Special Reports

Local dairy operators in crisis, at crossroad

Just about every time dairy farmers milk their cows these days, they're losing money.

They face growing pressures from all sides: weak demand, a declining export market and low milk prices.

Many have made the difficult decision to give up their life's work. Others are at the crossroads -- hanging on in hopes one of the worst dairy crises in recent years improves soon.

At stake is the future of an industry central to the central San Joaquin Valley's economy. The Valley leads the nation in milk production.

"A lot will depend on how long people can hold their breath," said Leslie Butler, a dairy economist at the University of California at Davis. "People will use all the resources they have, but there will be many who say they just can't make it anymore."

Fred Machado of Easton, a veteran dairyman, is among those who grew weary of losing money. He lost $70,000 a month over the past six months.

"I was going to end up with nothing, unless I got out," said the 77-year-old Machado. "I started this dairy from scratch, but I couldn't see the light at the end of the tunnel."

Machado sold his 900 cows as part of an industry-funded program aimed to cut milk production. This year, 103,000 dairy cows across the country have been sold to beef processors. Another round -- the eighth since 2003 -- is expected.

Of the 388 farms participating in the program this year, 80% are from the southwest and western U.S., including the dairy-rich San Joaquin Valley.

"Right now, it is safe to say that a vast majority of producers are having a difficult time of it," said Jim Tillison, CEO of the Virginia-based Cooperatives Working Together, the organization operating the cow-cull program. "And we're not done yet."

Machado, a farmer for more than 50 years, will continue in agriculture. He has 800 acres of almonds, grapes and corn. But it was the dairy where he devoted most of his time.

At one time, he was milking more than 1,500 cows. Now, the dairy stalls and barns are empty.

"I do miss it," Machado said. "But so much has changed in this business. And I don't think anyone thought things would get this bad."

In survival mode

Milk pricing has long been cyclical, like much of agriculture. But dairy operators have been hit by a combination of factors, including high operating costs, a weak economy and a declining export market.

When times were good -- and it wasn't that long ago -- the money and milk were flowing.

A shortfall in worldwide dairy products provided an open door for U.S. producers. They seized the opportunity, ramping up milk production. Last year, U.S. dairy exports reached $3.82 billion, a 25% increase over 2007.

But a global recession hit, shrinking the U.S. dairy industry's exports. In the first five months of this year, exports were down 53% compared to the same period in 2008, according to the U.S. Department of Agriculture.

The problem was that the cows kept producing. And without a brisk demand, supplies continued to build and prices plummeted.

Machado and others in the industry could see the problem developing.

"People built these huge dairies with no plans to market the milk, only plans to produce," Machado said. "Some of us have tried to keep growth down, but it hasn't really worked."

Talk of curbing production have been renewed of late. Members of the state's five dairy cooperatives are trying to reduce production by 5%, hoping the move will help boost prices that have fallen below the cost of production.

But many observers believe the dairy industry is not structured to give producers a sufficient incentive to control milk-production levels. The industry leaves itself vulnerable to the price pressures that come with declining demand, they say.

The average cost of making milk in California is $15 per hundredweight -- 100 pounds of milk -- while dairy operators are earning about $9 a hundredweight.

The federal government has stepped in and bought excess product, including 100 million pounds of nonfat dry milk since the start of the year. But it was a little too late for some.

Last year, 99 of California's 1,700 dairies went out of business. And this year, the number could reach at least 150, said Michael Marsh, CEO of the Modesto-based Western United Dairymen, whose 1,000 dairy members produce 60% of the state's milk.

Marsh's group and the dairy industry are in survival mode. They are looking at short-term and long-term solutions, including boosting domestic consumption, using government incentives to export more dairy products and creating a better safety-net program.

"There is not doubt we will see fewer dairies," Marsh said. "And we are very concerned about the financial stability of the ones who get through this."

Bruce McAbee, executive vice president at Fresno Madera Farm Credit, said he has encouraged his clients to save during good times so they can weather downturns in the economy.

"But I know a lot of dairymen who are going through all of their liquidity right now," McAbee said. "It's unfortunate, but that is what's happening."

And it will be very difficult for any lender to take on a new dairy customer.

"It will be a challenging year," McAbee said.

Cutting back

George and William Longfellow hope they can survive. But they also know they face long odds.

Sitting at a well-worn farm table in an office at their Hanford dairy, the brothers struggle to remain optimistic.

"At this point, we just don't know what will happen," said George. "We just don't know."

Dairy operators since the time they were children, the Longfellows grew up fast on their Hanford dairy. In some ways, they had no choice.

In 1963, their father, George senior, was kicked in the head by a cow and suffered permanent brain damage.

George, then 13, and brother William, then 11, took over many of the farm chores, helping their mother, Edith, run the family dairy. Up at 4 a.m., they worked for several hours before going off to school. After school, there was more work to be done.

Although they both went to college, they chose to come back to the dairy, raising their families and building a 1,700-cow herd.

They have invested several million dollars in upgrading their dairy and complying with strict air- and water-quality requirements.

The sprawling operation includes 1,500 acres of corn, alfalfa, wheat, barley and cotton.

But the dairy is losing money, more than $170,000 every month. To make matters worse, they owe about $750,000 in inheritance tax after their parents died.

"All of this can just wear you down," William said.

To stay afloat, the Longfellows are drawing equity out of their farm through a line of credit.

They have cut back on cattle feed, farm chemicals and the use of a veterinarian.

One of their farm managers told them recently there were a few bugs in their alfalfa, but William didn't spray.

"You can't spend money you don't have," he said.

They keep hoping and praying -- members of William's church provide him with spiritual support -- for the economy to rebound soon and for milk prices to start edging upward.

"We've looked at some estimates, and people say that maybe by September things will begin to change," George said. "And we will do everything we can to hang on until then."

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