Think of our nation's economy like the "Jenga" game. You know, the building block game where you slide out the blocks in the tower and put them on top.
Our nation WOULD grow & expand economically, with REAL asset value, at a marginal rate: Ergo, we build the tower, adding a few new blocks along the way, with frugal spending & controlled growth as we go. BUT, THAT WASN'T GOOD ENOUGH.
So, we got the mindset to build the tower bigger & faster by "borrowing" the blocks from the bottom, elsewhere & everywhere to fuel the building; loans, bonds, treasuries, Social Security, credit cards, inflated home values & stock prices, lax regulation & oversight, foreign investment (more loans), etc.
We've been doing this a long time, and the tower gets shakier and more fragile with each block we pull out and move to the top. And now, with our government stepping up the pace, we are jacking up the "borrowing" at a rate beyond belief. It cannot be any great surprise to see the tower collapsing...
How & where do you think it will end?
When & how did we forego the sane notion that "pay as you go" was intolerable?
And Yashua said, "Who then is that faithful and wise steward, whom his master shall make ruler over his household, to give them their portion of meat in due season?" Luke 12:42
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Creative borrowing catches up with California cities
“They’re circumventing the intent of the law,” says Larry Stein, an Oxnard accountant and longtime activist, of the city's sale and lease-back of its streets. “They’re indebting the taxpayers using future revenue streams that may or may not pan out in the long run. But the taxpayers have no say.”
December 31, 2008
Oxnard was in a bind, facing a $150-million bill to fix cracking and crumbling streets and no way to pay for the work without cutting other services.
The city had tried, and failed, to get voters to approve a bond measure for street repair. And it had borrowed money against almost all of its public property, including a soccer stadium, three fire stations and its library -- even the Police Department's evidence-storage building.
With virtually nothing left to hock, the city came up with an ingenious way to take on more debt: It borrowed against future revenue by "selling" its streets to a city-controlled financing authority.
"We had way too much construction work to do and way too little money," said Ken Ortega, Oxnard's public works director. "We really pulled every creative financing string we could to come up with the money."
Desperate for cash in a sputtering economy, local governments throughout California are digging themselves deeper into debt, and many are doing so through exotic financing schemes designed to sidestep the need for voter approval.
California cities, counties and other agencies borrowed $54 billion last year, nearly twice as much as in 2000, and governments are straining under the load.
Statewide, 24 cities and public agencies missed scheduled debt payments this year or were forced to tap reserves or credit lines to stay current, records show. That's up from nine in 2006, according to the bond industry's self-regulatory agency.
The city of Vallejo, burdened with huge debt obligations, in May became the largest city in California history to file for bankruptcy protection. Chula Vista, Orange County and Palmdale are among the other cities and counties staring at red ink.
Much of this borrowing binge was made possible by complex financial schemes such as the one Oxnard used. These nontraditional debt vehicles cost more over the long run because they are considered riskier than general-obligation bonds, which governments stand fully behind. Investors therefore demand higher interest rates.
"There are many cities and counties engaging in complex financial deals that they don't really understand," said Michael Greenberger, former head of the trading division of the Commodity Futures Trading Commission. "And now it's starting to catch up with them."
Government officials say such measures were necessitated by Proposition 13, the 1978 initiative that limited property taxes and required a two-thirds vote for future property tax hikes. Local governments can raise various fees or cut costs to reduce their need for borrowing, but many are reluctant to do so, fearing a voter backlash.
"Instead of saying we don't have enough income to do what we need to do, we've resorted to debt," said Jean Ross, executive director of the California Budget Initiative, a nonpartisan group that studies the state's budget priorities. "It's time for elected officials to have an honest conversation with voters about what their tax dollars can buy."
Sleight of hand
Oxnard's sale of its streets in December 2007 was a variation on a borrowing technique known as a lease-back.
In a typical example in the private sector, a business sells a property to raise money, then leases it back from the buyer. In the public sector, lease-backs are more a financial sleight of hand. A city council that needs to raise money might sell its city hall to a council-controlled finance authority. The council would then rent, or lease back, the building from the finance authority.
