Dairy Farmers Receive Short-Term Relief

Wayne M. Gauthier, Hay, Gary M., Morgan, Johnny W.  |  4/19/2005 10:29:22 PM

News Release Distributed 06/01/04 

Louisiana dairy farmers have received historically low prices for the past two years, but good times appear to be on the horizon – at least for the next few months, according to LSU AgCenter specialists.

Dr. Gary Hay, an LSU AgCenter dairy science professor, said dairy farmers are receiving some price relief this spring, but Hay cautioned he feels the relief will be short-lived.

"Dairy farmers have been receiving prices near 1970s and 1980s levels for the past two years, but a nationwide shortage of milk is bringing them some relief," Hay said.

According to Hay, prices have moved from historic lows to historic highs because cheese and butter manufacturers are paying the highest prices ever for their raw milk input. But Hay says cheese prices have begun to weaken, and he expects milk prices to begin to weaken by the end of summer.

"Under the federal milk market order system that has been in effect for several decades, the price producers are paid for their milk is driven by cheese and butter prices," Hay explained. "When cheese or butter prices fall, the price that producers are being paid will fall also."

LSU AgCenter economist Dr. Wayne Gauthier said the Louisiana dairy producers’ plight is "similar to a person diagnosed with terminal disease who gets a reprieve, but I’m afraid it won’t last."

Gauthier said there are several reasons for reductions in the milk supply and the corresponding increase in price. Among those he cited are:

–Monsanto’s decision to cut back on producing POSILAC, a natural protein that stimulates milk production.

–Feed prices are increasing because of several factors, one of which is a rust infection reducing the size of the South American soybean crop.

–A shortage of dairy heifers coming into the United States from Canada because of the border closing due to BSE.

Hay said what’s happening is that in the past five years competitive conditions have resulted in increased milk production in the West and North Central Regions of the United States while production in all other areas decreased.

"Herd size and numbers are increasing in western states where there are larger, more modern operations with confined feeding and cattle housing facilities," he explained. "These operations allow producers to milk more cows – thereby increasing their cash flow.

"In addition, the greater production per cow spreads fixed and variable costs over more units of milk production and allows dairy managers more control of the many factors that affect profitability in a farming operation."

Louisiana’s dairy industry has been made up of more traditional pasture-based feeding programs developed around relatively small herds.

"However, our dairy producers are finding it harder and harder to produce enough cash flow without milking more cows or getting increasingly higher production per cow," Hay said.

Pasture-based programs require larger investments in land, which constrains a manager’s ability to effectively implement either one of these two options, the experts said.

"The land investment increases fixed costs, and foraging reduces the cow’s milk production potential," Hay explained.

Another change occurred in the dairy industry beginning in 1996, and that is having a major impact on the size and potential profitability of the industry. The change came about in the 1996 U.S. Farm Bill when the Congress decided to reduce the level of federal milk price support for the dairy industry as one way of reducing the size of the federal budget.

The result has been producer milk prices that are driven more by nationwide supply and demand conditions.

"The relatively low federal milk price support level has negative implications for profitability, and it contributes to wider fluctuations in producer milk prices," Hay said, adding, "Greater fluctuations in milk prices make it much more difficult for producers to predict and manage their cash flow."

The LSU AgCenter dairy specialist said the milk prices paid to dairy farmers in May were about $20 per hundredweight – up from $13.50 in December. That means consumers should expect a 50-cent to 75-cent increase in the price of a gallon of milk this summer.

"At $13.50 milk prices, the dairy farmer’s share of the retail price for a gallon of milk is about $1.16." Hay said, adding, "Dairy farmers have been receiving about $11-$12 per hundredweight for the past two years, which amounts to about $.95 to $1.05 per gallon of retail milk."

Those prices are far below the cost of producing milk on most Louisiana dairy farms, according to Gauthier, who said, "Even at $20 per hundredweight, dairy farmers’ share of the retail price of a gallon of milk will be about $1.72."

Gauthier said that while the increased prices will mean a little more for dairy producers, consumers should keep the increase in perspective.

"Consumers should also keep in mind that what they didn’t see was a 50-cent to 75-cent drop in the price of a gallon of milk when dairy farmers were getting paid 95 cents to $1.05 for that same gallon of milk."

Hay said what we are seeing in the dairy industry today is similar to what happened to many small gas stations, grocery stores and retail stores in the 1960s and 1970s.

In both cases, larger, more modern facilities attracted more customers and thus produced much higher volumes of cash flow and subsequently more opportunities for profit, Hay explained. Small businesses, through no fault of their owners, became less and less competitive and were eventually closed because they couldn’t make a profit, he continued.

"During the past 10 years, the Louisiana dairy industry has experienced the same trend, as farm numbers dropped from 696 farms to 330 farms today," Hay said.

Many of the farms that exited the industry were smaller, less productive farms that were finding it difficult to make a profit, according to experts. As a result, the Louisiana dairy industry also has experienced nearly a 50 percent drop in total pounds of milk produced in the state.

That trend, in turn, is having a major impact on feed companies, equipment dealers, veterinarians and other businesses that provide resources to the industry.

According to Hay, Louisiana ranks 50th out of 50 states in milk production per cow.

"While the national average in milk production per cow has been increasing by 2 percent per year for the past 10 years, production per cow in Louisiana has been increasing by only about 0.3% per year," he said.

Also, nationally, the average number of cows being milked on a dairy farm has almost doubled from 57 cows to 99 cows. But, in Louisiana, the average number of cows on a dairy farm is virtually unchanged at 135 cows.

While the traditional pasture-based dairy operations have worked well in the past for Louisiana dairy farmers, experts stress the recent changes in the national dairy industry are making this system much more difficult to sustain.

"Through no fault of their own, dairy farmers in Louisiana are finding it much more difficult to operate a dairy using the same practices that have been so successful for them in the past," Hay said. "Milk prices during the past few years certainly have contributed to this trend along with other changes in the industry."


Wayne Gauthier at (225) 578-2765 or wgauthier@agcenter.lsu.edu
Gary Hay at (225) 578-2214 or ghay@agcenter.lsu.edu
Johnny Morgan at (504) 838-1170 or jmorgan@agcenter.lsu.edu

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