CMN

Guest Columns

Perspective:
Dairy Markets

Can dairy be profitable?

Mike McCully

Mike McCully is owner of The McCully Group LLC, New Buffalo, Michigan, and contributes this column for Cheese Market News®.

To the outside observer, the dairy industry is in bad shape. Dairy farms continue to go out of business, with Wisconsin losing 10% of its farms in 2019. Weather, volatile milk prices, increasing costs for labor and other factors present challenges to dairy farmers.

Cooperatives and processors are facing tough times as well. In the last few months, the two largest fluid milk processors filed for Chapter 11 bankruptcy. National headlines have called out the decline in fluid milk consumption due to the growth in plant-based foods. And dairy cooperatives are experiencing problems with both processing and the farm side of their business.

Looking beyond the tactical day-to-day operations of the business, does the dairy industry have the right structure to be competitive in the long run?

Starting with dairy farms, there has been a long-term downtrend in the number of dairy farms in the U.S. As noted in my guest column last year, simply continuing this trend would see 50% fewer dairy farms in the country by 2030. (See “Dairy farm numbers could fall 50 percent by 2020” in the Jan. 4, 2019, issue of Cheese Market News.)

In 2017, 3,500 farms, 9% of the total, produced 68% of all milk in the country. This macro trend of increasing concentration is expected to continue. Large farms will leverage low-cost production models to focus on commodity milk production. Small to mid-size farms will need to utilize low-cost production models and/or specialize in milk production for value-added products to be successful. Smaller farms will struggle to compete against large farms in commodity milk production due to the significant difference in production costs. Farms that succeed, whether big or small, will treat their farms as a business, aggressively manage costs and revenue, adopt technology and best management practices, and respond to consumer tastes and preferences.

Dairy farming also has a demographics problem — the average age of a farmer is in the 50s. Without the next generation taking over the farm, these farmers eventually will retire. There are a small number of programs that help young people get into dairy farming and assist with the transition from retiring farmers. There could be a role for government policy to develop or expand young farmer programs. This also could help stabilize the decline being seen in rural communities across the country.

On the processor side, the troubles of Dean Foods and Borden Dairy are part of a larger problem in the fluid milk processing industry — overcapacity. With declining sales volumes, plants become less efficient. Going back to 2009, more than 55 billion pounds of milk was processed for Class 1 products. By 2018, that number had fallen to 47 billion pounds. Assuming an average plant size of 25 million pounds per month, the decline of 8.4 billion pounds equates to the output of 28 fluid milk processing plants. Said another way, 28 plants needed to close just to keep the capacity utilization similar to a decade ago. While some plants have closed, the industry still has too much capacity in HTST (high-temperature short-time) milk processing plants, most of which are decades old, and not enough capacity for extended shelf life products.

The industry needs to think beyond a gallon jug of commodity white milk. Specialty milk and dairy-based beverages are growing to meet consumer demand. The industry needs to re-tool plants to meet this demand and address the chronic overcapacity of HTST milk processing to be profitable in the future.

Like fluid milk, other dairy products can be viewed as commodities — Cheddar and Mozzarella cheese, nonfat dry milk powder and butter. These are high-volume, low-margin products where successful companies have low-cost production models, the same theme as large farms. With the importance of export markets, there is a need to upgrade plants to meet the specifications of global buyers. More broadly, the production of value-added products brings more margin to processors and dairy farmers. A number of global buyers have the perception the U.S. is a producer of commodity products. More investment will be needed in plant infrastructure, research and development of new products, and customer service to change that perception.

No discussion about dairy would be complete without mentioning dairy policy and the regulated milk pricing system. The federal milk marketing order (FMMO) system was developed in the 1930s when conditions were very different from today. This is also true when looking at the current construct of the FMMOs from federal order reform in the late 1990s. Questions are being asked if the dairy industry has the right policy structure to be competitive. What changes are needed to FMMOs to ensure milk moves to its highest value use, whether for domestic or export products? Can the U.S. compete in global markets with current policies? Will the Dairy Margin Coverage and Dairy Revenue Protection programs be effective safety net programs for dairy farmers?

The government policy dynamic is one of the things that makes dairy and milk unique. However, policy tends to be slow to react to changes in the marketplace. The U.S. needs to have policies that allow dairy companies to be responsive to changing consumer needs, both in the U.S. and around the world.

The dairy industry needs to be attractive — for farmers, for processors, for brands and for consumers — to be sustainable. Dairy has long been a production-focused industry pushing milk and dairy products forward to consumers. To be successful in the future, the dairy industry needs to become more consumer focused. This will require a different mindset for operating farms, plants and brands, something akin to the old saying, “the customer is always right.” Disruption brings challenges for some but opportunities for others who are prepared to change the way they compete to meet consumer expectations.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.

CMN article search




© 2020 Cheese Market News • Quarne Publishing, LLC • Legal InformationOnline Privacy PolicyTerms and Conditions
Cheese Market News • Business/Advertising Office: P.O. Box 628254 • Middleton, WI 53562 • 608/831-6002
Cheese Market News • Editorial Office: 5315 Wall Street, Suite 100 • Madison, WI 53718 • 608/288-9090