stands aren't seeing the full benefits of the price disparities. Though there are milk bargains to be had, overall prices for dairy products increased 9 percent in the past year, and the average price nationally for a gallon of milk at grocery stores last month was down just 19 percent from its peak of $3.83 last July.

The global financial meltdown has cut the price U.S. dairy farmers are paid for their milk by 50 percent since last summer, wiping out profits and splattering red ink on balance sheets. The National Milk Producers Federation, a trade organization, has warned in a letter to President Barack Obama that the industry "is on the brink."

Dairy farmers, faced with too much milk, too many cows and spending more to maintain their herds than they're making on raw milk, are selling cows for hamburger meat.

In Ephraim, Steve Frischknecht sent 130 cows to slaughter in January, taking out his entire herd. He is tending some calves and heifers that he hopes to sell to other farmers, and he'll continue to grow alfalfa and grain crops, "but I doubt I'll ever go back into the dairy business."

Frischknecht took advantage of a voluntary program set up by dairy farmers who pay 10 cents per 100 pounds of milk into a fund to reduce the number of cows when a surplus drives down the price of milk. The program, operated by the Virginia-based Cooperative Working Together, will send 103,000 milk cows to slaughter over the next several months, including 38,000 dairy cattle in the West, or about 37 percent of slaughtered cows.

But that's only one fix for a problem that has many causes and few solutions. A couple of years ago, world demand for milk products went up and U.S. dairies responded to low global supplies by increasing production. Then the worldwide recession hit, slowing international demand and prompting Americans to spend less on everything from cheese pizzas to coffee lattes. And unlike grain farmers who can store crops to hold out for better prices, dairy farmers have to sell raw milk to processors or it spoils. And their cows just keep on producing.

"Dairy farmers are over a barrel," said Frischknecht. "We can either sell it or smell it."

Even as prices have collapsed, there's been only a gradual decline in the retail cost of bottled milk, said Chris Galen, with the National Milk Producers

Federation. Traditionally, consumers are hit with cost increases from the farm a lot faster than with discounts when food prices go down.

Camilla Hyde of Syracuse said that only recently has she seen ads for milk at 3 gallons for $5, bargains she needs because she is feeding four children, ages 1 to 8.

"I didn't know that farmers were having such a hard time," she added. "But we're all trying to pay our mortgages and keep up on our bills."

Though the volatility surrounding milk prices has existed for years, alternately squeezing the profits of farmers and processors, today farmers say they are getting less for their milk than their fathers did in the 1970s, while middlemen processors who buy the milk from the dairies are selling it to grocery stores at higher prices.

Milk processors and supermarkets see it differently.

Last year, processors and grocers swallowed losses because of high wholesale milk prices and government-imposed ceilings on what they could charge. They're now recouping some of what they lost, said Mike Nosewicz, vice president of dairy operations at Kroger Co., which operates its own dairy processing division and sells milk through 2,400 supermarkets, including the Utah-based chain of Smith's Food & Drug.

As that debate raged, in May Lynn and Jay Hardy in Box Elder County were sending 240 milk cows to slaughter. Lynn Hardy, 64, said he would rather slaughter his herd "than lose money feeding them." The two have five sons between them, but neither has encouraged any of them to go into farming.

"As more people get out of the business, who is going to feed the American people?" he asked. "We'll be importing food -- just like we're importing oil."

Ogden farmer Kerry Gibson said dairies are burning through equity to stay in business. But credit is drying up and banks that once valued dairy cattle at $2,000 a head are saying a cow is worth only $800. Cost-cutting can save a few thousand dollars here and there, but his farm is losing tens of thousands of dollars more each month.

"I'm worried that people who have never had to concern themselves about where their next meal is coming from won't see a connection," said Gibson, a state representative and fifth-generation farmer.

For the past several years, dairy farmers have been expanding their herds to meet a world demand for protein. Last year, U.S. dairy exports jumped to $3.82 billion, or 11 percent of all milk production in 2008, according to the U.S. Dairy Council. But the recession took care of that.

"The price for milk is the worst I've seen in at least 25 years," said Karen Koncar, executive director of the Dairy Council of Utah.

The price farmers are paid is set by the US. Department of Agriculture, based on world commodity markets that rise and fall with global demand.

Utah farmers in May were paid $11.40 per 100 pounds for milk, up 20 cents from April but down a whopping $7.10 from May 2008, according to the National Agricultural Statistics Service. Farmers generally need at least $16, and often more, per 100 pounds to break even, depending on their debt, feed requirements and other factors. (Although consumers purchase milk by the gallon, the industry measures by pounds.)

Some of the nation's 57,000 dairy farmers are lobbying for a bill that would change the milk pricing system so that wholesale prices reflect what they pay for feed, fuel and other supplies. If that happens, milk would be the only commodity to have a government-set price based on the cost of production.

But U.S. Secretary of Agriculture Tom Vilsack does not support redoing the milk pricing system. Instead, the USDA recently donated 500,000 pounds of excess powered milk to needy countries to help reduce U.S. milk supplies. Last week, the USDA said it would provide subsidies to export up to an additional 150 million pounds of nonfat dry milk, 46 million pounds of butterfat and 6 million pounds of cheese to help dry up the surplus.

Collectively, U.S. farmers need to slash milk production by about 5 percent to bring supplies in balance with demand.

A study by the trade group Packaging Machinery Manufacturers Institute, released last Wednesday, predicted that price fluctuations probably would intensify in coming years. In addition, dairy production is expected to shift to the West Coast, with industry consolidation creating a greater number of mega-dairies.

dawn@sltrib.com

The Associated Press and Los Angeles Times contributed to this story