Farming Magazine - July, 2011

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2011 STATE OF THE INDUSTRY REPORTS: The Dairy Industry Must Explore Its Options

By John Hibma

Photo by Bob M. Montgomery Images, www.bmmimages.com.

The U.S. dairy industry continues to deal with cycles of boom and bust, as milk prices react to a variety of economic forces. Price volatility is the norm rather than the exception. Dairy farmers may find themselves breaking even one year, profiting wildly the next, and then facing a financial train wreck the next. Adding to the financial quicksand is the continued rise in operating costs. Most dairy farmers are stuck at the bottom of the "food chain," unable to pass on increased production costs.

Dairy farmers find themselves in the tough position of having to maintain a fairly consistent level of production regardless if milk supply is long or short, making it difficult to react quickly to short-term changes in supply and demand. When the milk supply outpaces demand, the industry will spend months floundering with low milk prices. Once prices recover, there's little discipline within the industry to control supply, as many farmers add cows and produce more milk to take advantage of the higher prices, again leading to oversupply. A surplus of just 2 to 3 percent sends prices crashing. Many look to federal and state assistance, but as the U.S. struggles with its current domestic financial woes, agriculture is sure to take a backseat, making it all the more imperative that the industry rises to the occasion and re-energizes itself.

National food policy dictates that U.S. food remains cheap, and the dairy sector must compete with other foods and beverages in that environment. Consumer preferences change on a whim, and markets and products must adapt literally overnight. Per-capita consumption of dairy products in the U.S. has remained mostly flat in recent decades, making it even more difficult to survive in a quickly mutating and often brutal marketplace.

The U.S. dairy industry has gone through, and continues to go through, some significant challenges in recent years, with 2009 being the worst year, financially, since the Great Depression of the 1930s. At the same time, though, bright spots have popped up, most notably in 2006 and 2007, when international consumption of dairy solids surged, bringing dairy farmers some of their highest prices ever. In 2011, as world economies recover from the recession, there's a renewed interest in U.S. dairy products, helped along by a weakened U.S. dollar. However, as milk prices strengthen, profits are again being tempered by increasing feed costs, partly the result of the soft dollar, as well as rising oil prices and the increased competition coming from the biofuel industry.


Photo by Kirk A. Morrison.

Across the U.S., dairy farmers find themselves in a seemingly endless uphill battle to improve efficiencies in order to stay afloat financially. Milk prices can still plummet for short periods of time to 1980 levels, while recent input costs have risen precipitously. The more courageous entrepreneurs are sidestepping traditional market channels and discovering niche markets and private labels and recovering costs through valued-added marketing of farmstead products.

Regionalization of the industry has led to milk price and policy polarization. Rather, regionalization should be looked at as a strength that enables diversification of the industry. Different markets abound all across the country, as do different styles of dairy farming. Different regions of the country offer different economies of scale by which dairies can operate, and those economies offer strategic advantages for various types of dairy products. Regions such as the Midwest have traditionally been cheese producers. The western side of the U.S. tends to favor the large-scale farms that can efficiently produce many tons of butter and powder. All 50 states have dairy farms.

In highly populated areas like the Northeast, it is financially impractical to expand dairies to herd sizes in the hundreds and thousands. Even though the average herd size in the U.S. is now over 170 cows, there are many herds in the country with less than 100 cows, and many with less than 50 cows. A good portion of those smaller dairies do not support a family, even if milk is bringing over $20 per/cwt. Those are the types of farms that can enter and profit in a specific niche market.

Traditionally, the vast majority of dairy products marketed in this country are treated as a wholesale commodity, receiving a wholesale price at the farm level. Processing of dairy products - and adding of value - is mostly done away from the dairy farm, and the dairy farmer captures little of that profit stream. For most dairy farmers, producing milk is a full-time job. Marketing dairy products, for them, becomes a completely separate business.

Dairy farmers should be considering what specific markets to sell their products. In urban and suburban areas of the country, there's a waiting and ready market for high-quality dairy products. The organically grown and certified industries continue to expand. Farmers' markets that offer locally grown products also have an increased following. In Colchester, Conn., Cato Corner Farm has been producing European-style, aged raw milk cheeses for over a decade and marketing most of it at farmers' markets in New York City. Echo Farm in Hinsdale, N.H., has been taking part of its milk production and making delicious puddings for over a decade and marketing it throughout the Northeast. In Leicester, Mass., the Cooper Hilltop Dairy is a fourth-generation dairy farm that has been bottling and selling its own milk from its storefront location at the dairy farm close to the Boston area. Many people are willing to pay premium prices for dairy products that are locally produced.

