CoBank: Dairy farmers face longer periods of low prices

Dairy cows graze in Western Washington. Smaller operators and cooperatives need to position themselves to take advantage of higher value opportunities.

A structural shift in the U.S. dairy industry driven by consolidation to larger farms will challenge smaller farms and the cooperatives that serve them. But the changing dynamic is not without opportunity for those smaller operations and their co-ops, according to a new report from CoBank.

“Consolidation on dairy farms in the U.S. has driven the dairy industry to what might be a new era of longer, more drawn out prices cycles than the three-year pattern the industry has come to know,” Ben Laine, senior dairy economists with CoBank, said in a video accompanying the report.

The three-year cycle emerged in the 1990s as the federal Dairy Price Support Program was phased out. In the years that followed, the magnitude of price cycles increased as dairy exports picked up and exposed the industry to the volatility of the global market, he said.

To withstand the ups and downs, many farms looked to expand to take advantage of economies of scale and lower their costs, he said.

“Now, most of the U.S. milk supply is driven by these large, efficient farms that are much less responsive to near-term price changes,” he said.

Dairy farms with 1,000 cows or more now comprise nearly 50 percent of the dairy industry, up from 29 percent in the previous decade, the report notes.

These large farms are in the best position to survive extended periods of low milk prices during the new longer cycles, and the lack of supply response will likely mute the traditional three-year cycles, Laine said.

Milk prices have been stuck in a sustained pattern of lower prices since 2014, and the prolonged period of low milk prices have strained most small-scale farms without the relief of the expected peak year of price recovery, he said.

“Smaller farms and the cooperatives that serve them will have a difficult time competing with their larger counterparts on a commodity basis due to the higher costs they face,” he said.

But they might have an advantage in being able to tap into higher value products and capitalize on consumer segments that place a premium on local, smaller scale production, he said.

It will be critical for cooperatives and producers to position themselves for a scenario of prices remaining lower for longer without the peak years to provide relief, he said in the report.

In some regions of the country, smaller scale family operations have found success by pooling resources to build larger, more efficient operations. In addition, smaller farms are better able to quickly adapt to tap into niche markets such as organic, grass-fed, local and other options for premium dairy products, he said.

Cooperatives that have historically only pooled and marketed members’ milk will also need to investigate opportunities for adding value. Entering into branded business requires different management and marketing skills, as does investing in and operating a manufacturing plant, he said.

“But while challenging strategies and entering new markets may be challenging and risky, the risk of maintaining the status quo may be even greater,” he said.

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