From the gallon of 2 percent in your fridge to that Cheesy Gordita you had for lunch, the story of the dairy industry is sure to hit you in the stomach.

By Kirk Kardashian '00

Illustrations by Peter Horjus

He never thought it would come to this.
    “Are you Robert Simpson?” asked Deputy Sheriff Carrie McCool.
    “Yes.”
    “Did you bounce two checks to Feed Commodities, Mr. Simpson?”
    “Yes.”
    “Put your hands behind your back, sir. I need to take you in.”
    Simpson chuckled, his ruddy face growing a deeper shade of red. “You’ve got to be kidding me.”
    “Afraid not,” she said.
    Simpson, a stocky but gentle 58-year-old, protested a bit more. But within 30 seconds, he knew it was no use. Right or wrong, he was being arrested. So he turned around and McCool fastened handcuffs on his thick wrists. Then she opened the back door to her squad car and helped him in.
    As the car bumped down the steep, washboarded driveway, Simpson worried about his herd. He was shorthanded that day — May 1, 2009 — and he needed to move a few dozen of his Holsteins from the lower pasture into the feed barn on his farm in Braintree, Vt. His wife, Tay, had gone to the store. His son, Andrew, was away for the weekend at a wedding.
    At the police station in nearby Randolph, a small, blue-collar town with a cheerful main street of brick storefronts and American flags, Simpson was fingerprinted, photographed, and cited with two felony counts of false pretenses. The charges dated back to October of 2008, when he had inadvertently written two bad checks, each for roughly $7,300, to pay for a load of grain. This was the first time Simpson had ever been arrested, and if the experience weren’t so surreal, so ridiculous, he might have been angrier. But the truth was, Bob Simpson had bigger problems.


Dairy crisis
It was 2009, and the dairy industry was hitting a crisis. Milk prices were plummeting, costs surging, and hundreds of dairy farms were going bankrupt.
    For most of my life, I had paid little attention to the milk, cheese, butter, and yogurt in my refrigerator. But all that had changed in 2007 when my wife and I started taking our daughter Agnes to daycare on a family dairy farm near our home in Woodstock, Vt. The farmers were some of the nicest, hardest-working people I had ever met, and I respected them immensely. Suddenly, dairy wasn’t just a product to me anymore, but a symbol for good folks doing what they loved. I’d hear about the crisis on NPR while driving Agnes to that daycare. And then I’d get to the farm, and the hardship I was hearing on the radio came into stark relief.

“How could it be
that such honest, hardworking people could produce a nutritious food that almost everyone consumes, and do
it well, yet lose money?”
    Carrying the bitter taste of those stories through the squeaky screen door and into the diurnal rhythms of a struggling dairy family proved a potent tonic that made me think Big Thoughts. How could it be that such honest, hardworking people could produce a nutritious food that almost everyone consumes, and do it well, yet lose money? It seemed wrong that, in this greatest of meritocracies, the faithful could deposit their capital, sweat equity, and skill into the market and emerge on the other side with a debit instead of a credit. Surely, I reasoned, there must be a logical explanation.
    I wanted to know how the dairy industry had arrived at its current state, where, increasingly, cows don’t graze on pastures and many farms resemble factories. I wanted to uncover the implications of the journey — from grass to concrete, from farm to factory — for people, animals, and the environment. And I wanted to know how we might navigate to a place more just, prosperous, and sustainable. My attempt at some answers soon became my first book, Milk Money: Cash, Cows, and the Death of the American Dairy Farm.
    I started out by talking directly to dairy farmers about their experiences. Robert Simpson was one of my first interviewees. His story encapsulates the struggles of small and medium dairy farms caught in a system that’s not working for them.


