Dairies struggle as milk prices fall and costs climb

After earning record-high milk prices in 2022, dairy farmers have seen their earnings plummet in recent months, with more operations struggling to stay in business and some closing their doors for good.

Their plight has prompted comparisons to the 2009 economic crisis that forced droves of dairies into bankruptcy. Some say it may be worse this time around due to additional inflationary pressures and higher interest rates that make it more costly for businesses to borrow money.

“This is a real downturn,” said San Joaquin County dairy farmer Jack Hamm. “These last two months have been every bit as bad as 2009. There’s dairies for sale every week.”

In 2009, dairy farmers faced an unprecedented financial catastrophe as the global recession took hold. With an abrupt decline in export market demand and an oversupply of milk in the world market, milk prices tanked. At the same time, dairy farmers were paying historically high feed costs.

While milk prices were lower in 2009 than they are now, Hamm pointed out that overall production costs were “so much lower” back then.

Today, not only are dairy farmers paying more for feed, but all their other costs—including for labor, fuel and fertilizer—have skyrocketed.

“It’s tough right now to make ends meet,” Hamm said. “But it’s not the first time we’ve been through it.”

Dairy economists and analysts say milk prices have plunged because the slowing economy and higher food prices have softened demand for milk and dairy products.

Burgeoning milk supplies have not helped. In its report last month, RaboBank noted that global milk production continues to grow, though it’s beginning to lose momentum.

At the same time, food manufacturers continue to hike prices, as they “have learned that higher profits are to be found in ever-higher retail prices,” even though consumers push back by buying less, said analyst Rob Fox in his May report for CoBank.

More than 74% of the state’s milk is used to make cheese and dry whey, or what’s known as Class 3 utilization. The price of Class 3 milk in California stood at $14.91 per hundredweight in June, the lowest since May 2020.

In his report last month, Peter Fredericks, market administrator for the California federal milk marketing order, said Chicago Mercantile Exchange futures suggest most dairy product prices may continue to slide before improving in the fourth quarter.

With their milk checks shrinking and beef cattle prices remaining strong, dairy farmers have sent more cull cows and calves to auction, which brings more income.

“That’s definitely one of the bright spots, and that’s definitely helping us,” said Merced County dairy farmer David Barroso.

California milk cows totaled 1.718 million head in June compared to 1.722 million head at the same time last year, according to the latest figures from the U.S. Department of Agriculture. State milk production slipped 1.2% during the same period.

Nationally, the milking herd has not shrunk. Total U.S. milk cows stood at 8.929 million head last month, up from 8.915 million head in June 2022, with U.S. milk production expanding 0.2%, USDA reported.

“We continue to shoot ourselves in the foot,” said Stanislaus County dairy farmer Pete Verburg. “Most of us are guilty of it: When we have high milk prices, we put on more cows. When we have low milk prices, you put on more cows.”

Not wanting to add to the problem, Verburg said he has not increased his herd in 15 years and has been able to keep his business afloat mainly by not accruing any debts. That he grows his own forages also helps, he said.

But he acknowledged he won’t be making a profit under current economic conditions, which he characterized as worse than 2009.

“In 2009, the banks were still loaning you money, even though you weren’t cash flowing,” he said.

After all the dairy bankruptcies and getting burned in the process, banks have learned their lesson, he said. Today, lenders are less inclined to give dairy farmers operating loans unless they can show how they can stay in business.

With no other option—and with cattle prices as high as they are—Verburg said more dairies are selling their cows and getting out of the business.

“I think you’re going to see a lot of that coming up here in the next couple of months,” he said.

That dairies are culling heavier and sending more cows to slaughter may not necessarily help reduce milk production, he said, as farms are left with their best-producing cows, which could result in more milk.

What may reduce the milk supply is the recent heat wave, which he estimated zapped 5% of his production. Heat stress also disrupts cow reproduction. It’s a financial hit to individual producers, he said, but “it may help the industry in the long run.”

Because he grows his own alfalfa hay and silages, Tulare County dairy farmer Tom Barcellos said his biggest expenses are other ingredients in the feed ration, particularly grains and proteins that he must buy.

Those costs remain elevated, he said, and “the milk check is not covering everything.”

With more water this year, he’s able to farm all his ground, but “that costs money too,” he said, pointing out that the price of fertilizer and seed has gone up. Though he’s earning a “pretty good price” for his cull cows, he noted the cost to buy replacements to maintain his herd has increased.

“If you have any financing, the interest rate has gone nuts, and that’s putting a lot of pressure as well,” Barcellos said.

Risk management tools such as forward contracts and insurance may help, he said, but there are costs associated with them too, and they can “only do so much.”

While other producers may defer maintenance and other repairs on the farm until financial times are better, Barroso of Merced County said upgrades he’s making this year to help cool cows from the heat have helped to maintain milk production.

It’s too early to quantify how much, he said, but “there definitely have been improvements.” He noted his farm lost 20% to 25% milk production last summer without the changes.

“We’ve invested quite a bit into that,” Barroso said. “I’m not sure we picked the best year to do it, just because of cash flow and financial issues, but hopefully we’ll start to pay it off when that upswing happens.”