Each of these enterprises has found a niche market that allows them to add value to their dairy products and, at the same time, support the local economy and portray dairy farming as a respectable and valuable industry. These dairy farms are bucking the widely embraced concept of "get big or get out" by circumventing the traditional pricing structure that hobbles so many dairy farms.

The challenge that confronts the U.S. dairy industry is how to sell over 190 billion pounds of milk every year. Consumption of dairy products tends to be economically inelastic, meaning that it doesn't change much even as consumer milk prices may rise or fall. Three hundred million Americans cannot drink or eat all that milk, cheese, yogurt and ice cream. A growing U.S. population can barely absorb the annual increase of milk, which has averaged between 1 and 2 percent per year.

The U.S. dairy industry has focused much of its marketing energy on its domestic market. It encumbers itself in a tangle of regional milk politics and price support programs and tends to look upon the international marketplace for dairy products primarily as a place to dispose of excess products. Many millions of dollars are spent touting the health benefits of dairy products at home in an attempt to stay alive in the competition for beverage and food markets. Regarding international markets as merely a place "to get rid of milk" sends a contradictory message to them and does a great disservice to our industry. Emerging global markets are looking for more nutritious forms of food and fiber for its growing populations. The U.S. dairy industry must begin looking at the rest of the world as a huge, untapped market for value-added dairy products.

A study prepared in 2010 by the Babcock Institute for Dairy Research and Development has determined that if the U.S. dairy industry expects to remain viable and healthy, it must focus on international markets and pursue dairy exporting as a consistent option. The study emphasizes the need for the industry to develop strategies that will gain entry and survive in a global environment. The U.S. dairy industry cannot continue to regard the international marketplace as a place to dump dairy products when things aren't going well here at home.

The study notes that the number of middle-class consumers in emerging markets will triple by 2030, reaching 1 billion in that year. Traditional dairy-exporting countries, such as New Zealand and Australia, will not be able to supply all that growth. Even though there are many economic and climate-related uncertainties and variability, the trend will be for continued worldwide growth for food in middle-class markets. The U.S. stands to profit handsomely if it chooses to invest time and money in developing those markets now.

Some of the study's recommendations:

  • Develop capabilities to package and manufacture high value-added products to meet international standards.
  • Develop the ability to deliver products to customer specifications.
  • Reduce costs and increase productivity.
  • Reform regulated milk pricing systems and price supports.
  • Develop mechanisms to reduce price volatility.
  • Companies that are looking to enter a global market for dairy products will have to:
  • Focus on being competitive and not rely on trade barriers to help them.
  • Be a low-cost producer if it is to sell a value-added product.
  • Be in it for the long term, not the short term.
  • Expand brand portfolios.
  • Open new markets.

The U.S. dairy industry must look at both domestic and international opportunities in which to market its production. Looking ahead, farmers and processors will have to be focused on specific markets, choosing the type of market that fits best. We are already seeing some of the changes in the U.S. dairy industry that will set its course for the next several decades. The continued success of the U.S. dairy industry will include a larger percentage of exports.

Competition for dairy products will continue to increase throughout the world, and the aggressive companies that take advantage of emerging opportunities will be the ones who benefit the most from that endeavor. History shows that those companies that are first to enter a market and do a good job meeting customer expectations will attain and maintain the upper hand in that market. Developing international markets takes commitment, time and money.

At the same time, domestic markets for dairy products will continue to evolve, and dairy farmers and processors will need to be ever vigilant in recognizing those markets and opportunities. The nature of agribusiness will always involve some risk, and the long-term trend of the U.S. industry points towards cutting more costs and getting even more efficient. Whether a dairy is milking 50 or 5,000 cows, dairy farmers will be required to have a firm grasp of net revenue per cow if they hope to survive in an increasingly competitive environment. For the foreseeable future, market volatility will continue and dairy farmers will have to do a better job of managing risk by making better use of risk management tools, such as forward contracting of both future milk sales when opportunities present themselves as well as locking in future feed prices. Ultimately, dairy farmers need to assert themselves and turn the tide so that they can be more of a "price maker" rather than a "price taker."

The author is a dairy nutritional consultant and works for Central Connecticut Farmer's Cooperative in Manchester, Conn.