Down and out on the farm
Simpson’s farm, honored as a “Dairy of Distinction” by the Vermont Department of Agriculture, was hemorrhaging dangerous amounts of money. Barring some miraculous change in the milk market, the Simpsons would, like 52 of their colleagues in Vermont and hundreds more across the country in 2009 alone, be forced out of business and left with a knot of debts that only a bankruptcy judge could untangle.
    Times weren’t always so tough on the Simpson farm. Just eight years before he was arrested, Simpson’s farm was healthy enough that a bank lent him $2 million to build a bigger, state-of-the-art milking parlor, a center-aisle feed barn, and manure and grain storage facilities. Simpson could now milk up to 425 cows, and he had calculated that if the price for 100 pounds of fluid milk stayed above $14, he’d be all right.
    That plan played out nicely for a while. In fact, 2007 proved to be a banner year for American dairy farmers. Global demand for milk surged as developing countries grew more prosperous. Plus, droughts in Australia and New Zealand created a large milk hole that the United States was all too happy to fill. Milk exports rose to more than 12 percent of production, and in September the all-milk price hit a high of nearly $24 per hundredweight. The message to dairy farmers from Maine to Florida to Idaho was loud and clear: the more milk you make, the more money you’ll make.
    “The first thing producers did,” USDA economist Don Blayney said, “was buy more cows.” Herds swelled, and milk production followed, increasing by 5 percent between 2006 and 2008 to almost 200 billion pounds per year.
    But just out of view, trouble was on the horizon. The first blow came to the Simpsons in November 2007. A 2005 federal energy bill had begun to ramp up the amount of corn-based ethanol in domestic gasoline, moving grain prices a little higher. The news that another piece of legislation would likely be enacted at the end of 2007, effectively asking for twice the amount of ethanol by 2015, set off a bull market in commodity corn. In one month, Simpson’s feed costs rocketed up by $12,000.
    That might have been fine — if the price of milk had stayed high. But to see a line graph of milk prices over 2008 and 2009 is akin to watching a rock bounce down a jagged precipice. Simpson looked on in horror: $22, 19, 19.50, 20, 18, 17, 16 per hundredweight. Simultaneously, fuel costs went in the other direction, rising to more than $4.50 per gallon, which made fertilizer more expensive, too. Simpson was getting squeezed on all sides.
    Then, in late September 2008, milk’s very image as a healthful and wholesome food came under attack. More than 300,000 people in China, most of them under the age of 3, became sick from drinking milk tainted with melamine. Chinese dairy processors had been adding the nitrogen-based industrial chemical to low-quality milk to give it a creamier, more protein-rich mouth feel. It also, incidentally, gave infants kidney stones and caused renal failure. A billion Chinese people suddenly feared milk of any provenance.
    The falling milk price reached terminal velocity in October of 2008, when the global recession squelched domestic and international demand, causing exports to fall to 5 percent. And yet, all those cows that had been brought on line in the boom times of 2007 were pumping out milk. Farmers couldn’t just shut them off. This created a huge surplus. As complicated as the dairy industry is, the rule saying that when the supply of any commodity exceeds demand, its price will decrease holds true, and Simpson understands it all too well.



