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Milk prices may drop drastically

by Linda Hiller

Imagine your boss comes to you and says you are getting a 40 percent pay cut. No argument, no debate – a 40 percent pay cut, period. Deal with it.

Welcome to the dairy business.

Carson Valley dairy operators like Chris and Val Hellwinkel are joining other anxious dairies around the country as they brace themselves for what is anticipated to be a devastating drop in the price they get for their milk.

“For the last six months we’ve been getting paid at record levels – it’s been nice,” Chris said. “Now, it looks like we might see the biggest drop in years, and we can only hope it won’t last long. For a small dairy like us, it’s hard to absorb the losses.”

– Why is this happening? To explain the intricate, interwoven and mercurial dairy business takes a keen understanding of not only economics, human nature, weather conditions like La Nina, dairy cows and what influences their milk production, the effects of the “Got Milk?” campaign, and a vat of other factors that interact to determine not only how much dairies get for their product, but how much we as consumers pay for milk, cheese, butter and all dairy products in our local grocery stores. It’s a very complicated and unpredictable formula, but Chris Hellwinkel – after a lifetime around the business – has some insights.

“With milk and some other ag products, even a 1 percent surplus can flood the market enough to put prices in a tailspin, and a 1 percent shortage can have a big effect, too,” Chris said. “It was a pretty easy winter, so production has been up and there is a bit of a glut right now.”

La Nina and the effects of a wet year – creating muddy corrals and stressful conditions on a delicate milk-making machine like a dairy cow – held milk production down last year, contributing to the eventual production drop of up to 5 percent, he said. Shortages resulted in high butter and cheese prices nationwide.

“There actually was a shortage last year and the companies were fighting for milk to make cheese, so we did see the benefit of that,” he said, adding that large companies like Kraft drive much of the milk market. “Cheese is a big, driving part of our prices.”

Last year, many dairies experienced the rare surge in milk prices, bringing them the highest prices in many years. Families like the Hellwinkels were able to use this “pay raise” to start paying off back debts, trying to get caught up and catch a glimpse of some blue sky in what can be an overcast business. But as the seesaw goes up, so it comes down – it’s just not usually this dramatic, Hellwinkel said.

“We’ve had high and lows before, but this is the worst I’ve seen,” he said.

Because milk is a perishable product, farmers can’t sit on it and wait for the prices to go up or down. They have to move it or lose it.

Every day, a tanker truck comes and hauls off around 1,000 gallons of Hellwinkel milk. They get a check twice a month from the co-op they sell to.

Up to 70 percent of Nevada milk stays in Nevada, sold through companies like Model Dairy and Sunnyside (not all Sunnyside dairy products are from Nevada, however).

In a highly competitive world like the dairy industry, Hellwinkel said it is frustrating to be in a position of not having much say in the pricing of the product they work so hard to produce.

“We are at the end without much leverage,” he said. “It can be frustrating.”

– Got too much milk? The “Got Milk?” campaign, funded by dairy farmers like the Hellwinkels and the Whites – Carson Valley’s remaining dairies – gave the farmers some sense of having some input into the market, and has been responsible for a 2-1/2 to 3 percent growth in sales, Hellwinkel said.

And, when news broke last summer about the health dangers of margarine, many customers turned back to butter, which, the studies were reporting, was healthier to eat than the artificial product. This caused a surge in butter prices in the grocery stores, topping out at around $4 per pound. In September, wholesalers received a record $2.80 per pound, hence the skyrocketing retail prices.

“That was good for us, of course, because the product was in demand, but there comes a point when you don’t want to drive away your customers,” Hellwinkel said.

The current price has lowered to around $1.36 per pound for a 40-pound block, and store prices dropped accordingly.

Other ag products, such as beef, grain and pork, for example, have experienced their own lows recently, Hellwinkel said. Last year was especially bad for hog growers, and beef farmers struggled with prices, too. Grain is down also, so it’s not just the dairies, he added.

The low feed prices will actually be good right now for customers like the Hellwinkels but not so for the growers.

“That will help to cushion us for a while,” he said.” For us, it’s a bright side.”

Larger dairies pay less for feed because they can buy in larger volumes, and their larger herds can sometimes produce more if tweaked correctly. The Hellwinkels milk 150 cows and grow about half of the 1,200 tons of alfalfa hay needed to feed their herd for one year.

Coming off an encouraging half year of respectable prices – up to $17.34 per hundredweight (around $1.50 per gallon), the Hellwinkels, Whites and all others in the dairy industry anxiously await the release of next month’s basic formula price, BFP, which is announced on the 5th of each month.

According to Hoard’s Dairyman, an information service for dairy operators, the average BFP in 1996 was $13.39; in 1997 it was $12.05 and in 1998, $14.20. From January to February of this year, it dropped from a little over $16 to $10.27, the largest drop in BFP history and the lowest price since May 1991.

Federal support under Federal Milk Marketing Orders for dairy operators is still in place, he said, but only as a last resort safety net.

“It has to get down to about $10 per hundredweight before the government starts buying,” he said.

On Dec. 31 of this year, all federal supports will fall off.

“They’re trying to get away from the dairy support system,” Hellwinkel said.

It looks quite certain that the news in April will not be good, Hellwinkel predicted, and that the biggest plummet in prices could result in a sizeable pay cut, putting many operators at a break-even, or lower, point.

“The amazing thing is, it happened all within a month’s time,” Hellwinkel said.