Expect milk prices to drop after Obama signs Farm Bill

After about a year of record high prices for milk, Louisiana consumers can expect to see those prices go down soon because of the Farm Bill that President Barack Obama is prepared to sign Friday, Louisiana dairymen say.

“I’m going to guess about 30 cents a gallon once everything gets through the pipeline,” said Jeff Kleinpeter, picking out numbers from the various government orders that determine the tightly regulated price of milk, then pecking at his calculator. A dairy farmer and processor who also buys milk from 20 nearby farmers, his family sells about half the milk bought in the Baton Rouge area.

“We need stability so that the farmers will feel confident about planting certain crops. Once they do that and they plant more of it … then prices will come down,” Kleinpeter said. “Right now, I’ve never seen higher prices for milk.”

Mike Canella, store manager for Hi Nabor, a grocery store on Winbourne Avenue in north Baton Rouge, says milk is the commodity that most customers buy whenever they enter a grocery store. “We get milk delivered every day,” he said, adding that most customers tend to buy based on price.

Because state law requires retailers to mark up the price by at least 6 percent over the cost, milk prices tend to track what producers charge.

A quick survey Thursday of a dozen grocery stores in Baton Rouge and New Orleans showed prices for a gallon of whole milk sold as a “store brand” were within a few cents of $4.50, which is just above 6 percent of the price most producers are charging. The “local brands” of milk, such as Kleinpeter’s and Brown’s, were about a dollar more per gallon. Local brands, which use milk produced by nearby dairy farmers, tends to be fresher and last longer on the shelf than milk produced by large conglomerates that ship their product to Louisiana stores from out of state.

The U.S. Department of Agriculture each month uses a complex formula that takes into account many costs and factors. Federal Order No. 7 sets the price Louisiana’s 135 dairy farmers are paid for their raw milk.

The price for February is $26.32 for what is called a “hundredweight.” That calculates out to about $2.26 per gallon. The handful of processors still in business in the state transport the milk from the farm to the facility, where the commodity is tested, pasteurized, homogenized, bottled, then delivered to stores. That generally doubles the cost to which grocers have to add at least 6 percent to the price charged consumers.

Most of the attention on the $100 billion a year Farm Bill, which took five years to pass, was on the 47 million food stamp recipients. Food stamps were cut by $800 million, or about 1 percent. The bill also expanded crop insurance programs to create a cushion for farmers who face financial ruin because of unpredictable weather and market conditions.

Michigan State University announced that the president would sign the Agriculture Act of 2014 during a visit Friday. Michigan is the home state of U.S. Sen. Debbie Stabenow, who chairs the Senate Agriculture committee.

Much of the fight took place over dairy supports that had been in place since the 1930s. U.S. House Speaker John Boehner, R-Ohio, said he would not move a bill that included the traditional subsidies.

Instead, Congress agreed on a program in which dairy farmers pay premiums in exchange for guarantees, generally, that federal money would be available to individual farm operations if the price of milk fell below the cost of producing the commodity.

Traditionally, because the nation’s leaders wanted to ensure milk was available, they created a system that while it wouldn’t enrich dairy farmers, at least guaranteed a stable income. But in 2009 and again in 2012, the price of milk plummeted at the same time as feed prices went up, leaving a lot of dairy farmers without enough money to repay bank loans.

The old subsidy program made sense in 2000 when the corn that is fed to cows was $2.50 per bushel, said Andrew Novakovic, an agricultural economist at Cornell University in Ithaca, N.Y. When prices increased to $6 to $8 per bushel, the traditional subsidies were anemic. Plus, the old program, which subsidized smaller farms, did not cover the losses of the larger operations that own the most cows, buy the most grain, and produce the most milk.

The Margin Protection Program outlined in the bill gives dairy farmers more comfort that they’re not going to get devastated by a bad price-to-cost squeeze. “This dairy program pretty much takes the preexisting programs for dairy, tosses them in the trash can and comes up with something completely new,” Novakovic said.

Under the old program, when times were bad, smaller farmers got a check. Under the new program when times are bad, small and large farmers get a check.

“In that sense, it’s not all that different. But the mechanics of it and also the availability of it is really different,” Novakovic said. Who receives the money — and how much — is now based on the amount of milk they produce, rather than the number of cows they own.

He wouldn’t bet on an immediate decline in milk prices on grocery store shelves. “But by the same token, I would say that you, as a consumer, are going to continue to have a decent deal on milk. It’s not going up,” Novakovic said.

Donnie Fisher, a dairy farmer in DeSoto Parish, said the margin program “helps ensure that milk is on the shelf when you want it. Otherwise, it’d end up being rationed,” because dairy farmers would quit the business and not enough milk would be produced. Additionally, the farm bill also helps the farmers who grow the grain used to feed the milk cows, which should help that price from going dramatically up again, he said.

“This will be one of the best years for Louisiana dairy farmers since 2008,” Fisher said.

After calculating the various factors, Fisher also predicted a roughly 30-cent per gallon decrease in the price to consumers over the next few months.

But Louisiana Agriculture Commissioner Mike Strain waved a caution flag. He agrees the farm economy should stablize under the Farm Bill and that generally will help dairy farmers.

Speaking from a Washington, D.C., airport while waiting for a flight home after meeting with officials on the Farm Bill, Strain said the Margin Protection Program was added to the Farm Bill only a couple weeks ago, so all the details are not yet known.

“I have read that,” Strain said of the optimistic predictions that milk prices will drop. “That is a speculation that is out there, but I don’t know, they haven’t written all the rules yet.”