    By the end of 2008, Simpson’s milk check was $20,000 less per month than it had been the year before. The year 2009 dawned with prices at $15 per hundredweight, only to plummet to just over $12 by early spring. Now his milk check, in essence the revenue that would pay for everything related to the farm, was but a stub — “zero dollars and no cents” — because the dairy cooperative he belongs to skims grain bills, co-op dues, milk promotion fees, farm-loan payments, health insurance, workers’ compensation, and a host of other charges right off the top. The falling price of milk just made that skim deeper and deeper until, eventually, the skim was everything.
     The Simpsons have faith that they won’t become another statistic in the drawn-out denouement of family dairy farms, but the odds are against them. Between 1970 and 2006, the number of dairy farms in the United States fell by 88 percent, from 648,000 to just 75,000.  The overwhelming majority of these losses came from farms with 30 to 200 cows — typical small dairies. Meanwhile, the number of farms with more than 2,000 cows doubled over the much-shorter period of 2000 to 2006. The force behind this trend is well understood: bigger farms achieve an economy of scale that makes them less expensive to operate. They use their infrastructure more intensively and purchase feed at bulk discounts. They contract with breeders to obtain heifers from off site, reducing the expense of raising the animals themselves. They confine their milk cows in large barns or in dry-lot feed yards, which cuts down on real estate costs and yields more milk per cow. All of this results in total costs that are 18 percent lower on farms with 500 or more cows than farms with 200 to 499 cows; costs on farms with fewer than 200 cows are even higher.
    If you follow the logic, it’s not hard to see where it leads: a stark difference in profitability between large farms and small ones. Nationally, the average net returns for farms with 500 or more cows were positive, while smaller farms reported negative returns. That’s probably why a survey in 2000 by the USDA’s Economic Research Service found that 25 percent of farmers with fewer than 100 cows expected to close down by 2010. Meanwhile, only 7 percent of the larger operations had the same expectation.
    But that trend (which has proven generally to be the case) is not just numerical, it’s also geographical. The states with long histories in the dairy industry — New York, Pennsylvania, Vermont, Maine, Michigan, Ohio, Minnesota, and Wisconsin — contain mostly small and medium-size dairy farms. The growth of megafarms is happening predominantly in the Southwest and in California, which has operations with upward of 30,000 cows and now produces more milk than any other state or region.
    Synthesize these facts and you realize that small farms in the traditional dairy states are disappearing, or are in grave risk of disappearing, and the milk production is shifting to behemoth farms in the West. The global recession has quickened that exodus, presenting a frightening vision for the future of milk.

“If we lose the farms in New England,” Simpson said, “then people will be drinking milk made from concentrate. They’ll pull the water out of it, truck it across the country, and reconstitute it. And if people are fine with that, then the game’s over.”  

    Talk to enough farmers like Bob Simpson and you begin to really wonder how the milk pricing system works, and why it doesn’t ensure a fair wage for dairy farmers.

 
The Control of American Milk
The roots of dysfunctional federal dairy regulations were laid in the “milk wars” of the 1920s — fierce price competition between milk cooperatives serving the same regions that contributed to drastic price swings. Another source was the seasonal fluctuation of milk supply: in the spring (when cows give a lot of milk), prices sagged; in the fall (when milk production wanes), prices went up. The result was massive instability and unpredictability in the market.
    The Great Depression was the catalyst for change. Within two years after the stock market crashed, milk became a luxury. Demand for it dropped precipitously, and the classified pricing system that had developed during the “milk wars” of the 1920s broke down as well. The dairy cooperatives, blessed with an exemption to the Sherman Anti-Trust Act, rallied for government intervention to stabilize prices.
    “The attitude of the milk-shed representatives,” Agriculture Secretary Henry Wallace recalled, was, “‘For God’s sake, do something — and do it quick!’” Roosevelt’s nascent New Deal stepped in with the Agricultural Adjustment Act of 1933. This law authorized Wallace to enter into marketing agreements with handlers and processors to raise the price of agricultural commodities, including milk. Its central goal was crop control and bringing supply in line with demand. Although the Supreme Court would later strike down the law as unconstitutional, it was reshaped two years later and went unchallenged. The act laid the foundation for the Agricultural Marketing Agreement Act of 1937, which is the basis of the federal milk marketing order today.
    The marketing order, regulated by the USDA’s Agricultural Marketing Service, was designed to “ensure consumers an adequate supply of wholesome milk for drinking, and an adequate price for producers — a little stability,” said Robert Cropp, a professor emeritus of agricultural economics at the University of Wisconsin. Aside from some technical provisions about the components of price formulas, the marketing order remains largely unchanged more than 75 years after it was first conceived.
    The most important thing to know about the order is that it sets minimum prices that processors or handlers must pay to dairy farmers and coop-eratives for fluid-grade milk. They can pay more, of course, but rarely do. The prices are differentiated by region, the number of which has consolidated steadily from 34 to 10, reflecting the greater distances milk regularly travels today.
    One major problem is that the federal milk marketing order price has nothing to do with the cost of production by region; it’s all based on supply and demand, and, strangely, how far from Eau Claire, Wis., the milk is produced. In recent years, the Southeast has had the highest floor price in the country, and that’s because Florida has a huge and unmet demand for milk. The Northeast has one of the lowest, because there’s a glut of milk. The effect is that the floor price in the Northeast, where the cost of producing milk is the highest, is usually just a few cents more than it is in western and southern states. Northeastern dairy farmers, who are receiving a few dollars less per hundredweight than their southern colleagues, would like to ship their milk to Florida, but hauling costs are prohibitive.
    The regulation has created a sort of perverse incentive: the higher price in the Southeast encourages Southern farmers to produce more and meet that demand. The low price in the Northeast encourages farmers to make up the price losses with volume gains. All roads lead to increased supply and, therefore, lower prices.

