Squeezed the last drop: the vexed economics of small dairy farms

Any day now, Bill Sherwood will shut down his 50-cow dairy farm in Bethel, a stretch of pretty rolling pastureland outside of Boone, a town in the Appalachians of North Carolina.

“I sold my cows to a man in South Carolina,” he told me recently. “I’ll keep milking them until he comes and takes ‘em away.”

As late as the 1970s, there were 15 small dairy farms in Bethel. When Sherwood shutters the dairy business he started in 1959, there will be none. Similarly, the hills of Watauga County once teemed with dairy farms, most of them small in scale. According to Watauga County extension agent Frank Bolick, the county will only have one left when Sherwood retires, Tommy Tester’s 20-cow operation in the Silverstone Community.

The collapse of dairy farming in Watauga County stems from broad trends in the dairy industry and U.S. agriculture generally. Simply put, farmers have seen prices for their goods decline or stagnate, while the cost of doing business rises steadily.

According to the USDA’s Economic Research Service, in the early 1980s it cost farmers $11.90 to produce 100 pounds of milk, which drew an average market price of $13.40. That makes a 1.5 percent return. By the late 1990s, however, the average cost of doing business had actually run ahead of the average price. The economic return to the farmer went negative, to 1.6 percent.

Given those conditions, conventional dairy farmers face two choices: either get bigger, to try to make up on volume what they’re losing in price, or get out of the business.

A recent study by Geoff Benson, an agricultural economist at North Carolina State University, shows that the total number of U.S. dairy farms plunged from about 158,000 in 1993 to under 100,000 in 2001. Smaller farms showed a much higher tendency to go out of business than larger ones. Nationwide, about 15,000 farms in Sherwood’s size class—herds ranging from 30 to 100 cows--went out of business between 1997 and 2002, a 23 percent drop in just four years.

Meanwhile, the number of farms with herds of over 500 cows actually grew during that period, Benson reports. “Cows are being redistributed from small farms to larger ones and average herd size is increasing,” he writes.

Two major factors drive the low price farmers draw for their milk. The first is oversupply. Farmers have been squeezing as much milk as possible out of each cow to offset stagnant prices and rising costs. But doing so has caused a treadmill effect—the resulting glut of milk only makes it cheaper, forcing farmers to drive up production still more.

The second factor is consolidation of processors, the companies that buy the milk produced by Sherwood. The four largest processors buy 60 percent of the milk produced in the United States. In many regions, including this one, a single buyer exists for milk destined for fluid consumption (as opposed to cheese and other processed products). Most of Sherwood’s milk went for processing to Pet Dairy in Wilkesboro, a subsidiary of Dean Foods, the largest U.S. processor.

Dean recently announced plans to shut down the Wilkesboro plant, consolidating its business with another plant in Winston-Salem. Since farmers typically pay for trucking milk to the processing plant, that would have added to Sherwood’s cost burden.

When a single buyer controls a market, it wields tremendous leverage to minimize prices.

It’s not surprising, then, that Bill Sherwood’s son, James, has elected not to take over the farm when his father retires, choosing instead to work a county correctional facility.

“It just doesn’t make sense,” he told me recently. “Our costs keep going up, but the price the company pays stays the same.”

In a future post, I'll discuss ways in which communities can wrest control of dairy production from the mega-processors.