Dairy in 2018: musical chairs without enough chairs

Jan Shepel
As the supply of domestic milk has continued to rise, Milkweed editor Pete Hardin says the industry has largely failed to bring discipline to milk production.

PAOLI - The dairy industry today is “already a game of musical chairs with not enough chairs,” notes one of Wisconsin’s dairy experts as he looks ahead to the coming year.
Pete Hardin, editor and publisher of The Milkweed, a national dairy newspaper published in southern Wisconsin, spoke with a group of dairy farmers in Paoli recently, offering his outlook on 2018 and beyond as those farmers try to work out what’s going to happen on their farms with continuing low prices.

The group of dairy farmers was organized several years ago under a program with Madison Area Technical College’s agriculture program. When those classes were no longer offered they decided to keep meeting and bringing in experts to talk about issues related to their business. They now call it Paoli University or PU.

Dairy farmers continue to crank out more milk across the country and processors don’t always have the capacity to take in that milk in the region where it’s produced – that’s where the musical chairs analogy comes in. Hardin notes that in 2004, Wisconsin dairy farmers produced in the range of 22 billion pounds of milk per year but processors clamored for more, saying they couldn’t run their plants at capacity.

By 2016, Wisconsin’s dairy farmers had responded to state tax incentives and those offered by processors and were producing over 30 billion pounds of milk – a 36.4 percent gain in 12 years. State processors had also taken advantage of state tax incentives to add plant capacity and ramped up to meet those new production levels.

Pete Hardin

Then, milk from other parts of the country started flooding America’s Dairyland. As that so-called “distressed” milk arrived daily from Michigan and Northeastern dairy regions, it drove down prices being paid to Wisconsin dairy farmers. Processors were able to get “distressed” milk at rock-bottom prices, far lower than they had to pay their own local farmers.

Hardin reports that state milk processors were buying this distressed milk at $2 under the monthly federal class prices, delivered into Wisconsin. Such price cutting, he explained, means the sellers in those other states were absorbing losses of $4-$4.50 per hundredweight after transportations costs were figured in.

Dairy producers in Michigan have increased their milk production 22 percent since 2013 with little additional processing capacity in their state, so that flood of milk has to go somewhere. He recently staked out a dairy plant in southwest Wisconsin to document the number of Michigan-licensed milk transports that unloaded their milk there.

The advent of electronic logging device requirements is only going to add to the expense associated with running a milk hauling business, especially drivers transporting milk across state lines.

That hauling of milk for great distances to fill cheese vats in various regions may be impacted significantly by one new development – the required electronic logging of information automatically from milk semi tractors. Hardin noted that this development may affect labor costs for companies associated with hauling milk as they comply with new Department of Transportation rules for electronic recordkeeping. The economics of trucking milk long distances, he predicted, will change with the advent of ELDs – electronic logging devices, which combine global positioning information and the speed traveled by trucks as they haul their loads.

He noted that many haulers are finding it difficult to find drivers – often younger people have drug problems, are overweight or have criminal records that prevent them from being licensed as truck drivers. Those who don’t have those problems just don’t have much interest in driving, even at high rates of pay per hour. The advent of ELD requirements is only going to add to the expense associated with running a milk hauling business, Hardin said.

The solution to hauling long distances, of course, is having processing capacity near where the milk is being produced (or overproduced.) Hardin reported that two years ago there was a plan for Wisconsin-based cooperative Foremost Farms to partner with Dairy Farmers of America (DFA) and the Irish dairy company Glanbia to build a cheese plant in Michigan, but so far it appears those plans have fallen apart.

Good sales

The irony of all this, he says, is that U.S. commercial sales of dairy products are going very well. “In terms of selling we’re doing a good job.” Per-capita cheese consumption among U.S. consumers is up to 36 pounds – which means that people are eating two-thirds to three-quarters of a pound of cheese each week, which is good news for the industry. “Domestic sales are great but exports have slowed.”

As the supply of domestic milk has continued to rise, Hardin said the industry has largely failed to bring discipline to milk production. There are some exceptions, like Land O’ Lakes, which has instituted a sort of base program, he added.

In the Northeast dairy cooperatives are allowed to dump milk because that region has grown its milk production without growing any production capacity. Hardin said he calculated that the amount of milk that has been dumped, if put in gallon jugs placed next to each other would stretch from Boston to Denver – a total of 1,800 miles.