The authority, meanwhile, would issue bonds using the city hall as collateral. It would pay back the bondholders with the "rent" it collects from the city.
The sale of the building is a legal abstraction, a shuffling of paper whose purpose is to keep the debt off the city's books. That way, officials can circumvent the state Constitution's requirement of voter approval for government borrowing.
"The reason they enter into these leases is so that they don't have to get the debt voter-approved," said John Kim, an advisor with Los Angeles investment bank De La Rosa & Co. who has set up lease-back deals for a number of California cities. "They're so popular that a lot of cities then run out of assets to lease."
Oxnard is one of Kim's clients. In 2007, the city wanted to issue bonds to finance part of its $150-million street repaving project, using its share of state gas tax revenue to repay the debt. But the state Constitution says local governments can't issue debt against that revenue.
That's where Kim came in. His plan: The Oxnard City Council would sell the streets to the Oxnard Finance Authority, which consists of the council and mayor. The Finance Authority would issue bonds to raise money for the improvements and repay the bondholders by selling the streets back to the city.
Where would the city get the money to buy the streets? From its gas tax revenue.
"If you had to get a vote on everything, it would take a lot of time and there would be no guarantee that the voters would approve the debt," Oxnard financial services manager Michael More said. "Otherwise we would have to use a pay-as-you-go approach to every project, and we could never come up with enough money."
Recognizing the novelty of the approach, and facing some local opposition, Oxnard ran the strategy past state Atty. Gen. Jerry Brown.
Brown gave the green light, and De La Rosa & Co. -- which collected $300,000 in fees from Oxnard -- had a winning formula. The investment bank has since helped the cities of Santa Ana, Coachella and Indio come up with similar street deals, none of which went to a public vote.
"They're circumventing the intent of the law," said Larry Stein, an Oxnard accountant and longtime city activist. "They're indebting the taxpayers using future revenue streams that may or may not pan out in the long run. But the taxpayers have no say."
Of more than 10,000 bonds and other debt vehicles issued between 1998 and 2007, fewer than 700 went to a public vote, according to the state treasurer's office.
Legal trouble
It isn't just voters who are often left in the dark. The investors who lend to local governments are not always given a clear picture of the borrower's finances.
In April, the Securities and Exchange Commission accused the city of San Diego of misleading investors about its finances when selling more than $260 million in bonds. The SEC has asked a federal judge to fine the city, without specifying an amount. San Diego officials have denied the charges and are fighting the case in federal court.
"The fictions that are put together to fund the construction of public buildings and to cover these budget gaps are astounding," said Mattie Scott, a Monterey attorney who was hired by the Richmond School District to help it untangle its legal problems before it filed for bankruptcy protection in 1991.
Many cities pass their bond funds through technically separate public financing authorities, housing authorities, utility authorities or special taxing districts. The use of such entities makes it difficult for the public to assess a city's debt load.
Whether it's such a pass-through deal or a lease-back, bond buyers demand a higher rate of return for complicated deals.
The California Legislative Analyst's Office has estimated that the state government's use of lease-back deals costs as much as $370 million more for every $1 billion in debt than the use of general-obligation bonds. The report was issued in 1995, and finance experts say the added cost is probably greater now because the deals have become more complicated.
Chula Vista is an example of what happens when a city gets hooked on debt.
Between 2000 and 2007, the city in San Diego County took on $648 million in new and refinanced debt to build a city hall, a police headquarters and other projects, including a segregated dog park to keep the terriers from nipping at the Dobermans.
None of this debt was issued with voter approval. The City Council presumed that rising revenue would allow it to pay the debt. Then came the economic downturn, and Chula Vista now is cutting furiously to meet its obligations.
It has shrunk the budget by $30 million, or 17%, since mid-2006. Lost were library hours, senior programs, 200 jobs. Even the popular Fourth of July festivities were crossed off the calendar. More cutbacks may be on the way. The city is looking at a $20-million shortfall in the current fiscal year.
