Dairy policy analyst seeks input on economic stress

Ray Mueller
To remedy the oversupply of milk, UW dairy analyst Mark Stephenson listed two options: slow the pace of milk production increases or create new demand for dairy products.

KIMBERLY – With strategizing for policies in the 2018 Farm Bill emerging on the horizon, University of Wisconsin – Madison and Extension Service director of dairy policy analysis Mark Stephenson wants to know if dairy farmers are facing a tough economic period this year.

Stephenson used his appearance at the semi-annual farm management update sponsored by Extension Service offices in east central Wisconsin counties to pose that question to agricultural lenders who account for a majority of the attendees at the event.

Responses cited ever-increasing costs of farm equipment and service fees, low prices for cull dairy cows and bull calves, a tight labor market which drives hourly pay or salaries higher, a drop in premiums on milk checks, high costs for cropland purchases and rentals, accumulation of accounts payable due to relatively low milk prices in the past three years, and selling prices of bred dairy heifers which are lower than the cost of raising them.

Factors outside the MPP

Stephenson was seeking such input with the hope that he and other dairy economists could exert influence for the benefit of dairy farmers in the next round of federal dairy legislation. He agreed that many of the factors which affect a dairy farmer's bottom line are not considered in the Margin Protection Program (MPP) in current federal dairy policy.

The MPP formula includes only the national all-milk price and the cost of basic dairy ration feeds (corn, soybeans, and alfalfa hay), he said. Minimal payments have been made to dairy farmers under MPP, and the Department of Agriculture has recently announced that MPP enrollees will be permitted to step out of contracts originally set to continue through the 2018 federal fiscal year.

Stephenson predicted that MPP would be kept in federal dairy policy but observed that some changes ought to be made. He mentioned setting different premium rates and risk protection levels for large, middle-sized, and small dairy operations, using one rather than two-month calculations for milk and feed prices to determine if a payment will be made, and revising the feed cost formula along with the possibility of offering “a suite of options” for providing protection against low milk prices.

Milk production in the state of Wisconsin is up 6 million pounds per day compared to five years ago.

'A portion of the truth'

In reviewing recent history, Stephenson emphasized that blaming Canada and Wisconsin's Grassland Dairy for a loss of markets in the dairy sector represents only “a portion of the truth.” He noted that the early 2017 showdown with Canada involved that country's creation of a new and low milk pricing category for the production of milk protein isolates on which two dairy plants in New York and one each in Wisconsin (Grassland) and Idaho had enjoyed annual total sales of up to $100 million to Canada.

Stephenson didn't blame Grassland Dairy, a major butter manufacturer, as such for its decision earlier this year to drop 58 of its dairy farm suppliers in Wisconsin and 17 in Minnesota. Those farms, which supplied a total of about 1 million pounds of milk per day, scrambled to find new buyers or – in a few cases – sold the cows and retired from dairying.

Trade agreement provisions

Milk protein isolates (MPI) were not yet being produced in 1987, when the World Trade Organization tariff rates were set for exporting dairy products to Canada, Stephenson said. The subsequent North American Free Trade Agreement does not address dairy trade between the United States and Canada, he added.

Canada's dairy sector is governed by a production quota for which there is quota value of about $30,000 for one cow being added to a herd, Stephenson said. As one result, he noted that during 2016 the all-milk price averaged $23.48 per hundred in Canada compared to $16.74 in the United States.

Within Wisconsin, Stephenson confessed to being surprised that milk buyer cutbacks on quality and component premiums and on hauling subsidies had not happened earlier. He pointed out that milk production in the state is up by 6 million pounds per day compared to five years ago.

In neighboring Michigan, he pointed out, premiums have fallen into negative territory for many months during the past two years largely because of the price “reblending” that is permitted for dairy cooperatives.

Analyst says many of the factors which affect a dairy farmer's bottom line are not considered in the Margin Protection Program (MPP) in current federal dairy policy.

'Geographical Disequilibrium'

Stephenson used the term “geographical disequilibrium” to describe the dairy sector in the United States in general. By that, he means not only that there are great discrepancies in the geographic areas between where milk is being produced and where dairy products are being consumed but also between milk production volumes and the processing capacities – both excesses and shortages for the latter.

Those discrepancies have accelerated in recent years, Stephenson said. He cited a shortage of production capacity in Michigan in the wake of a doubling of the state's major milk production in the past 15 years and excess capacity in California following a daily drop of about 5 million pounds of milk from that state's high point in production.

In a larger perspective, Stephenson noted that starting in the early 1990s milk production increases were taking place in the western half of the United States while today the pattern has shifted to more production in the northern half of the country and reduction in the southern half.

As a result, he calculates that the Southeast region has an annual shortage of 40 billion pounds of milk, the West has an excess of 40 billion pounds, and the Northeast is short by 8 billion pounds compared to production in New York, Pennsylvania, and Vermont.

As remedies to the current situation, Stephenson listed choices of slowing the pace of milk production increases (currently at 2 percent per month in annual comparisons) or creating new demand for dairy products. For the latter, he notes that exports remain a good possibility but he warned that other major milk production locales in the world have had recent upturns in production.

Related points

On related points and in response to questions, Stephenson suggested that the introduction of bovine somatotropin in the early to mid-1990s and its ongoing phasing out at the behest of milk processors did not have a significant effect on average milk per cow or on milk prices. Recent rapid changes of up to $1 per hundred in milk futures prices indicate a nervous market in which prices could head in either direction, he said.

Considering the cutback of as much $1.50 per hundred in premium payments in some cases in Wisconsin, Stephenson isn't counting on any significant bottom line increase in milk prices in the state anytime soon. He cited the “large and early spring flush” in milk production this year, the record stocks of American cheeses and the continuing increases in average milk per cow per day and the number of dairy cows in milking herds.