Two scenarios for the future

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The U.S. dairy industry is undergoing dramatic and significant change. 

The fundamental forces shaping the U.S. dairy production sector are not unlike those shaping other livestock industries. New technology not only lowers the cost of production, but also systematizes the milk-production process. Adoption of TMR feeding, sophisticated milking-parlor technology and improved herd-health programs are transforming milk production into a “biological-manufacturing” process. 

At the same time, consumers and food retailers are increasingly demanding more, particularly with respect to food quality, safety and freshness. This, in turn, requires tighter linkages between the milk production, processing and distribution sectors — the food-value chain — to respond to consumers in a cost-effective manner. 

In addition, increased volatility in milk prices has dramatically increased the financial risk in dairy farming — a significant change from years past when support prices made dairy farms the most financially stable livestock enterprise. 

Lessons from pork
The U.S. and world pork industry faced almost identical drivers of change a little more than a decade ago, including new technology, increased quality demands from consumers and increased price risk.

The pork industry was once dominated by independent, modest sized, family hog farms. But, over the past 15 years, that dominance has shifted to larger-scale, vertically coordinated industrialized manufacturers of pork products. This has profoundly altered the decision-making, ownership and control of hog farms; in essence, redefining the pork industry. 

Will the same structural change occur in dairy? Clearly, the dairy industry is characterized by a different institutional structure than pork. For example, federal milk-marketing regulations provide minimum prices to all sizes of producers, and producer-owned cooperatives play a major role. 

Yet, the same fundamental economic forces that transformed the pork industry are now playing out in dairy as well. 

The transformation has begun
A shift in emphasis has occurred from farms with 100 cows or less to farms with 1,000 cows or more — even in traditional dairy areas of the Upper Midwest.

On these larger-scale dairies, all facets of milk production have been systematized into a biological manufacturing system. This, in turn, has elevated these producers’ emphasis on milk quality, cow comfort, nutrition management, and herd health. In fact, many of these dairies now meet or exceed the performance of small dairies on these objectives.

And, milk quality is becoming even more important. Retailers are increasingly sourcing milk from those who can provide the freshest product with the longest shelf-life. 

While it’s still unclear how quickly this transformation will occur and who will be the major players in the future, I see two possible scenarios:

  • Larger-scale dairy producers will secure ownership or contractual arrangements with processing facilities, thus making them preferred suppliers to food retailers like Wal-Mart and Kroger.
  • Or, producer-owned dairy cooperatives will transform themselves, finding ways to supply dairy products to food retailers even faster and cheaper. That will make them preferred partners in the food-value chain.

The jury is still out as to which scenario will evolve. But there is little doubt that the dairy farm of the future will be larger, on average. It will adopt the latest technology, become biological manufacturers of raw materials, and become more aligned with its value-chain partners in providing quality dairy products to consumers.  

Mike Boehlje is a professor of agribusiness at the Center for Food and Agricultural Business at Purdue University



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