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Declining milk prices worry farmers

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Posted on April 6, 2015 |
By Zach Despart



ADDISON COUNTY — Dairy farmers in Addison County and across Vermont are weathering a significant decrease in the wholesale price of bulk milk, a trend that shows no sign of reversing.

And what a difference a year can make. The price per hundredweight of milk peaked last year in New England at more than $25, an all-time record. This month farmers expect to be paid about $16 per hundredweight, or cwt, a unit of measure that equals about 11 gallons.

The price of milk has long been volatile, and dairy farmers do their best to anticipate price swings and plan accordingly.

“We’ve been experiencing these fluctuations about every 36 months or so,” said Marie Audet of Blue Spruce Farm in Bridport. “We’ve become quite resilient, and we try to plan for it.”

Jon Rooney of Monument Farms in Weybridge said price swings are just a part of the business.

“Farmers have been through this many times,” he said. “It’s a very cyclical thing.”

Rooney explained that in the global economy, changes in market conditions on other continents directly affect the price of milk in New England. He listed a number of factors that likely played a role in the latest price drop: increasing dairy production in Australia and New Zealand, decreasing exports to Russia and less demand from China, the world’s most populous nation.

A decrease in global demand by just a few percent can send prices tumbling by a quarter or more. Today’s price per hundredweight is about 36 percent less than a year ago.

“If exports decrease by a few percentage points, which they did, it impacts us immediately,” Audet said.

This cycle can be explained in part, Rooney said, by the simple concept of supply and demand. When prices are good, farmers produce more milk to increase revenue.

“Like any business, the higher the price goes, the more incentive there is to produce,” Rooney said.

But when ramped-up supply exceeds demand — even if only slightly — the price of milk plummets. This problem is exacerbated by the fact that milk, in its liquid form, is perishable. When demand dries up, farmers can’t store milk until the market recovers.

“There’s no place for the extra product to go,” Audet said. “Certainly if we had any product you could stick on the shelf, you could react more appropriately.”

Since dairymen and -women know the price of milk is unpredictable, they do their best to prepare their farms for unfavorable price swings.

Rooney said that price drops don’t significantly change the way Monument Farms does business, but drops do affect the dairy’s ability to make large investments in structures or equipment. He added that the price drops don’t just affect milk producers, but everyone they do business with.

“It affects everyone all the way down the supply chain: the dealers that sell equipment, the feed suppliers,” Rooney said. “It puts stress on financial ag lenders when producers can’t necessarily make payments.”

Rooney said Monument Farms does not feel the impact of price drops as quickly as other dairies because it markets its products directly to consumers, and thus has more control over the retail price of its milk. But this advantage only exists in the short term.

“If the price drops off long enough it could affect our ability to compete with big processors, like Hood or Garelick, because they’re buying their milk very cheaply, and it costs us more to produce it,” he said.

Audet said Blue Spruce makes the best of high prices by choosing at those times to pay down debt, pre-buy goods and make big purchases. This puts the farm on the solid financial footing needed to weather the other end of the price curve.

“You get yourself in a favorable position when the prices are good,” Audet said. “When prices are low, that’s not when we invest in new equipment or things that require extra capital.”

While cautiously optimistic now, farmers fear a repeat of 2009, when milk prices dropped to around $10 cwt, the lowest level in 30 years. For months, farmers sold milk for half as much as it cost to produce, and 11 Addison County dairies went out of business that year.

But Rooney said the market conditions are better than they were in 2009, the second year of the Great Recession.

“Feed prices aren’t as sky high as they were at that time, which was a triple whammy,” Rooney said.

MILK SAFETY NET

Farmers also have a new safety net in the form of the Margin Protection Program, a product of the 2014 federal farm bill. It compensates farmers when the margin between the cost of feed and the price of milk falls below a certain level set by the farmer. For instance, if a farmer chooses a $4 margin, if the price of feed is $10, the program will kick in if the price of milk falls below $14 per hundredweight.

The program is primarily aimed at small and medium farm operations, which are more vulnerable to price swings. As large dairies, defined by the state Agency of Agriculture as having more than 700 milking cows, Blue Spruce and Monument Farms chose not to enroll.

But the Associated Press reported that 582 dairies in Vermont did buy the insurance. If prices remain low for a long time or drop further, the Margin Protection Program could face its first test since farmers signed up last year.

Despite poring over market projections and making business decisions accordingly, there is little for dairy farmers to do now but wait.

“We have very little choice but to ride it out,” Rooney said. “We basically need to hope that demand recovers and production falls a bit.”

Audet said she is confident that this market downturn will be only temporary, and prices will rebound in the coming months.

“In the global sense, there’s a huge need for our product,” Audet said. “It will recover; it’s just a matter of time.”

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