Corporate model drives farmers to sell
By Jesse Roman
Through the first half of 2009, Vermont dairy farms folded at rate of one every five days. Of the 1,000 or so farms left, about 20 percent are in the process of restructuring their government debt payments.When the Borland family sold off their farm in West Glover this month — which the family had worked for 144 years — patriarch Ken Borland, 62, signaled that in many ways the sale was a relief; a heavy weight was lifted.
“That’s what farming’s been these last six months, trying to stay afloat with anvils. This is the day that I let go of mine,” he said to the crowd at the auction just before his cows were about to be sold off.
There’s little doubt that many farm families in Vermont envy such escapes. The Borlands unshackled themselves from a sinking ship, in which Vermont’s iconic dairy industry may drown under a sea of debt.
Most farmers will tell you they should have gotten out by now; all know their time to sink or swim is coming soon.
“Unless something dramatic happens, most farmers will be much better off selling the farms,” said Dr. Bob Parsons, an economist who focuses on farm management at the University of Vermont extension service. “At some point, when you’re in a hole, you have to stop digging. It sounds cold, but who’s going to come to the rescue? I’m not sure there is a cavalry here.”
“Dairy operations will go out of business across all sectors,” confirms Glenn Rogers, regional farm business management specialist at UVM extension. “We will have fewer farms; there will be consolidation.
Here’s the sad reality that has become Vermont dairy farming: You’re paid $1 per gallon of milk that costs you $1.50 to produce. You break your back from dawn to dusk and lose $10,000 per month while you supply raw material to giant milk processors who are posting record profits.
In the last year, feed prices have doubled while milk prices have plummeted. As a result, many farmers around the state are borrowed to the max, with no real prospects for a rebound. Milk-price futures, which indicate investor expectations, show prices will stay well below the cost of production at least into next June.
“The prognosis is that farmers will continue to lose money all through the winter,” Parsons said. “The question is: How long do they want to hold on? Many are going to have to get a bank loan to pay their feed bill. If you were a banker, would you do it? What do they have left for collateral?”
Broken system
In the modern era, dairy farming has been a tumultuous business.
Milk prices follow the principles of supply and demand, and right now the worldwide milk market is oversaturated.
At present, Australia is a problem. Dairy producers there have rebounded from a long drought, and Australia’s rising milk production is cutting sharply into U.S. milk exports to Asia. That leaves a lot of milk with nowhere to go, Parsons said.
U.S. dairy farmers were exporting almost 11 percent of their product in 2008, but this year that has been cut in half.
“With the economic slowdown we’ve seen in the United States and across this world, people are not buying high-end cheeses, high-end ice creams. Manufacturers are finding ways to cut ingredients,” says Rogers of the UVM extension. “All these factors are layered on top of one another.”
Milk isn’t like oil: People don’t consume more if the price drops. And, in hard times, farmers collectively tend to produce more, trying to increase their revenue.
Rogers says this is the worst situation he’s seen for farmers in 34 years. The immediate answer, he says, is to reduce the milk supply.
That is beginning to happen.
According to industry data, dairy cattle slaughter in the United States increased nearly 10 percent in the first four months of 2009, compared to the same period the previous year. Apparently, slaughtering dairy cows has become more profitable than milking them.
The National Milk Producers Federation recently announced it had accepted 294 bids from farmers around the country to “retire” their cattle — the third such “retirement” in nine months. The program is so popular, the organization had to turn many farmers away.
The latest wave of slaughter will involve 87,000 cows that produce about 1.8 billion pounds of milk per year, the second-largest cow elimination in the program’s history.
The largest occurred just a few months ago, when the federation sent 100,000 dairy cows to the slaughterhouse. Between those two cow “retirements,” the U.S. milk production capacity was cut by about 2 percent, and more is to come.
Jerry Kozak, president and CEO, said the milk federation “stands ready to conduct yet additional herd retirements later this year in order to help address the severe supply-demand imbalance that has depressed farm-level milk prices.”
Many farmers feel it’s not just cows that are being led to slaughter. Reducing the overall number of dairy farms, brutal or not, is considered the real solution by some lawmakers in Washington, says Anthony Pollina, a former gubernatorial candidate and founder of the now-defunct Vermont Milk Co.
“There’s no doubt that ups and downs (in prices) and loss of farms is the goal of the current policy,” Pollina said in an interview. “I went before Congress about five years ago and I brought up a statistic that we are losing one farm every four minutes. And one senator told me, ‘You don’t understand; the policy is working just fine; you have to let it run its course.’ Efficiency is fewer farmers working bigger farms. That is the corporate model, and in their view, that is what efficiency is all about.”
Farm to fridge
To understand the farmers’ conundrum, you have to examine the corporate forces that drive the milk industry.
If you’re a farmer in Vermont, chances are good you belong to and sell your milk to Massachusetts-based Agri-Mark (the owner of Cabot cheese), or the St. Albans Dairy Cooperative Creamery. Member-farmers own both groups; members pay dues and all profits are redistributed back to the farmers at the end of the year.
