Serious Cheese: With Milk Prices Down, Grafton Pays a Premium

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"This is not really the same thing as the government subsidizing (i.e. naturally inflating) the cost of corn, or soybeans."

In these tough economic times, it must be difficult for companies to take the long view on things. Especially one like Grafton Village Cheese, larger than many small-scale artisan producers but still tiny compared to the struggling giants making news on Wall Street Journal covers. But by temporarily subsidizing the dairy farmers they rely on to produce their cheese, this small Vermont cheesemaking collective was in the news yesterday for doing just that.

The price of milk, a commodity traded on the Chicago Mercantile Exchange, has fallen almost 40 percent in just one year (just like my 401k!). In March of 2008, a "hundredweight" (abbreviated "cwt." and equal to 100 pounds) of milk cost $18.

In March 2009, the price was at $11.20 per cwt. At prices this low, dairy farmers can hardly sustain their operations. Half that amount could be spent on feed alone.

Grafton is apparently very concerned about the effect these prices will have on the farmers whose milk goes into their cheese, and so this month they will begin a program to effectively subsidize the farmers until prices go back up. They will directly pay the farmers the difference of $20 and the current price of a hundredweight. That subsidy will scale down as the price of milk increases, and be zero once the price reaches $20.

But agricultural subsidies are bad, you say?

Well, this is not really the same thing as the government subsidizing (i.e. naturally inflating) the cost of corn, or soybeans. No, in this case Grafton is betting the prices will go up at some point in the near future, and they are sacrificing any additional profits they might have seen from depressed prices in order to prop up the farmers so they don't go out of business in the meantime.

It's nice to see them taking this tack. So often companies will maximize their short term profits without seeing the forest for the trees. In this case, though, perhaps because they are a dairy cooperative owned and run by farmers, Grafton is doing the right thing and investing in the real source of their value: the cows and farmers that work hard every day turning grass and grain into nutritious, delicious milk.