Producers may face many highs, lows

REGIONAL-The dairy industry is full of highs and lows.

But, much due to the global economic crisis, U.S. dairy product prices are slumped in a deep valley.

Yet, dairy producers and analysts remain hopeful for the future.

Dissecting prices
“Historically, the dairy industry would be described as a very volatile industry in terms of prices paid to dairy farmers for milk produced,” said Iowa State University Extension dairy field specialist Chris Mondak. “They move up and down radically, and sometimes without warning.”

Dairy producers are paid per hundredweight basis, rather than by gallon of milk, meaning every 100 pounds of milk sold, a producer will be paid.

Sometimes, the prices are at a healthy level, which would pay producers enough to cover their operation plus a little more. Usually, that price is in the $12-$13 range.

“The dairy industry is a supply and demand industry, so the price that the dairy producers receive depends on the market forces of supply and demand,” Mondak said. “Dairy producers are not price setters, they are price takers.”

Prices were at an all-time high last year due to factors ranging from an increased dairy demand in Europe and Asia, a decreased supply coming out of Australia, U.S. markets expanding globally and a good economy.

“On the flip side, we’re seeing a crash this year,” Mondak said. “We’ve gone from $18-$20 per hundredweight being paid to producers, to now about $10 per hundredweight.”

So, dairy producers are getting paid nowhere near their cost of production, which is making it difficult for them to remain in operation nationwide.

Mondak said a number of factors have contributed to the decline:

Because of the overall global economic slump, consumers have been pulling back, especially in the United States, where dairy products have decreased and people are being more careful with their money.

Australia and New Zealand are recovering from a drought, causing their milk supply to come back up.

“That increases the supply in Asia and causes a decreased demand for U.S. exports,” Mondak said.

The value of the dollar, which had been strong compared to other currencies, weakened, making U.S. products less attractive to buy.

“It is a dire financial situation for dairy farmers across the nation, including our local dairy farmers,” Mondak said. “While they are feeling the stress, they are also trying to remain optimistic. This is the business they know, the business they believe in, the business they are dedicated to. They are all about producing wholesome food for people, maintaining the occupation and lifestyle they have chosen. They want to stay in business.”

Coping strategies
While dairy producers are accustomed to the highs and lows of the dairy industry, Mondak said the most important thing they can do is remain hopeful.

“The USDA forecasts are talking about a bottoming out in the middle of 2009 and a prediction that there will be some improvement in the third and fourth quarters,” Mondak said. “Our producers are hanging on for that.”

But, besides remaining hopeful, the specialist said producers also should maintain a good relationship with their banker.

“The producers are being advised to let the banker know what’s going on, what their plans are and see if there are any strategies they can do to get through this time period,” Mondak said.

She said it also is a good time for producers to control costs and be efficient in their inputs.

And, that could come from providing a balanced ration for cows at the best prices possible,

“Those producers who own their own land and do some of their own production of corn silage or hay may have an advantage right now over those who are having to buy in everything. Producers and nutritionists are looking for opportunities where they can buy some of their feed inputs at good prices,” Mondak said. “They are just being good businessmen right now. They are having to be good shoppers.”

Local impact
Despite the hardship many U.S. dairy producers are facing, those in N’West Iowa have somewhat of an advantage.

“One of the reasons why this area has attracted dairy producers to move in from other places is because it has some of the elements that create good opportunities for a dairy farm,” Mondak said.

Dairy producers in N’West Iowa have access to land, a good water supply and the opportunity to have feed grown locally.

“Having feed grown locally is a huge advantage, because feed is the No. 1 expense on a dairy farm,” Mondak said. “Producers here in the Midwest region are situated close to the fields that grow the forage and grain crops needed to create balanced dairy rations and have an opportunity to get feed at costs lower than in some other places in the country that are not located close to a feed supply.”

And while there always will be dairy operations coming in and going out of the state, from an economic standpoint, Mondak said that can be a good thing.

“The dairy industry, including production and processing, is what some have called an ‘economic engine,’” Mondak said. “As an economic multiplier, it stimulates the region’s economy.”

She said economists calculate the dairy industry has having an economic multiplier effect of 2.29. So, for every $1 generated by dairy production, $1.29 is generated in economic growth, or every cow generates $15,000-$17,000 in economic activity.

“Given all major industries in Iowa, no other industry has an economic multiplier effect of this magnitude,” Mondak said.

This article appeared in the May 23, 2009 edition of The N'West Iowa REVIEW.