Dairy Industry Faces Hard Times

THIS should be the best of times for dairy farmer Ray Diebold. But it's not. After record high prices last year, his milk is selling at record lows. Many farmers are worried. Mr. Diebold sees the downturn lasting eight months to a year.

``You are going to have farmers who financially are not going to be able to make it,'' he says.

The downturn in dairy is a warning signal for the rest of agriculture. Hard times lie ahead. Low prices and reduced government subsidies are going to squeeze the farming sector. Most economists doubt the squeeze will be as severe as the one that wracked agriculture in the early 1980s. For one thing, farmers are in better financial shape to weather this crunch, they add.

The dairy industry, however, could get hit particularly hard by falling prices and shifts within the industry.

Sinking Valley, which extends north of Altoona into central Pennsylvania, is the kind of traditional dairying area that faces uncertain times. There are 24 dairy farms here - small operations run mostly by single families.

Diebold milks 55 cows with his son, Kevin. Between the milkings, the cows graze among trees - a far cry from the huge, automated dairies in the West.

During the 1980s, Northeastern dairymen were insulated from the vagaries of the farm crisis. Only three dairies in Sinking Valley closed up shop in the decade - none of them for purely financial reasons.

Diebold is optimistic the region will not fare too badly in this decade. ``I'm not one of those doom-and-gloom people,'' he says. ``The Northeast is more stable. ... There are other areas of the country that can't stand it as long as we can.''

But change - in the form of farm policy and the dairy industry itself - may not be so kind in the 1990s.

``The dairy industry is headed for a pretty tight period here,'' says Lynn Daft, an agricultural consultant and vice president of Abel, Daft & Earley outside Washington, D.C.

He expects special trouble ahead for a whole tier of traditional dairy states stretching from Vermont to Minnesota, and including Pennsylvania. The reason: This region boasts the nation's highest concentration of small dairy farms.

Until the 1980s, United States dairy policy insulated the industry from changes in agriculture, such as the shift to larger and larger farms. But in 1981, stuck with a glut of dairy products, the US government began dropping milk prices and moving toward a more market-oriented policy.

The five-year farm bill passed in 1985 continued that trend. And the just-passed 1990 farm bill, while freezing milk prices, has set the floor price so low that many small, traditional farms may not be able to make it.

For example, the bellwether Minnesota-Wisconsin milk price in November dipped to $10.25 for 100 pounds of milk - levels not seen since 1978. Adjusted for inflation, the current price would be worth only $6.70 at 1978 prices, says Larry Hamm, a dairy marketing and policy economist at Michigan State University.

Although dairy farms have become more efficient during this same period, Mr. Hamm calculates that the average farmer still made $150 less per cow during the month of November than he would have in October 1978.

The problem is not just that prices are low. They are much more volatile than ever before. Thanks in part to the drought of 1988, milk prices skyrocketed last fall to record highs. In the federal marketing order No. 2, the pricing area that covers parts of New York, New Jersey, and Pennsylvania, the price in November 1989 reached a whopping $15.28 per hundredweight.

The high prices encouraged more production. Within the past year, four farms in Sinking Valley added on new buildings to accommodate more cows, Diebold says. Then milk prices collapsed.

Last month, the price reached $12.52 - an unprecedented 18.1 percent drop in only one year.

One reason for the price collapse was the continued expansion of California dairy producers, who are not under the federal pricing system. The California producers operate dairy farms so huge that they are almost a separate industry from the traditional Midwest and Northeast dairies.

For example, the average Michigan dairyman milks 75 cows, Hamm says. The average dairyman serving Los Angeles milks some 700 cows a day, says Jay Gould, vice president of programs at Western United Dairymen, a dairy cooperative based in Modesto, Calif. California herds of 2,000 cows are not uncommon.

For years, these large dairies have been able to sell their surplus milk to the federal government at a profit, ballooning the nation's surpluses and beginning to undermine the integrity of the milk-pricing system.

The pricing system is now under intense scrutiny. Traditional dairymen want to bring California into the federal system - a move the Californians strongly resent. Many Midwestern dairymen want a single nationwide milk price, while Northeastern and Southeastern dairymen prefer the premiums the current pricing system gives their regions.

Diebold says he thinks the dairy industry is so fractured that the current federal hearings on changing the system won't amount to much. ``If the rules stay the same, we are not going to get the big hurts,'' he says.

But several analysts believe the stresses on the system are so great that change is inevitable.