The Current and Historical Relationship of Dairy Farmers to the Commodity Dairy Industry in the US
By Steven Judge
The dairy industry in the US is an anachronistic mystery for most people in the US, including more than a few dairy farmers. The number of dairy farms in the United States has declined precipitously since WW2, as has the number of dairy farmers and people otherwise familiar with dairy farming. In 1950 there were 3,681,627 dairy farms in the US that milked an average of six cows. By 2012 the number of dairy farms in the US had dropped to 58,000 and the average farm milked 159 cows. Due to the dramatic decline in dairy farms in the country today, very few people in the US understand the economics of the dairy industry and how dairy farmers are paid for the milk they produce. For generations we have heard that dairy farmers are underpaid, and listened to and read sad stories about how smaller neighborhood family dairy farms are going out of business at a rapid clip. They will soon be a thing of the past as factory farms displace them all across the US.
The nagging and rarely answered question is, how did the dairy farmers in the US end up in this situation? Why do they continue to accept consistently low and unfair pay prices for their milk generation after generation? The mechanism that determines the price paid to dairy farmers for their milk in the US is mind numbingly complex. Very few people, even many associated with the dairy industry; including many if not most dairy farmers, understand it.
Here is a very brief and simple explanation of the milk pricing system in the US (as explained in the on-line blog: (http://thedairymom.blogspot.com/) “Dairy producers are paid per 100 lbs. of milk - called a hundred weight (cwt.)* (See footnote). The amount a dairy farmer is paid per cwt. varies depending on which part of the nation they are in and how milk is used in that region. There are four classes of milk; Class I is fluid/drinking milk, Class II is soft products like yogurt/ice cream, Class III is hard cheese and Class IV is butter and milk powder. Each class has a different dollar value, which changes monthly based on a variety of factors such as supply, demand; export markets and the amount of each product in storage waiting to be sold.
The milk price paid to dairy farmers is based on the Chicago Mercantile Exchange (CME) price for Class III milk. In Ohio, dairy farmers are part of Federal Milk Marketing Order 33 (FO 33). On the 13th of each month, FO 33 will announce the price for milk produced in the previous month. That is the minimum price milk processors must pay dairy farmers.
In addition to this minimum price, producers will receive more or less money based on the Producer Price Differential (PPD) and percentage of fat and protein components in the milk. The PPD is determined by how milk in a given federal order is utilized - what percentage of the milk is used for Class I, II, III and IV. Each use has a different dollar value. For example, milk used for drinking commands a higher price than milk used to make cheese. So if a higher percentage of milk is used for drinking vs. cheese or butter, then the PPD will be higher.”
Amazingly, dairy food manufacturers such as Ben and Jerry’s enjoy a federally regulated and implemented price subsidy for the milk they buy. The dairy farmers who sell milk that is utilized for and sold as fluid milk pay the subsidy. A portion of their pay price is diverted to lower the price that dairy food manufacturers are required to pay for their milk. The net result is that when dairy food manufacturers such as Ben and Jerry’s and Stonyfield Yogurt buy milk to manufacture their products, it reduces the price dairy farmers are paid for their milk. And, the more they buy, the lower the pay price is for the all the dairy farmers in their region.
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