Vicious dairy cycle tests farmers’ ability to survive
By Carol Ryan Dumas
Pete Wiersma’s dairy legacy stretches back to 17th century Holland. He grew up on a dairy in California and now milks 1,400 cows on his farm near Buhl, Idaho. He started his own operation in 1991.
Milking cows is in his blood.
He likes the lifestyle and working where he lives, and he likes the idea of producing wholesome food people need.
He doesn’t, however, always like the prices he receives for the milk he produces.
“Milk prices are really lousy right now. They’re projected to get somewhat better through the course of the year, get up to break-even maybe,” he said.
Like most of the 40,219 dairy farmers in the country, he’s been operating at a loss following three years of low prices. For example, the Class III price for milk to make cheese in regulated federal marketing orders was $13.40 per hundredweight in February. They were comparable elsewhere, such as Idaho, where the average cost of production is about $17.50.
This year, prices are expected to be even lower.
That average federal price was $16.17 in 2017, $14.87 in 2016 and $15.79 in 2015, down significantly from the $22.34 producers received in 2014.
The down years are tough, and the great years are few, said Wiersma, who has asked himself many times how long he can ride the roller coaster.
“Sometimes, it doesn’t seem worthwhile. Other times, it’s profitable again,” he said.
A great year comes around once every six or seven years, he said, and the other years are split between operating at a loss and prices a little above break-even.
“It’s a commodity business; you know what you’re getting into. You just hope everything averages out at the end,” he said.
But some dairies go out of business at the bottom of every cycle, he said.
In the U.S., 6,910 dairies have gone out of business in the past 10 years. In Idaho, Oregon, Washington state and California, 760 dairies have closed or switched to crop production.
The ups and downs of milk prices create a troublesome cycle. High prices prompt farmers to expand their dairy operations, but expansion is not precise, and the industry often slips into overproduction, causing prices to weaken, he said.
“I don’t know if there is a solution, unless you want to get into supply management. But that kind of flies in the face of free enterprise and growing your business the way you see fit,” he said.
Additional milk processing capacity “couldn’t hurt, but you have to remember the processor has to be able to sell the product, too,” he said.
Increased exports would also be helpful, and the outlook on that front is bright. Populations are growing in Southeast Asia and the rest of the Pacific Rim, where more people are moving into a middle class that demands more dairy products, he said.
Ultimately, though, commodity milk producers are always going to be price-takers, he said.
“In production agriculture, it’s pretty hard to find a solution other than supply management,” he said.
Supply and demand
Two things can increase milk prices — less milk production or more demand for dairy products, said Mark Stephenson, director of the Center for Dairy Profitability at the University of Wisconsin.
Low prices tend to reduce supply, and several cooperatives do have restrictions on milk in times of oversupply. But the likelihood of a national supply-management program is slim, he said.
Limiting the amount of milk produced on U.S. farms has always been a controversial issue and was dropped from the original proposal for the Dairy Margin Protection Program in the last farm bill, he said.
On the demand side, there are always modest increases in domestic demand for dairy products, both from per capita consumption increases and from population growth, but export growth has been slower, he said.
Processing capacity is an issue in some areas, and more capacity could help in certain places, such as Michigan, he said.
“But I don’t think that’s the real issue. The real issue is, do processors have a customer for their products?” he said.
They can always run another shift to make more product. But if they really perceived there was extra demand out there, they’d build or expand, and no one is doing that right now, he said.
There are a few places in the country where plants have been built or capacity added, but most of those are capacity that meets the objective of a particular company, he said.
A new plant Walmart is building in Indiana is a good example, he said. That plant will produce fluid milk, but it comes at the expense of the capacity of existing Dean Foods plants that have been supplying Walmart with milk, he said.
“It is seldom the case that capacity is added just because we have surplus milk to process,” he said.
Plants don’t want to make cheese or other dairy products when they don’t have a known, or high probability, sale. If they make it but can’t find a customer for the product, then it goes into increased stocks of products — and sooner or later, those stocks have to be reduced, he said.
Investing in milk
The last three years of low milk prices have been uncomfortable for dairy producers, but not enough to change production behavior. But it’s gone on long enough now that it’s likely to start having an effect, said Ben Laine, senior economist at CoBank.
“I think production growth will start leveling off and then wait for demand to catch up,” he said.
The wild card is Europe, where production is still growing since milk quotas were eliminated a couple of years ago, he said.
The dairy industry is cyclical. Production sometimes gets out of balance with demand, but they do a pretty good job of matching each other over the long run, he said.
Both production and demand are going to continue to grow, providing export opportunities for U.S. dairy. It is critical the U.S. position itself for those opportunities, he said.
That means expanding processing capacity and building and upgrading infrastructure to be competitive on the world market, he said.
The ability of the U.S. to efficiently produce milk and increase production allows for continuing foreign capital to come into the processing sector, which ultimately benefits milk producers, he said.
Foreign companies have been investing in U.S. plants for decades, and at least 15 percent of the U.S. milk supply is processed by plants that are at least partially foreign-owned, he said.
“The U.S. has built a reputation as a reliable source of milk,” he said.
Additional joint processing ventures offer opportunity, and there’s been a new wave of investment and interest coming from countries with production limits, he said.
While producers are currently challenged near-term by oversupply and its negative impacts, the long-term outlook is good, he said.
While there might be opportunity for processors, the real question is whether new processing plants will pay a profitable price for milk, said Bob Krucker, an Idaho dairy producer and board member for National Dairy Producers Organization.
“More processing facilities that simply pay an unprofitable milk price do not help the dairy farmer, but rather hurt the dairy farmer by encouraging and accommodating an increasing supply of milk in excess of profitable demand,” he said.
Even though the processor is profitable, that doesn’t mean the producer is profitable. In fact, processor profitability might be based on farmers’ unprofitability — the ability to get low-priced milk, he said.
If milk oversupply is the issue, new processing projects have nothing to do with producer profitability, he said.
“The milk supply determines the milk price, and farmers determine the milk supply. Dairy farmers are making the milk and the milk oversupply,” he said.