Oregon dairy farmer Jerome Rosa has been producing milk for Organic Valley since 2001.
And despite the fact that demand for his product is growing, he says the past year has been by far the worst for the dairy business “hands down.” Since 2010, the price of the organic feed Rosa buys for his cows has doubled. But the price he gets paid for his milk has not.
Thus, he and other organic dairy farmers across the country say they can’t produce enough milk to meet growing demand. Organic milk shelves in supermarkets across the country are bare – some with signs notifying customers of a nationwide shortage.
“There’s a shortage of milk, but we can’t afford to buy the feed to meet the shortage,” Rosa said. “We’re having to short stores and only give them 90 or 95 percent of what they need.”
There are a couple theories on what’s driving the shortage. One blames the federal and state subsidies for corn-based ethanol production. Another blames bad weather in the Midwest last year.
Either way, the price of feed is the problem, and growing demand for organic milk is making it worse. According to the U.S. Department of Agriculture, sales of whole organic milk nationwide increased 17 percent from January through October 2011 compared with the same period in 2010. During that period, conventional milk sales decreased by 2 percent.
The shortage apparently isn’t as severe in the Northwest as it is elsewhere. I checked half a dozen grocery stores in the Portland metropolitan area and didn’t find any shelves that were completely empty. According to last week’s report on organic milk from the USDA, the shortage is most pronounced in the Southeast because the region has so few organic milk processors.
Farmers blame ethanol subsidies
Jim Krahn, executive director of the Oregon Dairy Farmers Association, said all dairy farmers are feeling the impact of federal subsidies for corn-based ethanol fuel. He said 45 percent of the corn produced in the U.S. last year went to ethanol production. That reduced the amount of corn available for feed and drove up the price conventional feed crops.
“And organic feeds even more so,” he said. “What’s happening here in the Northwest is organic producers are concerned about whether feeds will even be available for them in the coming years.”
Corn is the “base feed” for many farmers, he said. When its price goes up, so do the prices for alternative feed crops such as wheat and alfalfa.
Farmers who grow organic feed crops don’t produce as much as conventional growers, and they can only charge so much for their crop before no one will buy it. Thus, as conventional feed prices have gone up, Rosa said, organic farmers can make more money by switching to conventional crops.
“Organic milk producers are extremely concerned about the price of feed, obviously, but more about whether it will be available down the road,” said Krahn. “The price for conventional feed is extremely high also, but it is available.”
Corn: The only lower-cost substitute for oil?
Although the controversial ethanol tax credits launched in 2004 expired at the end of last month, Krahn said there are renewable fuel standards in the U.S. and individual states that will drive farmers to continue producing corn for fuel.
Bruce Babcock, agricultural economist at the University of Iowa, recently told NPR that most farmers haven’t even noticed that the ethanol subsidies are gone “because the price of corn has been so high and it continues to be so high – with or without the subsidies.”
The U.S. has actually been exporting corn-based ethanol to Brazil, he said, where farmers can’t produce enough sugarcane to keep up with demand for the cheaper oil substitute.
“I don’t see anything on the horizon suggesting that gasoline or crude oil prices are going to go down,” said Babcock. “When you have $100 crude oil prices, that increases the price of gasoline and that increases the search for lower-cost substitutes for gasoline. Corn ethanol really is the only lower-cost substitute we have right now in the short-to-intermediate run.”
Drought in the Midwest didn’t help
Tom Baker is the sales manager for Portland’s AlpenRose Dairy, a mid-size milk processor that supplies organic milk to Zupan’s Market, among other outlets. He said the biggest factor impacting the availability of organic milk now isn’t ethanol subsidies, but the drought the Midwest saw in 2011.
“It killed off a lot of organic herds, and it made it totally unprofitable for organic farmers in the Midwest because they couldn’t get their hands on any organic feed,” he said. “If there hadn’t been the great weather disaster in the Midwest, we would have had plenty of milk in the Northwest for the season.”
The dry weather dramatically reduced organic crops production and forced the dairy industry to start importing feed and milk from the Northwest, he said.
“There’s a gigantic shortage in the Midwest,” Baker said. “When that happens, organic grain from the Northwest pours into the Midwest to fill the shortage. Now you have railroad tanker cars of raw organic milk coming from the Northwest going to the Midwest.”
He said he’s been able to get the supply of organic milk his customers need, but only at a 15 to 20 percent premium.
How high can prices go?
Organic milk prices are going up across the country, too. A report from the USDA at the end of 2011 said the average price for a half-gallon of organic milk was $3.62 – up 51 cents, or 16 percent, from 2010.
George Siemon, founding farmer of Organic Valley, announced on Friday that the cooperative will be increasing its pay price to farmers in March to make up for skyrocketing feed prices and supply shortages.
“It’s important as we start 2012 to support our farmers during these difficult supply times by increasing our farmer pay price,” he said in a press release. “We recognize the challenge of high feed costs, and it is a major issue.”
But Rosa said the price can only go up so high before customers reach their breaking point and switch to conventional milk or another substitute. And farmers can only lose money for so long before they go out of business or switch back to conventional milk production.