Co-op trucks visit farms every other day or so, pick up the milk and ship it to processing centers where it is prepped for sale — most likely to Hood or Dean Foods, the two biggest milk buyers in the Northeast.
As of June, Agri-Mark paid its farmers just over $11 per 100 pounds of milk it shipped to its Middlebury processing plant — down almost $8 from a year ago. It cost most farmers $16 to $18 to produce 100 pounds of milk, which means enormous losses.
Why would a farmer cooperative pay its own members 40 percent less than it costs to make the milk?
“If we say to a customer, ‘We need the cost of production for our milk,’ they’ll say, ‘OK, we’ll just buy it elsewhere,’” says Bob Wellington, chief economist at Agri-Mark. “There are several places buyers can go that will sell it under cost.
“We have to move the milk. There is no other place to put it.”
“Unless you turn (the milk) into cheese, it is not worth anything after 10 days. You have a liability on your hands, and you have to do something with it,” says Rogers, an economist at the UVM extension service. “If (Agri-Mark) controlled 100 percent of the market, (it) could set the price. But there is enough competition and independence where buyers will go to the lowest prices.”
Vermont farmers account for just 1.5 percent of the milk produced in the United States. Coincidentally, Agri-Mark, which has members throughout New England and New York, also handles about 1.5 percent of the national milk production.
“We’re not a big kid on the block; in fact we are a very small kid,” says Parsons, the economist at UVM. “St. Albans has quality milk, but if a processor in New York is willing to sell its milk at $10 per hundredweight, what can you do? It is a highly perishable product and it has to be produced every day. Agri-Mark and St. Albans pasteurize the milk and it’s not there very long before it has to be shipped somewhere else.”
Farmers and their cooperatives take what they can get and have little or no power to negotiate prices. It’s either sell the milk to one of the few major processors in the area for less than the cost of production, or get out of the business.
“I don’t think they are independent enough of Dean Foods and other organizations to make decisions for themselves,” says Pollina, a longtime critic of Agri-Mark.
Profit-mongers
While farmers are going bankrupt, it’s clear someone is making a substantial profit.
The average cost of a gallon of whole milk for Vermont consumers was $3.45 in June, according to Vermont Milk Commission data. Farmers are paid just $1 per gallon of milk they produce.
“The money is there, but the money is going to the Dean Foods of the world,” Pollina said.
Dean Foods, which controls about 70 percent of the Northeast’s dairy supply — product lines include Garelick Farms, Horizon Organic, Land O’ Lakes, and many other dairy brands — is by far the largest milk processor in the nation. The company, which is five times larger than its next-largest competitor, had annual net sales of more than $12 billion in 2008, and this year looks even brighter. In May, it announced first-quarter profits of $76.2 million, more than double last year’s $30.8 million. Just last week, it announced a second-quarter profit of $64.1 million, up from $48.9 million the year before — a 31 percent jump.
“It’s all about the big guys making a profit,” said John Clark, whose family owns and operates Applecheek Farm in Hyde Park. “We have a very broken food system in this country and we need to start to recognize that. These big companies and corporations with special interests drive the food system, and drive the farmers out.”
In the last 20 years, there has been a massive consolidation of the New England dairy processing industry, led by Dean Foods. Since1994, Dean Foods has bought up more than 40 of its competitors around the country, and increased net sales from $150 million to more than $12 billion.
“There used to be 10 to 12 major food and milk bottlers in New England; now there are maybe four,” says Bob Wellington, the Agri-Mark economist. Agri-Mark sells its milk primarily to Hood, the second-largest processor of New England’s milk.
Since there is a finite demand for milk, more competition among milk buyers would not solve the entire supply-and-demand imbalance, economists say. However, when one company controls such a large percentage of the industry, it has the ability to influence prices in its favor.
“If I have 1,000 Fords, and there is only one buyer, when that buyer comes in I have to sell my Fords at whatever price,” Rogers said. “And we’re talking (with milk) about a perishable product.”
U.S. Sen. Bernie Sanders, I-Vt., is calling for a Senate antitrust investigation into the dairy industry. He said that could lead to the breakup of Dean Foods and, he hopes, an increase in what farmers are paid for their milk.
The company already faces civil antitrust suits in Tennessee, where producers claim the company has weakened competition and artificially driven up prices for consumers.
As Pollina points out, farmers — unlike Dean Foods — can’t consolidate in a way to exert power over prices.
“Farmers are not allowed to form unions under federal law. Technically, they are not employed by anyone,” Pollina said. “They are independent businesspeople, but they are not very independent. They are at the mercy of very large corporations.”
Nor can they band together to form one giant cooperative, which would control the market and be able to set a price.
“That would be a monopoly and that is illegal,” Parsons says.
Their lone tool is to form regional cooperatives, like Agri-Mark and the St. Albans Cooperative. Unfortunately, neither can do much to influence prices or to give their members much of a reason not to go the way of Ken Borland.
“We’re trying to get more money back to our members,” said Wellington, of Agri-Mark. “But it’s not even close to enough.”
