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The Good Life…For Cows

Dec 31, 2011 • 201 Views

I suspect that the life of a cow producing organic milk got better last June. For their owners, though, business surely became more complicated.

According to a new USDA rule, any milk labeled organic now has to come from a cow that spends much more time in the pasture. Their diet also has to have a pasture related minimum and, as always, no hormones, no synthetic pesticides, no genetically modified seeds. Described by the LA Times, these cows’ lives will be “au natural.”

Organic dairy farmers, though, are not as happy.

  • Demand: It sounds like a roller coaster. When the 2008 recession hit, organic milk sales plunged and the industry had to cut back. Now, during the first 3 quarters of 2011, sales rose 17% compared to the same period a year ago.
  • Supply: In addition to complying with the new USDA rules, farmers have faced soaring feed costs. In the U.S., ethanol production, and in China, a middle class eating more meat, helped push corn prices upward. Pricy corn became the incentive for using other grains whose prices then increased also.

With demand surging and supply more costly, price goes up. However, there is one more variable. Farmers claim that the cooperatives where they sell their milk are not paying them more. As a result, some organic farmers are switching back to conventional farming. So, in addition to the price rise, we have quantity descending and supermarket shortages.

The Economic Lesson

The history of organic farming is a classic cost/benefit story. Especially considering how antibiotics and pesticides spiked productivity and led to a cheaper and varied food supply, the costs and benefits of organic production are fascinating.

An Economic Question: What demand/supply graph might you draw to illustrate the current plight of the organic dairy farmer?

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