"We were growing so rapidly that the need to build these facilities happened quicker than people had anticipated," said Maria Kachadoorian, the city's finance director. "But now the growth has stopped, and we don't have the money coming in to cover a lot of our costs."
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A Nevada Town Escapes the Slump, Thanks to Gold
Wedding guests after the marriage of Bianca Hernandez and Jose Lomeli in Battle Mountain.
BATTLE MOUNTAIN, Nev. — Hundreds of revelers crammed into this small town’s community center on a recent Saturday night to celebrate the marriage of Bianca Hernandez and Jose Lomeli.
Throngs danced to Spanish folk music well into the wee hours. Beer, wine and laughter were abundant, and several tables were piled high with gifts. “It’s not just the wedding,” said a friend of the newlyweds, Jesse Dias, 34. “Times are good around here. People are happy.”
Good times? Happy people? Hasn’t word of the national economic anxiety and resultant austerity made it to this remote high-desert capital of Lander County, 215 miles east of Reno?
Yes, it has, but the economic meltdown in much of the country has been a boon to the county and its 5,000 residents, 4,000 of whom live in the Battle Mountain area.
The reason: They mine gold in Lander County, a mineral-rich area that is a major reason Nevada, nicknamed the Silver State, is also the world’s fourth biggest producer of gold.
And when the broader economy declines and the value of the dollar fluctuates, people buy gold. At current prices — gold hit $892 an ounce on Monday, its highest price in three months and not that far off its record high of more than $1,000 an ounce in March — places like Battle Mountain hum with good-paying jobs and rising home values, making the financial woes of the rest of the country a distant concern.
“I don’t know of anybody who is getting foreclosed on; it’s just not something that’s an issue out here,” Charlotte Thompson, 56, said, shrugging as she seated diners on a frigid, wind-swept evening at the Owl Club Casino and Restaurant, the main attraction of Battle Mountain’s four-block main thoroughfare, Front Street. “That’s the way it usually goes, though. We’re always opposite of the rest of the country.”
To grasp how anomalous Battle Mountain is now, consider the data. Home foreclosures, as Ms. Thompson noted, are unheard of here, even though November was the 23rd consecutive month that Nevada had the nation’s highest foreclosure rate.
Unemployment in Lander County was 4.8 percent in November, while the statewide rate of 8 percent was the state’s highest since 1984. Two goldless counties bordering Lander, Nye and Pershing, had unemployment rates in November of 10.5 percent and 8 percent, respectively.
Even with annual salaries for average mining jobs starting at more than $60,000, the two largest mining companies in the area, Barrick and Newmont, cannot find enough qualified workers to fully staff their operations round-the-clock. Mr. Dias, the friend of the newlyweds, is working six days a week.
Robert Perry, a shift supervisor at Barrick’s Pipeline Mine, a 12-year-old facility near Battle Mountain that yields about a million ounces of gold a year and is expected to continue to produce until 2014, said the mine was always interviewing and hiring people.
“Our housing market, I would say, is better than most, just because there are jobs around here,” Mr. Perry said. “My house I bought five years ago for $134,000, and right now it’s worth about $300,000.”
The gold-mining business is doing so well that industry lobbyists did not complain when the Nevada Legislature passed a measure in early December requiring mining companies to pay $28 million in 2009 taxes early to help the state patch a $340-million shortfall in revenue.
And Barrick is set to spend nearly $500 million to open a new mine near Pipeline, provided it wins a legal challenge by the Western Shoshone Indians, who assert that the mine would disturb the tribe’s most sacred religious site.
“In tough times, people need a backup for their money, and that backup is gold,” said Omar Jabara, a spokesman for the Newmont Mining Corporation, which operates eight Nevada mines that yielded 2.3 million ounces of gold in 2007.
Battle Mountain residents are clearly enjoying the upswing, just as they clearly suffered through the high-tech boom of the late 1990s that brought prosperity to much of the rest of the nation. During that time, gold fell to about $215 an ounce, the local economy was moribund and several mines laid off workers. The Owl closed for four years, during which Ms. Thompson worked as a truck driver.
