Milk prices and cooperation

I’ve seen a couple of articles about milk prices in the last few days, which is not surprising because the dairy industry is undergoing a historic price collapse that will probably drive many farmers out of business. Basically, the story is that farmers are being pushed to take drastic measures like destroying milk and even turning milk cows into burgers.

Unfortunately, those articles that I’ve found outside of specialized agriculture publications have missed a very important point in this whole story: Co-ops. The New York Times did a story about organic dairies, and while it did prominently mention a co-op, Organic Valley, it did not make any distinction about how it was different from its main competitor. Maybe there isn’t much difference in the prices that members receive, but it would be important to know this as part of the story. In any case, the members at least have a say in the democratic structure of a co-op.

Historically, a very large portion of the dairy industry has been cooperative because of just this sort of volatility. Milk production is a finely-tuned system in which supply must be closely matched to processing capacity and demand. Before co-ops, farmers basically had to take whatever price was offered. The perishability of their product meant that they could not shop around. In any case, those processors that stayed in business long were probably running at full capacity. By forming co-ops, farmers gained some control over prices, and they had a way to limit the gluts that cause these price collapses.

Unfortunately, co-ops have a significant weakness in that when there is a price boom, their stable prices suddenly don’t seem like such a great deal. Some members may quit, and this can sometimes weaken a co-op to the point of failure. Inevitably, prices go back down and the old co-op doesn’t seem like such a bad thing.

The Sacramento Bee also published a story on the price collapse, and it had an unfortunate lack of information about the distinction between dairy farmers and dairy producers. To get an idea of where the problem lies, consider that the story reports that farmers are getting $1.01 per gallon for raw milk, which cost them about $1.50 to produce. The average retail price is about $2.61. There are obviously costs involved with converting a tank truck of raw milk into a carton in your grocery store, but it seems worth considering that a lot of the $1.60 of mark up (which is nearly constant despite commodity price fluctuations) is going to be profit for various intermediaries, including processors, marketers, distributors, and groceries. 

Even though the story mentioned the need to reduce herd size by grinding up Betsy, it did not go into the detail of how that would be managed. It refers to a new effort to cull 103,000 head, but ignores Cooperatives Working Together ,which is one example of the solution that co-ops offer. This voluntary, farmer-led program has been addressing the herd size problem during several busts that have happened since 2003.

Unfortunately, the voluntary nature of CWT will limit its impact as long as there are those who keep boosting production. There may turn out to be such a severe problem that only government intervention can turn it around. But in order for people to understand the ramifications of that, we need better information from our journalists about what other options remain. So far, the government has been buying milk powder with our tax dollars and shipping it out of the country. The shortcomings of such an approach should be obvious, so we should hope that this particular crisis can be addressed with minimal additional government help.

For those wishing to dive deeper into this, here’s the analysis of Geoff Vanden Heuvel, who is quoted in The Bee and understands the industry a lot better than I ever will. His first recommendation, is that “there needs to be some type of growth management. New production must not be able to demand market share just by showing up; some type of buy-in needs to be created.”

That sounds a lot like a co-op to me.

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One Response to Milk prices and cooperation

  1. Great Blog, Milk doesn’t impress many people but still staple in almost every Americans’ lives. As a commodity broker the price swing has been just as extreme as the stock market. Lower heard, less milk, less farmers all equals higher prices right?

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