One of the solutions to this overproduction, of course, is to export excess product out of the country. Hardin said he had his own criticisms of the Trans-Pacific Partnership trade agreement and wasn’t overly concerned when newly minted President Donald Trump decided to withdraw the United States from that trade pact. But now it’s becoming clear that the other nations that would have been in the TPP with the United States are forging their own agreement – minus the United States. In general, that doesn’t help our dairy industry sell much of its “excess” product.

But if Hardin had his own reservations about TPP, he’s certain that the North American Free Trade Agreement (NAFTA) needs to stay in place for the sake of the dairy industry and the rest of U.S. agriculture. “Mexico is the biggest export destination for dairy and Canada is number-two,” he said. “And Canada has their own system to create stability in their dairy industry. Who are we to them how to run their nation’s system?” Farmers in Canada, with their quota system, are currently paid roughly $25-28 per hundredweight, he added.

When the Trump administration “denigrates” our neighbors and major trading partners the way it has, “it’s a huge mistake.” In the wake of blustering over NAFTA, Canadian dairy farmers have been allowed to increase their production and the industry there is replacing dairy products that previously were imported from the United States. Quality springing heifers are bringing as much as $6,000 in Canadian currency, he reported, at dairy auctions north of the border.

Due to our trade threats, New Zealand has replaced the United States as the major supplier of butter. “We’re blustering about their quota system and wasting our time and our breath and they are turning their backs on us. This is serious stuff,” he said.
With depressed milk and livestock prices in the first quarter of this year, he predicts “it’s not going to be pretty. I hope I’m wrong,” adding that there may be a lot of farmers who decide to exit the business.

In other parts of the world, things aren’t all rosy either. New Zealand, a dairy nation built on pasturing its cows, currently has challenges from drought. Farmers there have little capability for storing forage and variables of weather hurt the industry there.

On farm advice

For farmers coping with the current set of economic challenges, he advised keeping in close contact with their farm lender. “Bankers have their challenges too but you won’t help yourself by not communicating,” he told the farm group.

He also advised farmers to cull from the bottom of their herds and make those decisions sooner rather than later. During the low-ball dairy prices in 2008-09-10 many farmers cut input expenses by removing minerals from the dairy ration, an idea he says hurts breeding and productive efficiency later on, so he advised against it.

Looking to the future he also believes there will eventually be a market for dairy produced with non-GMO feed and for milk from cows with A2A2 genetics. “If I were a dairy farmer I would breed all my cows to A2 bulls.” Eighty-five percent of the 1.4 billion people in China think they’re allergic to milk but many have found that they have no problem digesting A2 milk.” (Dairy genetics companies furnish the information on the genetic markers on their bulls and the A2 gene is often included.)

“This is the future – linkage of knowledge and science to research and human health.”

Marketing cheese

While Hardin “thoroughly defends” the efforts of the Wisconsin Milk Marketing Board, he believes that Wisconsin “needs to sell cheese smarter” perhaps forming a cheese marketing enterprise with dairy farmers and cheese plants and setting up a mail-order business to give consumers a choice of Wisconsin’s best cheeses.

“Cheese is one of the most marked up products in the supermarket; that’s where the money is. Let’s sell big packages of Wisconsin’s quality cheese. Let’s sell our way out of this mess.”

Hardin believes that Wisconsin “needs to sell cheese smarter” perhaps forming a cheese marketing enterprise with dairy farmers and cheese plants and setting up a mail-order business to give consumers a choice of Wisconsin’s best cheeses.

The industry could also do a better job of selling butter – a product that consumers are once again clamoring for. He criticized the National Dairy Board for spending only $1 million per year on butter promotion. “People are walking away from margarine. We should be doing more to promote butter.”

When it comes to politics and policy, he believes farmers should have a right to vote on whether or not they keep the dairy check-off and should be able to vote for National Dairy Board representatives, rather than having them appointed by the U.S. Agriculture Secretary. But the biggest national priority needs to be talking to the Trump administration about the importance of NAFTA. “It may need to be improved but we need to protect it.”

According to the National Corn Growers Association, Mexico’s consumption of corn has increased 200 percent in the last five years. That nation is the number-one importer of U.S. corn. But Hardin noted Mexico is already turning to Brazil to supply its corn – in light of the faltering NAFTA negotiations.

Another priority, Hardin said, would be reforming the Class structure in the dairy industry. He believes there should only be two classes in the pricing structure and milk used to produce cheese should be in the top pricing class since cheese is a premium product. Yogurt should be included in the top class too.

If the Margin Protection Program-Dairy is retained in the next farm bill, he believes it needs to include regional calculations for feed costs and regional milk prices. The all-milk price is not the price farmers receive, so it’s not the right price to use in the program’s calculation, he said.