“We went 11 years without a new business really opening up here, but now we’re getting a new furniture store, and there are some new commercial businesses opening that are mining-related,” said Sarah Burkhart, director of the Battle Mountain Chamber of Commerce. “We’re getting a Family Dollar, and that’s kind of a biggie for us because it’s like a mini-Wal-Mart.” (The nearest Wal-Mart is about 50 miles away in Winnemucca.)
These signs of prosperity are especially gratifying to residents who took umbrage at a 7,000-word cover article in The Washington Post Magazine in December 2001 in which the writer, Gene Weingarten, went searching for the “armpit of America,” and found it in Battle Mountain. Some town boosters, like Ms. Burkhart, used the national notoriety to organize three annual Armpit Festivals, sponsored by the deodorant-maker Old Spice, but others were insulted by the article and glad when the festivals were abandoned.
“I think we ought to have a little more pride than that,” said Kimberlie Davis, owner of Sage Homes, a company here that builds about 25 homes a year in Lander and neighboring counties. “If that’s all we have to market, then don’t market it.”
There is so little to see in Battle Mountain that the state’s promotional map, Nevada Wide Open, designed to generate interest in tourism in the sparser, less-known regions of the state, does not highlight it. The town has no traffic lights. Besides two small casinos and one legal brothel that caters almost exclusively to truckers who crisscross the nation on Interstate 80, there is a pizza place, a coffee shop, a McDonald’s and a Super 8 motel.
“Oh, we’ll drive 75 miles to go get Chinese food,” said Ms. Davis, 39, who moved here from Portland, Ore., in 1989 after visiting a childhood friend who had come here to be with her miner boyfriend. “If you’re going to the movies, that’s 55 miles. It’s an event. You make a big deal out of it. You give up conveniences of the big urban areas for a great deal of safety and comfort and a really nice place to raise your families.”
The town’s isolation and its dominant, blue-collar industry propel many of its disaffected young people to pursue college degrees.
“It’s too small — there’s not enough opportunity as there is in a big city,” said Ed Figueroa, 20, home for a holiday visit from the University of Nevada at Reno, where he is studying international business administration. “There’s nothing to do here. All our parents work at mines. I like to come back and see friends, but the town itself is ... whatever, you know?”
Both Ms. Davis and Ms. Burkhart shrugged off such statements, citing numerous examples of Battle Mountain natives who do return, as Ms. Davis noted, “after they swear they never will.”
Most everyone here is concerned that a national economic recovery could drive gold prices down again. A Barrick spokesman, Louis A. Schack, agreed that it was a danger, but he noted that in the decade since the last major slump, gold had become a staple as an electrical conductor in things like cellphones and most high-tech wiring, boosting its value considerably.
Yet Mr. Schack acknowledged that commodity markets were unpredictable, so Ms. Davis and the rest of Battle Mountain know that slow times could return and are determined to enjoy their good fortune while it lasts.
“It’s a very unique economy that exists out here,” Ms. Davis said. “I don’t want the national economy to be awful by any stretch. I like a happy medium. There is a point when everything’s even, when it’s good here and good everywhere else, too, but it’s very short lived.
“More than likely, gold’s going to devalue and the cycle will start all over again.”__________________________________________
Steel Industry, in Slump, Looks to U.S. Stimulus
The Granite City Works U.S. Steel mill in Granite City, Ill., cost more than 2,000 people their jobs when it closed.
The steel industry, having entered the recession in the best of health, is emerging as a leading indicator of what lies ahead. As steel production goes — and it is now in collapse — so will go the national economy.
That maxim once applied to Detroit’s Big Three car companies, when they dominated American manufacturing. Now they are losing ground in good times and bad, and steel has replaced autos as the industry to watch for an early sign that a severe recession is beginning to lift.
