Herd slaughter a reality for US farmers

Falling global production could benefit New Zealand dairy farmers if next year's prices rebound as tipped. Photo / Brett Phibbs

Dino Giacomazzi, whose great-grandfather started the Giacomazzi Dairy farm in Hanford, California, in 1893, said he had no choice in February but to slaughter 100 cows, or 11 per cent of his herd.

Rising feed prices and a world surplus meant it cost as much as US$17 ($26.62) to produce US$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, Virginia, will pay dairy farms to slaughter 103,000 United States cows in coming months.

Milk futures prices will double next year to a record US$23 per 43.5kg as the national herd shrinks by 171,000 head, the most since 1989, says Michael Swanson, a senior economist at Wells Fargo, the largest lender to US farmers.

The cuts will lead to the first two-year drop in output in four decades and higher prices next year for butter, cheese, milk and the non-fat dry powder that's a benchmark for global exports, according to US Department of Agriculture forecasts.

Futures for delivery in September 2010 trade 56 per cent above today's prices on the Chicago Mercantile Exchange (CME).

Retail butter prices may rise above the record of US$3.937 a pound (453g) and cheddar cheese may top US$5.097 a pound, according to Jerry Dryer, 65, the editor of the industry newsletter Dairy & Food Market Analyst in Delray Beach, Florida.

"We could easily see US$20 milk again next year," said Richard Bradfield, a vice-president of the dairy business at International Ingredient, a manufacturer of specialty feed products in Fenton, Missouri.

"The longer these low prices last, the greater the potential for a big spike up in prices as dairies make larger cuts."

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

"No one is making money producing milk," Wells Fargo's Swanson said by telephone from Minneapolis.

"The milk price remains well below the total cost of production."

US output increased to a record 7.5886 billion kg last month as cows on average produced 818kg each, the most ever, the USDA said. A gallon (3.78 litres) weighs 3.9kg.

Corn wholesale milk fell 51 per cent in the past year and reached US$9.93 per 100 pounds last week on the CME. The USDA forecasts average cash prices this year will drop 34 per cent, the most since the agency began keeping the data in 1980.

While corn fell to US$4.19 last week from a record US$7.99 a bushel in June last year, it's still 54 per cent above the decade average.

In California, the largest milk-producing state, dairy farms lost US$1.07 per 100 pounds in April, compared with a profit of US$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.

"We're all in survival mode," said John Gailey, 35, the general manager and a part owner of the 4000-cow Milky Way Dairy near Visalia, California.

Gailey cut his herd by 400 head, or 9.1 per cent, since March. "I'm surprised we are not hearing about more people filing for bankruptcy."

It took about 24 months and US$1600 to feed and care for a dairy heifer before it started producing milk, Gailey said. The price of a young cow ready for milking had halved in the past year to US$1200.

Farmers spent most of the past decade expanding to meet rising global demand.

Futures peaked at a record US$22.45 in June 2007 as a drought in Australia and New Zealand, the biggest exporters, curbed supplies.

Demand increased in Asia as economic growth allowed consumers to switch to more protein-based diets.

US exports jumped to a record 2.55 million tonnes last year, up 16 per cent from 2005, and the value of the shipments rose 25 per cent, according to the US Dairy Export Council in Arlington, Virginia. Overseas sales accounted for 11 per cent of US production, more than twice the share of 2002, the council said.

By the end of last year, with the global economy in the first recession since World War II, US milk production had grown to a record 190 billion pounds and the dairy herd was at a 12-year high of 9.315 million cows, according to the USDA.

When global prices sagged, European farmers sought government aid and disrupted food supplies. Eight hundred producers from across Europe protested in Brussels last month, and in parts of France grocers ran out of cheese and yoghurt because of protests.

Dairy Farmers of Britain, the UK co-operative, filed for receivership this month after firing workers and closing dairies.

Dairy Crest Group, Britain's biggest producer, lowered its milk price in April to 26.28 euro cents a litre, reflecting a 32 per cent drop since October, said the website of the Dutch farmers' organisation LTO-Nederland.

US dairies are trimming the herd. The kill in the week ended June 6 rose to 60,800 head, 35 per cent higher than a year earlier, according to USDA data. This year's cull is up 13 per cent from last year.

Sherman Toone, 58, a third-generation producer with 350 cows and 730ha of wheat, barley and alfalfa near Grace, Idaho, said reductions might accelerate because government payments to small- and medium-sized farmers began to run out this month.

"This is the worst I've ever seen the imbalance" between feed costs and milk revenue, said Toone, whose grandfather started with 25 cows in 1923.

US milk production will fall 1.3 per cent to 187.5 billion pounds this year from last year's record, and to 186.4 billion next year, the first back-to-back decline since 1969, the USDA said.

Kelvin Wickham, the managing director of global trade at Auckland-based Fonterra Co-operative Group, the world's largest dairy exporter, predicts prices probably will rise at least 25 per cent by the second half of next year as production slows and consumption rebounds with an improving economy next year.

"We do expect prices to trend higher toward the back half of the year," Jack Callahan, the chief financial officer at Dallas-based Dean Foods, the biggest US processor, said this month at a New York conference.

Shares of Dean Foods rose 3.5 per cent so far this year, beating the Standard & Poor's 500 Index's 2 per cent gain.

Fonterra's Wickham cautioned that even a smaller herd might not be enough to turn the market around as rising subsidies and government stockpiling in the European Union and the US delay the recovery.

"People haven't been buying the stuff, that's the problem," said Lloyd Downing, 61, who farms 560 cows on 187ha southwest of Morrinsville.

"It's not until the American economy comes right that we'll start doing any good."

The US economy contracted three straight quarters, including 5.7 per cent in the first quarter.

Economists expect a 2.7 per cent contraction this year before growth resumes next year, based on the median of 62 estimates in a Bloomberg News survey.

In the European Union, where growth was 0.63 per cent last year, the economy will shrink 4.2 per cent this year, a Bloomberg survey of 17 economists shows.

Global milk-production growth will likely slow to between 0.5 per cent and 0.7 per cent this year, in line with the increase in consumption, Fonterra's Wickham said.

China, the world's third-largest fluid-milk consumer after India and the US, is recovering after melamine contamination last September slashed domestic output.

The Swiss-based Tetra Pak Group, the biggest maker of milk and juice cartons, predicted this month that consumption growth that averaged 13 per cent for the past three years would likely return to pre-melamine levels by the end of this year.

China increased imports of milk powder and other dairy products after the Government shut 19 per cent of the nation's 20,393 milk-collection stations between November and April, the official Xinhua New Agency reported this month.

"It only takes a relatively small amount of difference in production and we're going to have a significant effect on international prices," said New Zealand Federated Farmers dairy section chairman Lachlan McKenzie, who owns a 600-cow dairy farm northeast of Rotorua.

New Zealand exported 50.8 million kilograms of milk powder to China in the three months ended March 31, more than four times as much as the same period a year earlier, according to Statistics New Zealand.

Dairy farms are the country's biggest export earner, accounting for about 20 per cent of trade receipts, government data show.

Whatever happened with demand, said Milky Way Dairy's Gailey, a recovery would not be possible without a cull in the industry.

"We are in a depression right now," he said. "I have to be an optimist that the dairy farmers can get together and find a way to reduce the cow herd about 5 per cent so that prices can recover quickly."Bloomberg