 
Milk Gone Wild
Ironically, another part of the challenge is that we’ve become too adept at making milk. And, while the price of milk is pushed, prodded, held up, and stamped down, market supply is completely unregulated — left to the whim of farmers and the innovations that corporations and land grant colleges can put into their hands. What that means, oftentimes, is that we just have too much of it.
    In 1944, the United States had 25.6 million dairy cows. Today, there are about 9 million. Those midcentury cows made a total of 120 billion pounds of milk per year, while today’s much smaller modern population pumps out 190 billion pounds. Since 1900, we’ve increased annual per-cow milk yield from roughly 3,000 pounds to 20,000 pounds — a nearly sevenfold rise. At the same time, even though the U.S. population has doubled in the past 60 years, per capita milk consumption has declined. And this, despite the vigorous efforts by the Got Milk? campaign. One effect of this overabundance is that farmers’ margins are razor thin, leaving them increasingly vulnerable to the price swings that define the industry.
    Another effect is less obvious — but more weird. People are drinking less whole milk, and, at the behest of their doctors and the USDA, they’re drinking more skim and low-fat milk. This, in turn, has left a lot of excess milk fat on the market — the raw ingredient in cheese. Instead of going through the front door with a Got Cheese? promotion, in the mid-1990s the USDA formed a sub-agency called Dairy Management Inc. (DMI) to subtly push more cheese into the foods we eat.

“Instead of going through the front door with a Got Cheese? promotion, in the mid-1990s the USDA formed a sub-agency called Dairy Management Inc. to subtly push more cheese into the foods we eat.”  
    As the New York Times reported in November 2010, with its chief executive making more than $600,000 a year, two other executives earning more than $300,000, and 160-plus employees, DMI more closely resembles a private corporation than a governmental entity. The budget for this marketing organ, whose goal is to put more saturated fat into American stomachs, tops $135 million per year — paid for largely by a mandatory charge to dairy farmers. Meanwhile, the budget for the USDA’s Center for Nutrition Policy and Promotion, an advocate of healthful eating, is $6.5 million.
    With these resources, DMI has developed specific goals and helped many fast-food chains launch new cheesier foods. According to internal documents obtained by the Times in a Freedom of Information Act request, DMI wants to see more “cheese snacking fanatics” and to increase cheese use in sandwiches and elsewhere. Since the late 1990s, DMI has been working with restaurants such as Pizza Hut, Domino’s, Wendy’s, and Taco Bell to devise new menu items topped, stuffed, coated, and baked with cheese. The first campaign in this effort was Pizza Hut’s declaration of the summer of 2002 as the “Summer of Cheese.” During the 12-week period, Pizza Hut reintroduced the Stuffed Crust and Insider pizzas, increasing cheese use by 102 million pounds by the fall.  In October 2010, with $12 million worth of DMI’s marketing funds, Domino’s rolled out a new pizza for its Legends line of cheesier pies. Dubbed the Wisconsin, this pizza featured six types of cheese on top and two more in the crust.
    Even while DMI helps Domino’s brainstorm these cheese-blasted concoctions, its parent organization, the USDA, issues nutritional brochures such as “Your Personal Path to Health: Steps to a Healthier You,” which provides hints on good eating habits such as portioning snacks on a plate, and ordering appetizers instead of entrées. Under “When You ‘Order Out,’” it offers the strangest advice: “Make your pizza a veggie with toppings like mushrooms, peppers, and onions.” And “ask for whole-wheat crust and half the cheese.”
    How did we end up with a system where farmers make too much of a product? Largely, it’s a result of the unfair prices farmers receive for their milk. Over the years, the federal government has treated the symptoms of the broken pricing system by implementing various subsidies and export incentives. Those efforts, while valiant, have proven incapable of ensuring dairy farmers a sustainable wage. A proposal in the next farm bill may be a step in the right direction.