The industry itself is turning to government for orders that, until the September collapse, had come from manufacturers and builders. Its executives are waiting anxiously for details of President-elect Barack Obama’s stimulus plan, and adding their voices to pleas for a huge public investment program — up to $1 trillion over two years — intended to lift demand for steel to build highways, bridges, electric power grids, schools, hospitals, water treatment plants and rapid transit.
“What we are asking,” said Daniel R. DiMicco, chairman and chief executive of the Nucor Corporation, a giant steel maker, “is that our government deal with the worst economic slowdown in our lifetime through a recovery program that has in every provision a ‘buy America’ clause.”
Economists in the Obama camp said the president-elect’s proposals to Congress will include significant infrastructure spending that draws on heavy industry.
New spending should provide an immediate jolt to the steel business, which has already gone through the painful makeover now demanded of automakers. Steel mills were closed, companies were consolidated, hundreds of thousands lost their jobs and the survivors agreed to concessions. As a result, productivity shot up and so did profits, to record levels in the first nine months of this year. Even as the economy wobbled, steel held its own.
But then the recession hit in force. Steel goes into nearly everything made in America, from homes and office buildings to cars, appliances and light bulb sockets, and as construction and manufacturing wound down, so did the output of steel, plunging 50 percent since September.
The steel industry’s collapse closely tracks the alarming late-autumn swoon in the national economy, as the housing bust and the credit crisis converted a mild downturn into “a severe one that has much further to run,” says Nigel Gault, chief domestic economist at IHS Global Insight, offering a view increasingly shared by forecasters.
Through August, steel production was actually up slightly for the year. The decline came slowly at first, and then with a rush in November and December. By late December, output was down to 1.02 million tons a week from 2.1 million tons on Aug. 30, the American Iron and Steel Institute reported. The price of a ton of steel is also down by half since late summer.
“We are making our steel at four mills instead of six,” said John Armstrong, a spokesman for the United States Steel Corporation, adding that two mills were recently idled and the four still operating are running at less than full capacity.
“The third quarter was one of the best in U.S. Steel’s history,” Mr. Armstrong added. “And it has been a very precipitous drop from there.”
The cutback has been particularly hard on workers at the big integrated mills like those at U.S. Steel and Arcelor Mittal USA, with their blast furnaces and coke ovens converting iron ore and other materials into steel. Operated at less than full capacity, these mills are less efficient than the equally large “minimills,” like Nucor, whose electric arc furnaces can be operated efficiently at lower speeds.
So the plant closings have been mostly at the integrated mills, whose 50,000 workers — roughly 40 percent of the nation’s steelworkers — are represented by the United Steelworkers. The union says that early this year it expects 20,000 workers to be on furlough.
Ten thousand already have been. Kathleen Loepker, a millwright and mechanic, is among the most recent to join their ranks. She was laid off on Dec. 19 from the U.S. Steel plant in Granite City, Ill., which shut, putting more than 2,000 employees out of work. With nearly 30 years seniority, Ms. Loepker, 48, has worked through bankruptcies, union concessions and consolidations during which her mill was acquired by U.S. Steel in 2003.
Her income today is tied more to incentive bonuses than in the past. On layoff, she is collecting $20 an hour, which is 80 percent of her base pay of $25.12 an hour. That base pay, rather than rising significantly, is fattened by incentive bonuses tied to amounts of steel produced and to profits. It had been averaging an additional $7 an hour — money now gone until the mill reopens.
“No one knows when that will happen,” said Ms. Loepker, who lives by herself in a four-bedroom home she bought in nearby Belleville, three blocks from a married sister. “The company tells us the end of March, but they don’t know either,” Ms. Loepker said. “The uncertainty has everyone fearful.”
Not since the 1980s has American steel production been as low as it is today. Those were the Rust Belt years when many steel companies were failing and imports of better quality, lower cost steel were rising.
Foreign producers no longer have an advantage over the refurbished American companies. Indeed, imports, which represent about 30 percent of all steel sales in the United States, also are hurting as customers disappear.
The industry, in response, is lobbying the Obama transition team for infrastructure projects that would require big amounts of steel. Mass transit systems are high on the list, and so is bridge repair.
