One of the themes in my "stump speech" is the rising cost of food. We have three children, but their growing appetites haven't damaged our food budget nearly as much as rising food costs themselves. Take milk, for example. Regular milk now costs around $4 per gallon. Organic milk is now up to $5.50 per gallon, although we can find it for $5 if we're careful.

There are many reasons for rising food costs. Here are just a few:

• Increased commodity demand on international markets: With Asia's rapid growth and advancing standard of living, the price of various "inputs" such as energy, protein for feed, and food itself has risen.
• Our government's own misguided effort to subsidize corporate agriculture with ethanol subsidies: Paying agribusiness to divert corn into energetically-questionable ethanol production raises the cost of feed and food for everyone, and subsidizes irrational investment in an ethanol industry that makes no economic or environmental sense.
• Debasement of our currency: This factor is the most painful to contemplate -- it's not just food, all commodities have gotten more expensive, and especially over the past five years. It's not that the commodities are rarer or more "expensive", our U.S. dollar just buys less stuff since we've printed and borrowed so much money in this age of fiscal insanity.
• Highly-regulated and anticompetitive markets: This factor is probably the most damaging to farmers, yet most within our reach to address.

Let's take the milk example a bit further. A friend forwarded this Connecticut article that notes how dairy farmers are being squeezed out of business: while our retail milk prices are rising, revenue received by dairy farmers is actually declining! Even worse, given how dairy farmers' costs are rising, more of them are being forced out of business as razor-thin margins are disappearing completely. This article from the University of Florida's Institute of Food and Agricultural Sciences provides even more quantitative data on the similar dynamics in Florida:

The Dairy Business Analysis Program (DBAP) is a cooperative effort of the Universities of Florida and Georgia, Southeast Milk Inc., and Southeast (Dairy Herd Improvement Association) DHIA. This project annually surveys participating dairy farms about their revenues, expenses, and investments. The average of participating DBAP dairies (2005 data) showed a slightly positive net farm income of $0.09 per cwt., 4% return to invested capital and 1% return to equity. Revenues were somewhat ($0.50 per cwt.) lower than 2004, while expenses continued an upward trend inherent since 1999 and $1.00 per cwt. higher than 2004. The cost of inputs continues to squeeze producer margins. Labor costs in 2005 were an all-time high at $3.53 per cwt., 17.4% of total expenses. Feed costs were $7.50 per cwt, in 2005, 37% of total expenses and are expected to move higher in 2006 and 2007. These Dairies that participated in DBAP averaged 1,091 cows and sold, on average, 18,474 pounds of milk per cow. Assets per cow were $6,518, debt per cow was $1,862, and equity per cow was $4,032. Equity growth rate was 0.9%, slightly lower than the 1.1% annual average since 1995. Asset turnover rate was 0.8, lower than the 0.88 average of the eleven-year period of this continuing survey (1995-2006).

• Since revenues have increased more slowly than costs, it follows that margins have decreased. In fact, the average net farm income per cwt. was $1.22 for years 1995 thru 1999, but $0.73 from 2000-2005, a 33% reduction.
• Reasons for declining profit margins are several but one statistic that stands out from the others is capital investment. Total assets employed in the business on a per-cow basis clearly show that investments have risen substantially. In the years 1995-1997, total assets per cow averaged $3,721 compared to $4,357 in years 1998-2001 and $6,086 in 2002-2005.
• Since margins have decreased over time, yet producers have increased the assets of their businesses, the data suggest that assets are being used less efficiently. If this is true, the dairy farms would have had increased difficulty paying for new assets. Financial data supports this conclusion. Debt per cow averaged $1,381 in years 1995-1997, $1,400 in years 1998-2001 and $1,853 in years 2002-2005. Producers have leveraged their futures to provide new assets.
• Asset turnover rate (ATR) is another statistic that provides another method of analysis of the same effect (declining ability of dairy farms to pay for investments in new assets). ATR is total annual revenues divided by total assets. Thus, ATR indicates the ability of a business to efficiently utilize assets to generate revenues. DBAP average ATR in years 1995-1997 was 1.03, 0.99 in years 1998-2001 and 0.67 in years 2002-2005.

A 1% return on equity? Rising debt burden with shrinking margins? Talk about a miserable business. How can this happen in a "free market"?

Hint: the market is not free. This Web site, keepmilkpriceslow.com, details what independent dairy farmers have been doing to fight back against our government, agribusiness, and its food cartel. Put yourself in a dairy farmer's position for a moment -- imagine that the price you can charge for your product, in this case milk, is out of your control. There is really only one massive "cooperative" who will buy your milk, and just one massive bottler that will take your milk and put it into stores. The federal government tries to "help" by setting minimum prices at a level to "protect" you, but those prices are set artificially and can't adapt to fluctuations in feed, fuel and labor costs.

What would you do? Most people would give up and sell the farm, which is an all-too-common occurrence. Thus small farms become a new strip mall or subdivision, or perhaps swallowed up by a bigger farm that still has the "economies of scale" to maintain its thin margins. A courageous minority of farmers, however, are trying to stay in business the old-fashioned way -- by bringing a good product directly to the customer.

Think about it -- the Connecticut article from January 2007 records a retail price of $3.92 per gallon, with just $1.28 paid to the farmer. Could you profitably put milk in bottles, pasteurize it, and get it to the store or a consumer for less than the $2.64 that the bottler, distributor, and store are currently charging? Of course! Should you be able to try? Why not?

Hein Hettinga is an an independent dairyman who built a business that allowed him to compete against the established corporate interests by bottling and distributing his own milk directly to stores. As a result of his success, Hein was rewarded by efforts to regulate him out of business and made to play by the same "rules" that keep the "dairy cartel" in power. Spend some time reading this Web site, as well as the commentary from the University of Florida article and other state/regulatory agencies. Ask yourself if the government is helping the people, or corporate interests.

When you're ready to ask more questions about the role of government in the food industry, check out this interesting blog post from Pittsburgh where farmers' attempts to differentiate their product are being squelched by a bureaucrat with an apparent conflict of interest. Finally, this article from Acres U.S.A. is classic, yet tragic.

We're fortunate to have a local dairy that is breaking the mold and distributing its own milk. It's not less expensive, but for some reason I've always thought milk tastes better out of a glass bottle.