March 2010 Articles

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Tough Times and the Milk Price

Tough Times and the Milk Price, Wayne Kellogg, Professor Is there a competitive disadvantage to having a small dairy farm compared to larger farms? Well, there are the obvious items like discounts that might be realized by purchasing huge volumes of feed and supplies. There are also less obvious disadvantages of having to meet the same quality standards, or in some instances the same environmental standards, with fewer cows or gross income to spread a set cost. Producers can realize premiums on the value of milk sold from the farm by increasing the fat content (and protein percentage in some parts of the country) and by improving the quality of the milk sold. But, the pay check is probably lower per hundredweight of milk because of hauling charges from a small farm to the marketplace compared to a large farm. Smaller farms are at a disadvantage when the milk truck has to make several stops to gather a load as opposed to stopping only once to fill the 5,000gallon tank, and in some cases the additional costs are charged back to the farm. Even with those items, the small producers may have an advantage during tough times because costs can be controlled easier. Overall, the pricing system for milk is a complicated issue. The Federal Milk Marketing Order uses formulas to determine the prices paid to the milk producer. It is a complicated system, but it was designed to set a fair price for milk based on the use of the milk. Fluid milk commands the highest price, while the price for milk used in other products – such as butter, cheese, ice cream and dried skim milk – varies with the raw materials used and the costs to make the specific product. Ultimately, the price varies with the demand for products. If the demand is high and purchasers are bidding for milk in short supply, then prices paid to the milk producer will increase. Unfortunately, the opposite condition adversely affects the prices paid by customers. Milk spoils, so it must be sold quickly. The alternative is to manufacture products that are stable, but it is also expensive to store excess product. Therefore, a relatively small amount of excess milk has a disastrous negative con sequence on the price. Once the surplus is resolved, the price of milk may rebound quickly. For that reason, retailers hate to reduce prices in the store because it is difficult to maintain sales when the prices increase rapidly. (Obviously, it also hurts profits in a business that historically operates on a small margin.) It may be appropriate to encourage retailers to drop prices hoping that sales will be stimulated. However, it is not appropriate to ‘throw rocks’ at the people who purchase and sell the products we produce. They provide a valuable service. Milk producers have been hurt by the world’s economic problems – perhaps more than any other sector. For awhile, milk prices were better than usual, but expenses for feed and fuel escalated at the same time. When the demand dropped, the farm price decreased dramatically. It is a tough time. The situation has improved slightly, and each producer will need to develop a strategy for their business. Hopefully, good times are ahead.