“We are sharing with the president-elect’s transition team our thoughts in terms of the industry’s policy priorities,” said Nancy Gravatt, a spokeswoman for the American Iron and Steel Institute.
The Obama team has not yet revealed details of the president-elect’s soon-to-be-announced recovery plan other than to indicate that most of the package will probably go into infrastructure spending rather than tax breaks.
“If the president-elect really follows through, he’ll fund a lot of mass transit projects,” said Wilbur L. Ross Jr., the Wall Street deal maker who put together the steel conglomerate known as Arcelor Mittal USA. “All the big cities have these projects ready to go.”
The sharp slide in steel production has several causes. Construction and auto production have fallen sharply; between them, they account for 57 percent of the steel bought each year in the United States, according to the Iron and Steel Institute. Appliances, machinery and other electrical equipment account for an additional 13 percent, and the fall-off in production of these goods has also reduced steel orders.
Then there are the wholesalers, known in the steel industry as service centers. They buy in huge quantities from the mills, building up inventories and selling to customers like a construction company that needs I-beams to build a shopping center, or a manufacturer of auto parts in need of steel tubing.
Until recently, the inventories were bought on credit, and the service centers constantly replenished these stockpiles as steel was sold to end users. But now the service centers, unable to borrow money easily and reluctant to borrow anyway in these hard times, have stopped buying from the steel mills. They are selling off their inventories instead, raising cash in the process. It is a tactic that annoys Mr. DiMicco, the Nucor chief, no end.
“They don’t want to be without cash when they go into whatever the black hole is that is being created by the financial crisis,” he said, and faulted the nation’s lenders for collecting billions in government bailout money and then, in his view, refusing to lend it to the service centers on reasonable terms. “Credit completely dried up,” Mr. DiMicco said, “and it is still hard to get.”_________________________________________
As Recession Deepens, So Does Milk Surplus
Arthur Machado, a dairy farmer in Fresno, Calif., has to keep feeding his herd of more than 300 cows. He plans to sell them and take up a more stable commodity.
By ANDREW MARTIN, NYTimes
FOWLER, Calif. — The long economic boom, fueled 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 to 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.
Mr. Van Groningen’s company does not own the surplus milk powder, but merely stores it for the new owners: the taxpayers of the United States. To date, the government has agreed to buy about $91 million worth of milk powder.
“The thing is, they are going to produce it because they have to milk the cows,” Mr. Van Groningen said. “It’s like a river. It keeps coming.” In addition, dairy farmers are all too aware that, unlike industrial machinery, cows cannot be turned off and stored until economic conditions improve; they must be fed and cared for, at continuing expense.
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 like Mexico, Egypt and Indonesia. Many of those countries were benefiting from a global economic boom led by free-spending consumers in the United States.
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 its assorted byproducts, like milk powder, butter and whey proteins — that has led to a precipitous drop in prices.
The price of powdered skim milk, used in infant formula, dairy products and processed foods, has fallen to roughly 80 cents a pound today from about $2.20 in mid-2007. Other dairy products have declined as well. Whole milk at grocers has not declined as rapidly as wholesale powdered milk, but it has dropped to $3.67 a gallon, down nearly 6 percent from the peak.
While consumers are undoubtedly pleased by the lower prices, dairy farmers are struggling.
“Everything was going great,” said Joaquin Contente, a farmer in Hanford, Calif. “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 some of their 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 program is relatively small, and at least so far, most farmers are holding onto their cows.
“People don’t want to panic,” said Brian W. Gould, an agricultural economist at the University of Wisconsin, adding that farmers were receiving $20 for 100 pounds of raw milk just a few months ago. The price is expected to drop to about $14 for 100 pounds of raw milk in coming months. “It is unclear as to whether this will be a short-term or long-term market correction. It all depends on how long it takes the U.S. economy to recover,” he said.
Other agricultural sectors are also struggling with a slowdown in demand from foreign buyers because of the global recession and an increase in the value of the dollar, which has made American exports more expensive abroad. The Agriculture Department is expecting steep declines in exports of corn, wheat, soybeans and pork.
