N.C. State economist’s never seen it this bad

Published 12:00 am Saturday, December 12, 2009

By Katie Scarvey
In his 31 years with North Carolina State University, professor emeritus Dr. Geoff Benson has seen the fortunes of North Carolina dairy farmers go up and down. A former extension economist, he understands the cyclical nature of the dairy industry.
Still, the current dairy crisis in this country troubles him.
“I have never seen it this bad,” he says.
And in fact, Benson says, a global dairy downturn has affected farmers not just in this country but worldwide.
North Carolina is one state that has been hit hard, although not as hard as some other Southern states, Benson says. Mississippi and Louisiana have lost dairy producers at a particularly high rate. In the southeast, Kentucky and Tennessee are losing farms at a greater rate than North Carolina.
Although the dairy industry in the eastern part of the country has been struggling, production nationwide is still increasing, at about 1-2 percent a year. The West in particular has seen growth, particularly California, the No. 1 dairy state.
Farms that have survived tend to be getting larger, with smaller farms being pressured out of business.
In the North Carolina Piedmont, several factors make dairy farming particularly challenging, Benson says, including high-value land and a growing population.
Still, Benson says, North Carolina does have profitable farms.
How well farmers are able to weather the current crisis is partly attributable to luck, he says.
If farmers borrowed money recently to expand, a high debt load at the same time that milk prices are depressed over many months can signal disaster.
Benson says he’s particularly concerned about what will happen in the spring.
With milk prices down for so long, many producers have had to borrow money not to expand but simply to continue in business.
This spring, he believes, will be a crucial time. Farmers looking to plant a corn silage crop will need to borrow money. Whether lenders will be willing to take on the risk remains to be seen.
“I’m afraid we may see more trouble, ” Benson says.
Benson says milk prices have historically been quite volatile.
Over the past 20 years, he says, there have been at least seven major price fluctuations รณ which are a double-edged sword.
“A very small shortage will cause the price to go up a lot,” he says, “but highs tend to be very short, and lows somewhat longer.”
The recent dip in milk prices, Benson says, was driven by a decrease in the export market.
The United States has historically had import restrictions on dairy products, which means that domestic dairy prices tend to be higher than world prices.That has meant relatively little dairy trade between the U.S. and the rest of the world, Benson explains. So what U.S. dairy farmers produce, for the most part, has been consumed domestically.
In recent years, however, with a burgeoning world economy, the United States was exporting significant amounts of dairy products.
Since that meant less supply domestically, milk prices in this country shot up in 2007 and 2008.
But when the global economic crisis hit, the demand for dairy products in developing countries shrank.
“All of a sudden, the export market vanished,” Benson explained. A stronger dollar also made U.S. farmers less competitive.
“So all of a sudden, what do you do with that product you’ve been exporting?” Benson asks. “It’s all backed up at home.”
In that situation, you simply hope the world economy recovers or that domestic demand increases, but that hasn’t happened, Benson says.
Matters are complicated by the fact that there is no incentive for a dairy farmer to reduce production or sell out, which would cause milk prices to increase.
“He needs to keep his farm running flat out,” Benson says. “Chances are, he wants to keep his barn full.”
In order to nudge production down, a dairy cooperative got involved.
Cooperatives Working Together (CWT), according to the Web site, is a national program designed and funded by dairy farmers for the benefit of dairy farmers. Its goal is to strengthen and stabilize milk prices by balancing supply with demand.
That is done through subsidizing exports or through herd reduction in the form of buyouts.
Cows that are bought out through this program must go to slaughter to keep them out of the milk supply chain.
Benson says that “quite a few cows” have been taken out of production through this buyout program.
And that’s one reason why milk prices have increased recently.
Another reason is that typically, demand for dairy products is a little stronger this time of year, while production in the latter part of the year is typically weaker.
Although prices have recovered a bit in recent weeks, it won’t help farmers like Lonnie Hoffner.
“When prices are so bad for so long, it does hurt enough that some producers will leave,” Bensons says.
Some, like Hoffner, will sell their stock in conventional ways, and others will take advantage of CWT buyout offers.
Although things have been bleak in 2009, Benson says the economic situation for dairy farmers will turn around.
“We will see record high prices in the future,” he says.
Unfortunately for some, it will be too little, too late.