A problem of plenty as recession deepens - Money Matters

Fowler, California: The long economic boom, fuelled by easy credit that allowed people to spend money they did not have, led to a huge oversupply of cars, houses and shopping malls, as recent months have made clear. Now, add one more item to the list: an oversupply of cows.

And it turns out that shutting down the milk supply is not as easy as closing an automobile assembly line.

As a breakneck expansion in the global dairy industry turns to bust, Roger Van Groningen must deal with the consequences. In a warehouse that his company runs here, 8-20 trucks pull up every day to unload milk powder.

Bags of the stuff—surplus that nobody will buy, at least not at a price the dairy industry regards as acceptable—are unloaded and stacked into towering rows that nearly fill the warehouse.

Van Groningen’s company does not own the surplus milk powder, but merely stores it for the new owners: the taxpayers of the US. To date, the government has agreed to buy about $91 million (Rs445 crore) worth of milk powder.

“The thing is, they are going to produce it because they have to milk the cows,” Van Groningen said. “It’s like a river. It keeps coming.”

The bags of milk powder represent a startling reversal of fortune for the dairy industry, which flourished in recent years in part because of a growing appetite for milk, cheese, ice cream and pizza in places such as Mexico, Egypt and Indonesia. Many of those countries were benefiting from a global boom led by free-spending consumers in the US.

As American dairy farmers increased their shipments of powdered milk, cheese and other dairy ingredients to foreign markets, their incomes rose. And the demand surge helped drive up the price of milk for American families. The national average for whole milk peaked at $3.89 a gallon in July, up from an average of $3.20 a gallon in 2006.

But now, demand for dairy products is stalling amid a global economic slowdown and credit crisis, even as supplies have increased. The result is a glut of milk and milk products that has led to a precipitous drop in prices.

While consumers are undoubtedly pleased by the lower prices, dairy farmers are struggling to adapt.

“Everything was going great,” said Joaquin Contente, a dairy farmer in Hanford, California. “The product was moving. Then this financial crisis came along and, shoot, the whole thing came to a halt.”

Logic might suggest that dairy farmers would simply sell off some of their dairy cows to a hamburger plant to cut the milk supply and raise prices. Indeed, the dairy industry has a cooperative effort under way to cull the herd.

But farmers are reluctant to do that if they expect a demand recovery, since rebuilding a herd can take years. The culling programme is relatively small, and at least so far, most farmers are holding on to their cows.