But while the government has price-support programs for about two dozen agricultural products, so far milk powder is the only commodity that has sunk low enough to start the flow of government dollars. Some expect that taxpayers will soon be buying blocks of cheese, too, given the plunging price.
Government price supports provide a price floor for agricultural products as a way of keeping farmers afloat during hard times and ensuring an adequate food supply.
The Agriculture Department has committed to buying 111.6 million pounds of milk powder at 80 cents a pound, for roughly $91 million, which includes some handling fees. Before October, the last time the government bought milk powder was in June 2006, and it was eventually used in government nutrition programs, given away as animal feed or sold on the open market, said Steve Gill, director of commodity operations for the department.
He said the agency has not decided what to do with the cache of milk powder in California.
Some critics of farm subsidies argue that price support programs are antiquated and allow farmers to continue producing even when the economics make no sense, as taxpayers will always buy up the excess production.
“They don’t want to downsize or respond to the market signal. They want to keep producing,” said Kenneth Cook, president of the Environmental Working Group, a Washington research organization that has long been critical of the government’s farm policy. “Once you get in a jam like this, it becomes our collective problem.”
The government purchases come after what the department calls a “euphoric period of record prices and booming exports” for the American dairy industry. Since 2003, dairy exports have increased from $1 billion a year to about $4 billion this year, with exports of powdered milk increasing sixfold during that period. Milk powder is an attractive product to export because it does not require refrigeration, has a long shelf life and can be used to make numerous beverages and foods.
Much of the increase was caused by increased demand in developing countries, where a growing middle class replaced starch in their diets with protein sources like meat and dairy products. Some Asian countries had little history of eating dairy products but were introduced to milk and mild cheeses by government nutrition programs or by restaurant chains like McDonald’s and Pizza Hut.
In China, for instance, per-person dairy consumption nearly doubled in just five years, to 63 pounds in 2007 from 33 pounds in 2002 (though it remains far below the per-capita consumption in the United States of about 580 pounds), according to the U.S. Dairy Export Council. The growth translates into the need for nearly 40 billion pounds more milk each year, roughly equal to California’s annual milk production.
In addition to the increased demand, exports from the American dairy industry benefited from a relatively weak dollar and tight global supplies. For instance, droughts reduced milk production in New Zealand and Australia, two major dairy exporters, allowing American suppliers to fill the gaps.
American dairy shipments soared to places like Algeria, Bangladesh, Indonesia and the Philippines. The biggest market, however, was Mexico, where imports from America increased to $853 million in 2007 from $258 million in 2003, according to the Agriculture Department.
But now, global demand has stagnated amid high prices and economic uncertainty just as the dollar has strengthened and milk production in New Zealand and, to a lesser extent, Australia, has bounced back. The continuing scandal involving melamine contamination of dairy products in China is expected to further diminish demand.
“In some of these countries where dairy hasn’t been a big part of their diet, this is where we are seeing people pull back,” said Deborah Perkins, managing director of the food and agribusiness research group at Rabobank International.
Several dairy exporters say they remain bullish on their long-term prospects, given the barely tapped markets in the developing world. Until then, dairy farmers say, they are braced for a period of low milk prices even as feed and other costs remain relatively high.
Arthur Machado, who milks cows on the outskirts of Fresno, said he sold more than half his herd in 2006, the last time prices collapsed. Now, with prices plummeting again, he said he is trying to sell the remainder of his herd to another dairy farmer.
“The business isn’t what it was in the ’70s, when I started,” he said. “There are not enough peaks to offset the valleys anymore.”
Once the herd is sold, Mr. Machado said, he plans to focus on less volatile commodities, like almonds and grapes. But it is not so easy to get out of the dairy business. Just as with automobiles and homes, there is simply too much inventory on the dairy cow market.
“Right now, there are no buyers,” he said. “When it’s on the upswing, we’ll sell. Until then, we’ll struggle through.”
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