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Dairy Chief Calls for Milk Revamp as Prices Plunge (Update1)
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By Alan Bjerga

July 14 (Bloomberg) -- U.S. milk-price support programs are hurting dairy companies as they try to expand and innovate, according to the head of a trade group representing Dean Foods Co. and other producers.

Government programs distort markets, contributing to imbalances that have helped push wholesale milk prices down 46 percent in the past year, said Paul Kruse, the chief executive of Brenham, Texas-based Blue Bell Creameries LP. He testified for the International Dairy Foods Association at a congressional hearing today in Washington.

As dairy farmers cope with low prices, lawmakers need to re-examine policies rather than increase subsidies, said Kruse, who is also chairman of the dairy group. Congress should “avoid the temptation to put a Band-Aid on an old system and look at long-term approaches that get us to grow and innovate as an industry,” he said.

The USDA, which raised dairy-export subsidies in May, is seeking ways to help milk producers, James Miller, the undersecretary for farm and foreign agricultural services at the U.S. Department of Agriculture, said at the hearing. He said the department expects prices to rise later this year and in 2010.

Appearing at the hearing, House Agriculture Chairman Collin Peterson, a Minnesota Democrat, said the department may be able to help farmers by raising support payments, adding that the USDA’s options are limited by the structure of dairy subsidies. He chuckled when asked later about Kruse’s suggestion for a policy overhaul.

‘Never’ Low Enough

The dairy foods group, which includes milk-buyers such as Kraft Foods Inc. and Safeway Inc., “can never get prices low enough,” Peterson said. He said the agriculture committee plans to hold more hearings on low dairy prices, including the role trade is playing in putting U.S. farmers at a disadvantage.

Milk prices dropped after industry output climbed to a record last year while demand fell. Class III milk futures for July delivery were unchanged at $9.89 per 100 pounds (43.5 kilograms) today on the Chicago Mercantile Exchange.

Production is projected to fall 1.3 percent to 187.6 billion pounds this year from 190 billion last year, the USDA said on July 10. Output will decline to 186.4 billion pounds in 2010, the first back-to-back decreases since 1969, according to data from the department.

Falling Prices

Average cash prices this year will drop 39 percent, the government estimated last week. To prop up prices by curbing supply, the National Milk Producers Federation in Arlington, Virginia, paid U.S. dairies to slaughter about 101,000 cows this year, and last week began another effort to reduce herds.

Farmers are killing milking cows partly because the cost of corn, the primary dairy feed ingredient, averaged about $5.38 a bushel last year, based on Chicago futures. While corn’s average price has dropped to about $3.95 a bushel this year, fluid milk exports sank 14 percent through May, the U.S. Dairy Export Council has reported.

In June 2007, class III milk futures reached $22.45 per 100 pounds, the highest since at least 1996, as a drought in Australia and New Zealand, the world’s biggest exporters, curbed supplies. Demand increased in Asia as economic growth allowed consumers to switch to more protein-based diets.

Milk futures prices will double next year to a record $23 per 100 pounds as the U.S. dairy herd shrinks by 171,000 head, the most since 1989, Michael Swanson, a senior economist at Wells Fargo & Co., said last month. Wells Fargo is the largest lender to U.S. farmers.

To contact the reporter on this story: Alan Bjerga in Washington at abjerga@bloomberg.net.

Last Updated: July 14, 2009 13:19 EDT