Overproduction and low demand part of the reason milk industry is struggling

NEW LONDON, Minn. -- It's 11 below zero at 6:15 a.m., and Steve and Amy Combs are just finishing milking their 100-head Holstein dairy herd.

As the cows file in and out of the old-style dairy barn on the family farm west of New London, Minn., the farm report on the radio delivers a string of futures markets for milk that are not good.

Since last fall, when milk prices peaked at $20 a hundredweight, the price Combs and other dairy farmers now receive for their product has been nearly cut in half.

It's one of the biggest swings Combs has seen in his 30 years of milking.

"It's going to be a struggle just to break even this year, I think," says Combs, who expects to be "working at a loss" for much of the year.

'Dropped like a rock'

"Just terrible," is how Matt Quade, division manager for Associated Milk Producers Inc. in Paynesville and Dawson, Minn., describes the last two months for milk prices.

"It's taken a big-time downward spiral, and it's not done yet. It's very serious," Quade says.

Milk prices were strong until the middle of December. "And then it dropped like a rock," says Quade, catching most people off guard. "This was not seen by anybody."

In 2008, raw milk prices were high and generated good revenue for dairy farmers. But feed costs and operating expenses also were very high.

"So our profits were still good but they weren't as good as they could've been," Combs says.

Feed has come down in price, but prices are "not half of what they were last year," he says. His paycheck from the milk buyer, however, is half of what it was last year.

"You take the good with the bad and keep struggling through and, hopefully, in the end you come out ahead," he says.

"There's no way farmers can survive on these prices," Quade says.

There are several reasons for the quick price drop for farmers, including overproduction and under-consumption -- both domestically and internationally. European subsidies also were increased, which decreased the demand for American milk products.

But so far there has not been a reciprocal drop in milk or cheese prices at grocery stores.

"Although we fully expect lower farm milk prices to be reflected in the dairy value chain, processors, distributors and stores will ultimately make that determination," says Carolyn Hudson, who works in public relations for the Midwest Dairy Association.

But, she says, "No one knows exactly what will happen."

Waiting on the right price

Just like the price of gas that took a while to come down after oil prices decreased, there may be a lag time in when consumers see lower dairy prices at the store.

"Food prices at retail stores are generally a reflection of a combination of factors," says Chris Murphy, director of communications at Cub Foods. "A change in a single pricing input is not always a determining factor in the price consumers pay for a given product."

Murphy says the store strives to "pass savings on to our customers" and provide the "best available value."

Because part of the problem with low raw milk prices is because of overproduction and under-consumption, the Midwest Dairy Association is using dairy checkoff dollars to team up with Dominos Pizza to give a short-term boost to cheese sales.

The pizza maker has developed a new line of "American Legend" specialty pizzas that use 40 percent more cheese than a regular pizza, says Sherry Newell, industry relations manager for the Midwest Dairy Association.

Pizza consumption has a direct impact on cheese sales, according to the association's CEO, Mike Kruger. About 25 percent of total cheese is used on pizzas, which accounts for more than 25 billion pounds of annual milk production.

'Nutrient recession'

Hudson, a registered and licensed dietitian, says Americans are not only in an economic recession but also a "nutrient recession" because they are eating more calories but getting less nutrition. She says consuming milk, cheese and yogurt is a way for people to "spend their food dollar wisely" and get more "bang for the buck" when it comes to nutrition.

The price farmers receive has been so low the prices have dipped below the federal price supports in recent weeks.

The average price for raw milk in 2008 was $18.25 a hundredweight, Quade says. The January price is $11 and it will be $10 this month.

"That's pretty much in a nutshell where it is," he says. "It's going to be ugly these next couple months, especially if the market stays where it's at."

The futures market doesn't show much improvement.

That's been prompting farmers to sign up for the Milk Income Loss Contract, says Wes Nelson, director of the Farm Service Agency in Kandiyohi County, Minn.

"We've had producers in real steady this month," he says.

The program, which was extended in the new farm bill, pays 45 percent of the difference between the average price and the target Boston milk price of $16.94.

"It's a little help, but it's certainly not a money maker," Combs says.

Farmers knew the high prices from 2008 wouldn't last forever, but they are a little spooked by the sudden drop in price.

"They're concerned about it," Nelson says. They're hoping it's cyclical and that prices will even out again.