A Fix in the Farm Bill?
About every four years, Congress debates and reauthorizes the farm bill, an omnibus piece of legislation that encompasses everything from conservation to corn subsidies. Dairy farmers have been trying for years to secure provisions that would reduce the wild price swings in milk and give them a little stability. The 2012 farm bill had been their best chance yet. In a version passed by the Senate last June, a new law called the Dairy Security Act would provide margin insurance and implement a supply control program, which would help prevent an oversupply of milk. The same law was contained in a version of the farm bill that passed the House Agriculture Committee.
    But that’s where it stalled. Citing irreconcilable differences on budget cuts to the food-stamp program (also part of the farm bill), the Speaker of the House, John Boehner, announced that he would not bring the bill to a vote before it expired on September 30. Then, in the waning hours of 2012, the farm bill debate was overshadowed by the wrangling over the so-called fiscal cliff. In the 11th-hour deal on the revenue side of the fight, the House passed a bill that included a nine-month extension of the 2008 farm bill. The Dairy Security Act was left out, but, hopefully, the new Congress will see its utility and include it in the new farm bill.
    The impacts of this legislative neglect are already starting to appear. In Bridport, Vt., Leonard Barrett has decided to end his 40-year career as a dairy farmer, telling the Addison County Independent that he was “forced out” by the combination of rising production costs and stagnant milk prices. “I’m very disappointed with our people in Washington, D.C.,” he said. With stories like Barrett’s, it isn’t shocking that Vermont has 22 fewer dairy farms than it did last year. In Florida, Mike and Freda Carey are holding on to the last dairy farm in Polk County, hoping that the situation improves enough to pass the operation on to one of their four children. Given the current outlook, it doesn’t seem likely. “It’s pretty hard to keep working when you’re losing $500 to $600 a day,” Mike told The News Chief, a newspaper in Winterhaven.
    In other parts of the country, as CNNMoney.com reported in October, struggling dairy farmers are feeding candy, ice cream sprinkles, and hot cocoa mix to their cows as a way to save money. And, farms’ financials have worsened still: November 2012 was the first month farmers didn’t receive an MILC payment, costing them precious thousands of dollars. Thankfully, those payments will resume this year, under the extended farm bill.
    Yet another culprit in the milk surplus crisis is the status of milk as a commodity — something that’s supposed to be uniform across the market. In a commodity market, producers have little incentive to make a higher-quality product, because they won’t be rewarded for the extra work it requires.
    But one man might have discovered a way out of the commodity trap. Dr. Sam Simon is the founder of the dairy cooperative Hudson Valley Fresh (HVF), which produces high-quality milk, yogurt, and sour cream and sells it under its own brand name. His business model offers a glimmer of hope for small- and medium-size dairy farms.


