Story on current state of affairs for dairy farmers.
REALITY CHECK: US DAIRY OFFLS: PRODUCTION-LED PRICE
PLUNGE
--Composite Dairy Prices Down 34% in May from Dec's Record Highs --But Price Breaks to Consumers Modest at Best
By Gary Rosenberger
NEW YORK (MktNews) - U.S. dairy industry officials say milk commodity prices have retreated dramatically from historic highs, and farmers say they're again suffering financial stress while consumers get little benefit.
With the exception of milk, the steep decreases in commodity cheese, butter and other dairy products have yet to reach supermarkets and consumers, one retailing official says.
Back in December, prices for dairy products soared to uncharted highs as El Nino rains cut dairy production amid growing consumer demand for high butter-fat products, dairy industry officials say. The then prohibitive cost of butter-fat (a major component of premium ice cream and cheese) forced temporary shutdowns of several ice cream plants and pushed up retail prices for a host of dairy products.
But since then wholesale prices plunged as dairy producers reacted to the price windfall by revving up production -- setting the stage for the ongoing price declines, they add.
Price volatility was compounded, then and now, by the termination of federal government price supports and stockpiling, they add.
The basic price on a composite of dairy goods fell to $11.26 per hundredweight in May from above $17.00 in December, more than a 34% drop, according to Hoard's Dairyman, an industry trade publication.
Butter prices fell even more steeply, to around $1.50 a pound last week from around $2.80 a pound late in the third quarter, about a 47% decline from that historic high, the publication said.
Commodity cheese also fell back to below $1.30 a pound in June from the historic highs of $1.90 a pound in December, about a 33% drop, Hoard's Dairyman said.
Andrew Carrano, a spokesman for The Great Atlantic & Pacific Tea Co. (A&P) based in Montvale, New Jersey, said consumers have seen "moderate" declines in the price of milk that were passed along as wholesale prices dropped.
He added that the amount of price cutting for milk at the retail level varied by location.
"We have not seen a decline in cheese, premium ice cream or any other related products with butter fat," he said, noting that those items have yet to be discounted by distributors.
Ronald Wood, a Pennsylvania-based dairy farmer, said the recent sharp price declines at the producer level have put small dairy farmers in financial trouble.
He complained that he saw no corresponding price drops at his local supermarket.
"That tells me someone in the middle is making a good profit and the consumer isn't seeing it," said Wood, who manages the Gor-Wood-D Holsteins farm in Mansfield.
He stated that farmers saw the biggest monthly drop in milk check income in memory this spring.
"It's very disheartening," he said. "I've been managing this farm for 30 years and the last three years are the worst I experienced in my life. I can tell you that the prices we saw November to March saved a lot of family farms."
He noted that farmers used the price spike to "pay their bills from the year before and make improvements on their farms -- it's not like we made a killing."
"Everything got healthy -- cattle prices went up, local carpenters got jobs, it enhanced the whole economy down to the local shoe store," Wood said.
Wood said small dairy farmers are being hurt disproportionately because they can't garner the cost-efficiencies that large-scale producers can demand from suppliers.
He also observed problems with the unskilled labor market, noting farms can't compete with businesses that pay "$7 or $8 an hour."
Richard Keene, president of Holstein Association USA, also described a bleak outlook for the small dairy farmer.
Keene's Gilbertville, N.Y., dairy burned down two years ago, and he chose to retire rather than to rebuild it.
"The average New York dairy farmer has 40 to 50 cows and can't compete with the average California dairy that has more than 1,000 milking cows," Keene said.
But the latest turn of events is part and parcel of the farm economy and its volatile ways, according to an official for a dairy association.
"We never did expect those record prices to be sustained," said Peter Vitaliano, vice president of international trade, economics and market research at the National Milk Producers Federation.
"We've returned to a more normal pricing system and a more normal supply-demand balance with a tendency toward more surplus production," Vitaliano said.
The reason for the price drop was nearly 100,000 commercial dairy farmers independently revving up production in response to last winter's price windfall, he said.
He projected that current prices are likely to retreat further.
"When people are getting record prices, the natural tendency is to produce more -- and the additional supply tends to bring prices from a higher-than-normal level to a lower-than-normal level," he said.
"The U.S. has no system to coordinate supply, and farmers making independent production decisions tend to overshoot the mark," he said.
Vitaliano added that in times of low commodity prices, farmers tend to cut back production too sharply, which quickly raises market prices -- tripping the classic cycle of vicious price volatility.
In summer, a seasonal component enters the picture to usually drive up fresh cream and butter prices -- namely the ice cream season -- but its impact this year should be minimal, he said.
"With the ice cream season coming on, it usually drives up demand for fresh cream," Vitaliano said, noting that ice cream and butter producers compete for the same supply of cream.
This year, however, overproduction of milk means more than adequate supplies to meet the seasonal increase in demand -- and no cost-push on ice cream is expected, he said.
"Production is way up, about 4% -- commercial demand does not grow by 4%," he said.
"There are no signs of any product in shortage -- there is an adequate milk supply," Vitaliano said. "If anything, farmers are worried about the opposite situation -- too much milk around."
Vitaliano said anecdotal evidence is growing of trouble on the farm with "member farm cooperatives feeling the start of a pinch from lower prices."
"With the extra supply expected to lower prices, producers will find themselves financially stressed again," Vitaliano said. "We feel we're definitely headed for that kind of year."
© 1999 Market News International, Inc. |
