cow killer milk drinkers face tough times ahead

theist · July 14, 2009

Price of milk may double Rising feed costs, surplus of cows will force farmers to cull herds by 103,000

By Jeff Wilson

Bloomberg News

Published on Tuesday, Jun 30, 2009

Dino Giacomazzi, whose great-grandfather started the Giacomazzi Dairy in Hanford, Calif., in 1893, said he had no choice but to sell 100 cows, or 11 percent of his herd, in the past four months. Rising feed prices and a world surplus meant it cost as much as $17 to produce $10 of milk.

''Producers are in an absolute state of panic,'' said Giacomazzi, 40. ''To spend 100 years building a dairy business and see much of that equity disappear in a year is very troubling.''

Farmers plan to shift the pain to consumers. The National Milk Producers Federation in Arlington, Va., will pay dairies to slaughter 103,000 U.S. cows in coming months. Milk futures prices will double next year to a record $23 per 100 pounds as the herd shrinks by 171,000 head, the most since 1989, said Michael Swanson, a senior economist at Wells Fargo & Co., the largest lender to U.S. farmers.

The cuts will lead to the first two-year drop in output in four decades and higher prices in 2010 for butter, cheese, milk and the nonfat dry powder that's a benchmark for global exports, according to U.S. Department of Agriculture forecasts. Futures for delivery in September 2010 are trading about 56 percent above current prices on the Chicago

Mercantile Exchange.

Retail butter prices might rise above the record of $3.937 a pound and Cheddar cheese might top $5.097 a pound, according to Jerry Dryer, 65, editor of the industry newsletter Dairy & Food Market Analyst in Delray Beach, Fla.

Farmers are culling herds because exports plunged 26 percent in the first four months of the year, supplies rose and the cost of corn, the primary feed ingredient, averaged almost $4 a bushel.

''No one is making money producing milk,'' Wells Fargo's Swanson said. ''The milk price remains well below the total cost of production.''

U.S. output increased to a record 16.73 billion pounds in May as cows on average produced 1,804 pounds each, the most ever, the USDA said June 18. A gallon weighs 8.6 pounds.

Wholesale milk fell 51 percent in the past year and reached $9.93 per 100 pounds on June 19 on the CME. The USDA forecasts average cash prices this year will drop 34 percent, the most since the agency began keeping the data in 1980. While corn fell to $4.195 last week from a record $7.9925 a bushel in June 2008, it's still 54 percent above the decade average.

In California, the largest milk-producing state, dairies lost $1.07 per 100 pounds in April, compared with profit of $11.23 in July 2007, based on feed costs and milk prices, USDA data show. In January, the state was the most unprofitable in at least six years of record-keeping.

It takes about 24 months and $1,600 to feed and care for a dairy heifer before it starts producing milk. The price of a young cow ready for milking has dropped by half in the past year to $1,200, he said.

U.S. milk production will fall 1.3 percent to 187.5 billion pounds this year from last year's record, and to 186.4 billion in 2010, the first back-to-back decline since 1969, the USDA said June 20.

Prices probably will rise at least 25 percent by the second half of 2010 as production slows and consumption rebounds with an improving economy next year, said Kelvin Wickham, managing director of global trade at Fonterra Cooperative Group Ltd. of Auckland, New Zealand, the world's largest dairy exporter.

''We do expect prices to trend higher toward the back half of the year,'' said Jack Callahan, the chief financial officer at Dallas-based Dean Foods Inc., the biggest U.S. processor and parent of Reiter Dairy operations in Akron.

Dairy cows feed at the Milky Way Dairy farm near Visalia, California, (Phil Hawkins/Bloomberg News)

Dino Giacomazzi, whose great-grandfather started the Giacomazzi Dairy in Hanford, Calif., in 1893, said he had no choice but to sell 100 cows, or 11 percent of his herd, in the past four months. Rising feed prices and a world surplus meant it cost as much as $17 to produce $10 of milk.

''Producers are in an absolute state of panic,'' said Giacomazzi, 40. ''To spend 100 years building a dairy business and see much of that equity disappear in a year is very troubling.''

Farmers plan to shift the pain to consumers. The National Milk Producers Federation in Arlington, Va., will pay dairies to slaughter 103,000 U.S. cows in coming months. Milk futures prices will double next year to a record $23 per 100 pounds as the herd shrinks by 171,000 head, the most since 1989, said Michael Swanson, a senior economist at Wells Fargo & Co., the largest lender to U.S. farmers.