California dairies caught between falling milk prices, rising feed prices [The Sacramento Bee, Calif.]

Aug. 12--As drought in the Midwest drives up the price of crops such as corn and soybeans, dairy farmers in California are struggling to cover expenses, and some are leaving the industry.

The soaring cost of feed, they say, is one more stress on an increasingly marginal business.

"It's darn serious," said Case van Steyn, a dairyman with three facilities in south Sacramento County. He owns over 1,000 cows, and he said the high cost of feed means he is losing about a dollar a day on each of them.

Most of the nation's livestock feed is grown in Midwestern states on farms that aren't irrigated. On Monday, the U.S. Department of Agriculture's weekly report characterized 39 percent of the soybean crop and 50 percent of the corn crop as "poor" or "very poor." The estimates covered 18 states that account for more than 90 percent of production.

Fluctuations in crop prices affect California livestock producers, who buy feed from Midwestern farms. The dairy industry, already weakened by the recession, is particularly vulnerable. California produces about a fifth of the nation's milk, more than any other state.

"Of any of the sectors -- beef, pork, poultry -- I think dairy is the worst," said Joel Karlin, a market analyst at Western Milling, which is California's largest feed company.

Karlin said feed prices are higher than they've ever been. The price of corn delivered in the Central Valley, currently around $360 a ton, is 50 percent above the average price for 2006 to 2011.

Just in the last six weeks, futures for September corn on the Chicago Mercantile Exchange have risen approximately 60 percent, exceeding $8 a bushel.

Peter Van Warmerdam, who with his brothers milks about 1,000 cows in Galt, said he receives about $15.50 for 100 pounds of milk. Because of high feed prices, that same amount of milk costs him $18 to produce.

"For every gallon of milk we produce, we're losing about 50 cents," he said, rounding the numbers.

High feed prices are exacerbating other problems for the dairy industry. Many farmers borrowed money to continue operating when milk prices fell after 2009, and feed prices were already high because of federal policies encouraging corn ethanol production.

In California, dairy farmers also complained that milk prices set by state regulators are too low, making it difficult for them to compete with dairies in other states.

California's dairymen are in an especially difficult position, because there aren't enough processing facilities in the state for all the milk that dairy cows here produce. Stringent permitting requirements often lead processors to build new facilities in other states, leaving California with an oversupply of raw milk. As a result, farmers are at a disadvantage in negotiating better prices from California processors.

Last month, in response to a petition from farmers, state Food and Agriculture Secretary Karen Ross changed the formula that determines the price cheese manufacturers must pay for the whey component in milk. The adjustment immediately raised the price about 4 cents per hundred pounds of milk, an increase of less than 1 percent.

"The increase we received was not significant, and it was far short of what we asked for in our petition," said Michael Marsh, the chief executive officer of Western United Dairymen.

The organization, which represents dairy farmers in California, petitioned Ross again on Monday, this time with a new proposal designed to shield smaller cheese manufacturers from the effects of the increase.

Marsh said many farmers are filing for bankruptcy, and banks are sending cattle trucks to repossess dairy cows. Smaller farms have been going out of business in California steadily as the industry consolidates, but even some large dairies are going belly-up because of this year's drought.

Bankruptcies at dairies are "becoming routine right now," Marsh said. "If we don't stop it with some kind of price relief from the secretary, then unfortunately the infrastructure in our industry will crumble."

Rachel Kaldor, who represents milk processors as the executive director of the Dairy Institute of California, said she was sad to see so many farmers in bankruptcy.

"It's all these families. We know these people," she said.

Yet she also said that because of the oversupply of raw dairy products in the state -- a situation exacerbated by the shortage of in-state processors -- a decrease in the number of dairies is unavoidable.

Earlier this year, Kaldor said, dairies simply produced too much milk. "Milk was hitting the ground, going to calf ranches, or moving out of state," she said.

Van Steyn, the Galt dairyman, objected vehemently to the argument that the state's milk supply must shrink. "The new definition of supply management in California is bankruptcy. That's what we're doing," he said.

Five years ago, van Steyn said, he would not have believed possible such a difficult situation for the industry. Now, he said, he is ready to leave the business. "If I could find a way out, I would," he said.

Since the industry is so unprofitable, he said, his cows and his facilities are practically without value, and he does not think he can sell them.

Rising prices may provide farmers some relief. Futures market prices for milk to be delivered at the end of the year are about 10 percent above current levels. California's raw milk price -- set by state regulators -- is based on the market price. "The futures market is anticipating some scarcity," said Marsh of Western United Dairymen.

Fortunately for consumers, rising prices for raw products do not always lead to higher prices in grocery stores, as processors and store owners may absorb part of the increase. The U.S. Department of Agriculture's July price index forecast predicted that retail prices for dairy products will end this year 2 percent to 3 percent higher than last year, and will average 3.5 to 4.5 percent higher next year than this year.

Call The Bee's Max Ehrenfreund, (916) 321-1049.

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