Rising Production Costs, Low Corn Yield Threaten Calif. Dairies
The following is part of our series wading through the economic jargon, Crunching Numbers.
Corn, among the primary sources of feed for the country’s livestock, showed a considerable downturn in production across the U.S. The USDA released its World Agricultural and Supply Demand Estimates Report Wednesday, offering lowered projections for U.S. corn production. The agency’s expected 10,779 million bushels in August fell to 10,727 for September, a downgrade of 52 million bushels.
That helped push up feed costs in California by nearly 27 percent in the first quarter of 2012 during the period since this time last year. Producers now face a cost of $208 per one hundred pounds of milk, or hundredweight. The amount of money dairy farmers take in minus the sum they pay to feed livestock—“income over feed cost”—dropped about 36 percent.
“The increase has just been catastrophic,” Michael Marsh, chief executive of Western United Dairymen, said. Marsh pointed to the drought ravaging the nation, as well as federal subsidies that direct a significant percentage of the nation’s corn harvest to ethanol instead of feed.
Under the EPA’s Renewable Fuel Standard, 13.2 billion gallons of corn-based ethanol will be blended into the vehicle fuel supply this year, with another 13.8 billion gallons in 2013. That quota hasn’t budged even as the country’s worst drought since the 1930s wiped out about 50 percent of the crop this year. Consequently, prices for dairy producers have reached record levels.
California’s farmers have struggled to find ways around the rising costs, switching to organics or making changes to their production flow. But more often than not, Marsh said, their efforts fall short.
“The truth is, they’re not offsetting [the costs]. They might adjust feed rations a bit, or start culling animals from herds more quickly, but at the same time they’re simply being foreclosed upon or filing for bankruptcy,” he said.
When these farms fail, they aren’t simply absorbed into larger ones. Instead, they’re sold off, the land repurposed for “more permanent crops” like almonds and grapes, Marsh said.
To be sure, not every aspect of dairy production has increased in expense. Total hired labor costs fell 4.5 percent in dollars per hundredweight, while overall operating costs, including utilities and supplies, decreased by almost 6 percent.
And experts familiar with milk movement say consumers likely won’t feel much of a pinch in grocery checkout lines. Retail prices aren’t expected to jump significantly, and Leslie “Bees” Butler, a dairy marketing specialist at University of California, Davis, said it could take a good three to six months for stores to see even a minor uptick.
“Retailers hate changing prices because it upsets consumers,” Butler said. “Supermarkets will select a price for a certain time period that they think will reflect the price they pay for milk, which changes every month. It gives them a risk margin.”
But Butler pointed out retailers may not need to be so concerned about maintaining prices. Though there could be slight increases a few months down the line, “The typical consumer doesn’t care what the bloody price of milk is,” Butler said. “Most people, if they need milk, they’re going to buy it. As long as the milk’s in the fridge, I don’t care if I buy for $1.60, $1.80, $3.00.”
This week, grocer Safeway listed a half-gallon of Lucerne whole milk for $2.89.
Seasonal factors like cooler weather and the resumed funneling of milk to schools back in session may soon provide some temporary gains for producers. According to Marsh, futures for October, November and December put the price per hundredweight that diary farmers receive for their milk at around $19, up from the current $16.30.
While producers wait out the drought to see what the next several months will bring, Marsh agreed they can at least take some comfort in the inelastic demand for their milk: “People are unlikely to switch to Coca Cola for their Corn Flakes.”
Read more from Neon Tommy's Crunching Numbers series here.