Who's to blame for the dairy crisis?
The more stories and letters to the editor you read, the more culprits for the dairy crisis—now in its fifth year—emerge. Here are but a few: 3X milking, sexed semen, immigrant labor, expanding CAFOS, lack of processing capacity, stalled exports, world dairy prices, Canada’s Class 7 program, the European Union (EU), China, Mexico, Vladimir Putin and Donald Trump.
Which of these villains you view as culpable largely depends on your politics and whether you consider yourself a small or large dairy farmer. I’m not without my own biases, but I’d like to sort out some of the facts.
The Back Story
In 2014, when prices reached their zenith (in terms of non-adjusted inflationary value), total milk production in the United States was 206 billion pounds, a record level. Production per cow was 22,259 lb, and cow numbers totaled 9.257 million.
In 2018, total milk production grew to 217.5 billion pounds (another record). Production per cow rose to 23,173 lb and cow number grew to 9.385 million. In other words, total milk production grew 5.5% over those five years, cow numbers grew 1.4% and milk per cow grew 4.1%.
On the consumption side, commercial use of dairy products grew (on a skim/solids basis) from 170 billion lb in 2014 to 178 billion lb in 2018, a 4.5% increase. As such, domestic consumption was not keeping up with production, increasing the U.S. dependence on exports to whittle away the surplus. Note: Latest export figures show the U.S. exported a record level of dairy products in 2018, equal to 15.8% of U.S. milk production on a skim/solids basis. U.S. imports were about 3%.
But as they say, as in politics, milk prices (and margins) are locally dependent. Wisconsin is a good example. In the Badger State, milk production grew 10% from 2014 to 2018. But cow numbers grew by just 1,000 head to 1.271 million, an increase of 0.08%—practically a statistically rounding error. But Wisconsin dairy farm numbers fell by 17% to 8,500 in 2018, and cows per farm climbed from about 125 cows in 2014 to 150 in 2018. Milk per cow went from 21,885 lb to 24,059 lb, a 9.9% increase—accounting for just about all of the state’s increased production.
At the same time, Wisconsin processors had not increased capacity much if at all, though they had switched to higher value, specialty cheese production. At about the same time, though, Michigan went on its expansion binge, adding 20,000 cows from 2014 to 2018 and increasing overall milk production 16%. With the state’s processing capacity already stretched, Michigan milk started flowing into Wisconsin at heavily discounted rates. At times, the only limit to how much milk Michigan was sending to Wisconsin was the turn-around of milk tankers through Chicago’s rush hour.
The end result of increased production in both Wisconsin and Michigan was that Wisconsin processing capacity approached 100%. Quality and volume premiums eroded considerably, putting even more pressure on margins squeezed by low Class III prices.
2014 was also the year that world events overtook dairy markets. Recall that on March 31, 2014, dairy quotas ended in the European Union, unleashing pent up enthusiasm for growth that had been stymied for 30 years. 2014 was also the year of the Winter Olympics, which Russian President Vladimir Putin used as cover to invade and take control of the Crimea peninsula in Ukraine. That crisis precipitated Western sanctions on Russia; Russia reciprocated with sanctions on EU, U.S. and Australian dairy exports. The EU had been exporting about a third of cheese and butter to Russia. So that combination of events resulted in a mountain of milk powder being taken off the market in the EU, depressing powder prices almost to this day.
TPP and NAFTA/USMCA
In 2016, Donald Trump was elected president. On January 23, 2017, the first day of business President Trump was in office, the President pulled out of the Trans Pacific Partnership (TPP). TPP was a 12-country trade deal, and estimates by Purdue University economists projected a $1 billion increase in U.S. dairy exports had the U.S. signed on.
Nine days later, on February 1, 2017, Canada’s new Class 7 milk pricing regulation went into effect, and Canadian processors told U.S. exporters they would no longer accept diafilterd milk products (milk protein concentrates) on May 1. That left about 100 dairy farms in the Wisconsin, Minnesota and New York looking for a home for their milk production at a time when processing capacity was nearly full. Virtually all of these farms eventually found a home for their milk, but many had to take the base price minimum for their milk without any premiums.
The Class 7 controversy got embroiled in the North American Free Trade Agreement (NAFTA). On May 18, 2017, the Trump Administration announced its intention to renegotiate NAFTA. Eventually, NAFTA became the U.S. Mexico Canada agreement (USMCA), and was signed by all parties on Nov. 30, 2018. It has yet to be ratified by Congress. While the Class 7 controversy was somewhat resolved by USMCA, questions remain. The USMCA also opened Canada to 3.59% of its dairy market to U.S. dairy products, slightly more than the 3.25% that would have been allowed under TPP.
Other problems remain, however. To “encourage” Mexico to re-negotiate NAFTA, President Trump imposed tariffs on Mexico’s steel and aluminum exports to the U.S. in the spring of 2018. In turn, Mexico imposed tariffs on U.S. products, including cheese. Those remain in place, though cheese sales to Mexico were up fractionally in 2018 as some exporters themselves offset the tariffs in their pricing.
Finally, there is the U.S.-China trade dispute. On July 6, 2018, the Trump Administration imposed 25% tariffs on about $34 billion worth of Chinese products. The Chinese reciprocated, including tariffs on U.S. cheese exports. Up until that point, U.S. dairy sales to China had grown 17% in 2018. But they plummeted by a third in the final six months of the year. At this writing, that dispute is on-going. But there is some hope of resolution soon.
In the end, it is safe to say there is no one villain who is culpable for the dairy crisis. It’s also safe to say there is no one solution.
“Reprinted by permission of Farm Journal media, September 2018”
This article originally appeared on the Farm Journal website.