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Recession Takes Root in Rural Minnesota, Souring the Dairy Economy

October 06, 2010 By Lee Egerstrom, Economic Development Fellow
Congress is readying emergency legislation this week for the ailing dairy industry as the national and global recession spreads to the rural economy in ways important for Minnesotans both on and off the farm.

The dairy industry is disproportionately important for Minnesota agriculture and the state's rural economy because it generates jobs on farms and in dairy plants and remains one of the last truly labor intensive sectors of agriculture.

Now, with dairy prices well below estimated costs of production on most Minnesota farms, jobs on farms and in dairy processing plants look as vulnerable as any in the state's industrial sectors.

Minnesota data assembled by statisticians Kevin Stukenberg and Nicolas Wieland for the National Agricultural Statistics Service shows the dramatic collapse in one year's time.

The average price paid Minnesota farmers for milk in September was $13.50 for 100 pounds - or 13.5 cents per pound, the statisticians said in their Sept. 29 "Minnesota Ag News - Price Report." [PDF] That was 30 cents for 100 pounds more than the national average price last month, and 50 cents more than the August price in Minnesota.

While that shows some upward movement, the average price paid Minnesota farmers for milk in September a year ago was $18.80 for 100 pounds, or $5.30 more than this year, and the average price paid during 2008 was above $19 for 100 pounds before falling below $13 during the first four months of this year. The price swing wiped out profits on most dairy farms.

The U.S. Department of Agriculture has already taken administrative action to raise prices and induce additional demand into the dairy market. That accounts for some price improvements in the past few months.

Emergency legislation primarily pushed by New England and Upper Midwest members of Congress would pump about $350 million into the nation's dairy economy. By the weekend, however, there was uncertainty about how the legislation might work as California members of Congress worried the benefits would favor Eastern and small dairy farmers more than West Coast milk producers.

Regardless how regional concerns get worked out in the days ahead, Minnesota and Wisconsin dairy farmers could use help getting surplus dairy products off the markets. By extension, it is equally important for the broader economies of the Midwest dairy states.

Milk - No Drop in the Bucket
In its "Dairy Products 2008 Summary" report published in May, the National Agricultural Statistics Service tallied production from 37 dairy processing plants in Minnesota, a decline of three plants from 2007.While butter production is especially huge in Minnesota, 12 cheese plants did produce more than 610 million pounds of various cheeses.

All told, there are about 70 plants in Minnesota that gather, handle and process - adding value with each step - to farmers' milk production.
The farm value of milk produced on Minnesota's 4,770 dairy farms in 2008 was $1.658 billion, or 10.5 percent of Minnesota farm income. That was down from $1.692 billion in 2007, or 13.2 percent of Minnesota farm income.

Those higher prices and higher values for milk in recent years promoted farmers to expand herds and increase milk production. Minnesota had 464,000 diary cows in 2008, up from 460,000 in 2007; and these cows produced nearly 8.8 billion pounds of milk in 2008, up from 8.7 billion pounds the year before.

Given the length of time from calf to heifer to milk cow, herd sizes are not easily balanced with markets. The dairy cycle doesn't easily adjust to volatile markets so surplus production for domestic and export markets are again destroying farm profits.
The dairy industry, meanwhile, is labor intensive from farm production, feed, dairy processing, transportation and manufacturing. The Minnesota Department of Agriculture in May pegged total economic impact from dairy production at $9 billion and credited the sector for having more than 39,000 Minnesota jobs.

This is the economic reach and why all Minnesotans are impacted by the state's dairy industry.

Going Forward
The recession has reached deep into Minnesota agriculture. Part of the stronger prices for dairy products in recent years came from exports as demand for protein foods increased around the globe.

That demand strength for the markets has weakened while domestic consumers have rationed food purchases in the face of recession pressures. The U.S. Dairy Export Council trade group tallied dairy exports at $3.82 billion in 2008, a 25 percent increase over 2007, with whey and powdered milk products each gaining more than 40 percent in year over year volume.

But trade value was off 50 percent during the first seven months of this year. Predictably, farm prices for milk have tanked as well.

This creates a serious problem for Minnesota agriculture and for the state's policy makers. With the success of exports in recent years, the dairy industry is less of a domestic supply-demand market than in past decades. This limits what both federal and state policies can do to correct market imbalances.

At the same time, dairy remains a large generator of jobs in the state's economy. Losing dairy farms ultimately means losing jobs in the industry and the multiplier impact is felt in rural communities and in the Twin Cities.

For now, state officials had best hope that federal efforts will succeed in restoring dairy prices by year's end. If not, Minnesota should be prepared to revisit 1980s-style state emergency programs to help dairy farmers ride out the current imbalance in supplies and demand.

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