Grass Fed, Free Range, Streamline Baby
You might say Sam Simon is a third-generation farmer. His grandfather, Albert, was a cattle broker in Germany and had contracts to provide the German government with horses and grain, which he would buy and sell at the Russian border. But by 1937, the whole family had escaped the Third Reich. Knowing cattle, they bought a farm in Middletown, N.Y., where Sam’s father did most of the work raising beef cattle and milking cows. When Sam reached grade-school age, his father was happy to have the extra set of hands on the farm. From the earliest he can remember, Sam idolized doctors and vets, but he was forced to farm. He grew up to be an orthopedic surgeon in Poughkeepsie. When he retired in 1995, he went back to dairy farming. “I wanted to do it one more time,” Sam, now 66, recalled — “my way, where I could be immersed in it.”
    From the moment he started making milk in 1999, he received quality premiums from Agrimark, the cooperative that makes Cabot Cheese. These premiums recognize the low raw bacteria and somatic cell levels in farmers’ milk. The raw bacteria count is a measure of the cleanliness of the environment. The somatic cell count, a measure of the white cells in the cow, is an indication of the cow’s health. By both standards, Sam’s farm was outstanding. But the premium bonuses were nothing more than a token — certainly not enough money to offset the higher cost of production. He knew of other farmers in the region who were also making great milk, but struggling to survive. Then the thought came to him: We need to put this premium milk under its own label, not commingled with anybody else’s milk. That’s the challenge.



    Simon rounded up eight other farms under the Hudson Valley Fresh name and was lucky to find a processing plant in Kingston that agreed to only process milk from HVF. The product was an immediate hit. One of their earliest and most vocal advocates was Eli Zabar, the son of the founders of Zabar’s market, and the owner of Eli’s Manhattan, a premium grocery store on the Upper East Side. When Simon walked into his store and gave Eli a taste of HVF milk, Eli immediately knew he was on to something special. “It had this very smooth, rich flavor, and I thought it was better than everything else we carried,” Eli recalls. Then he heard Simon’s story, his mission to provide punctilious dairy farmers with a living wage in a way that conserves land and is good for the environment. “I thought it was noble and admirable,” Eli said. “It all worked into my philosophy when he showed up.”
    The bread and butter of HVF’s sales don’t come from places like Eli’s, however, but from supermarket chains such as ShopRite, Stop & Shop, Whole Foods, and Hannaford. These stores make it possible for HVF to sell 4 million pounds of milk per year, and reap $2 million in sales. In most of these outlets, the price of a half-gallon of HVF milk is about a dollar less than its organic competitors,  and usually about 50 cents more than commodity milk and private label brands.
    For all this, HVF is not in the promised land yet. In fact, it has a long way to go. Right now, it’s able to give farmers $22 per hundredweight on about 30 percent of the milk they make. The rest gets sold to a mainstream distributor, because they produce more milk than HVF can currently sell. “I want it to get big enough so that the farmers can sell 75 percent of their milk under the Hudson Valley Fresh label. That would be ideal,” Simon said. “Then I would guarantee them a living wage in perpetuity.”
    But there are no guarantees in dairy farming, only stories. There are the farmers who try their best and still can’t make it, and then there are the innovators, like Simon, who have made modest but encouraging gains. Each one is different. The keys to HVF’s success are, you might say, idiosyncratic: an unusual collection of local farmers producing premium milk; access to a milk plant that processes only HVF milk; an agreement with a cooperative to haul the milk; access to the New York Metro Area, which is chock-full of educated people with some money; and, importantly, a burgeoning local food movement.
    I’m happy to also include Bob Simpson and his family in the innovators category. They made it through the 2009 crisis and, last summer, diversified their farm with a starter herd of Boer goats for meat. As for the dairy daycare that started this odyssey? Let’s just say Agnes, who’s now 5, and my 2-year-old, Brian, still come home smelling like a barn.

After graduating from Colgate, where he majored in peace studies, Kirk Kardashian ’00 received his JD from Vermont Law School in 2004. He practiced real estate and land use law for five years in Vermont while freelance writing on the side until 2009, when he decided to write full time. He’s been a senior writer at Dartmouth’s Tuck School of Business communications office since 2011. Milk Money: Cash, Cows, and the Death of the American Dairy Farm (University of New Hampshire Press), whose forward was written by U.S. Senator for Vermont Bernie Sanders, is his first book.