U.S. dairy — consolidation or restructuring?

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Consumer demand for quality food products at a reasonable price, combined with the development of standardized animal-production systems, has led to vertical integration within the pork and poultry industries. As a result, they have been transformed from commodity markets to value-added markets.

So, the question becomes “When will dairy be transformed, too?” For years, my answer has been “It won’t.” After all, the quality and consistency of products that vertical integration provides for pork and poultry has already been achieved by the PMO regulation in dairy. And what processor would want to tie up capital in comparatively expensive production units and long growing periods (cows vs. chickens and sows)?

However, these differences are no longer sufficient to say the dairy industry will not integrate. To the contrary, demographic data strongly suggest restructuring has begun.

Shifts in market share
In the 1950s and 1960s, the average dairy had less than 20 cows with little variability in herd size. As the number of herds declined, herd size grew among the remaining dairies. Fast forward about 30 years…. Between 1985 and 1997, the industry lost 169,000 dairies, yet ownership of the first 50 percent of cows remained in the hands of about 14 percent of the dairies.

That is consolidation.

In 1998, changes in market share indicated that consolidation was changing to restructuring. By 2004, the first 50 percent of cows were owned by 7.5 percent of the dairies — or just 5,200 herds. However, instead of processors driving the change, like in pork and poultry, it is dairy producers driving integration forward. The motivation is complex, but, in short, it is to capture more value for the product, have more predictability with regard to income, and capture economies of size and scale that provide significant ability to control input prices.

The implications
Restructuring is important for everyone to understand, regardless of herd size, because it helps explain some of the discomfort and disenfranchisement that many producers feel.

There is a “disproportionality” that exists in the dairy industry. Disproportionality is my term for the disempowerment and distress felt when the sources of power are out of balance.

There are three primary sources of power: influence (political power), resource base (ownership), and economic impact (money). When a status quo exists, these power sources find a balance within the industry. Everyone knows his position and the future seems predictable. However, when an industry is in transition, the balance breaks down. The figure below illustrates this:

Dairies with less than 200 cows account for more than 90 percent of U.S. dairy herds. Yet, they own less than 50 percent of the cows. On one hand, they wield power with politicians because of their sheer numbers. But, they do not wield the same power with service providers and suppliers.

Economic power is even more distinctly disproportionate, with approximately 10 percent of herds (herds larger than 199 cows) driving nearly 62 percent of the economy of the dairy industry based on total milk produced.

This disproportionality has been evident since the mid-1980s, and it will continue.  Yet, there will be room for 50- to 200-cow dairies to fill specific niches, as well as for producers who specialize in milk production.

We’re only misleading ourselves if we think the dairy industry is incapable of integrating. We need to recognize the reality around us and then take advantage of new opportunities to determine our own destiny.

Roger A. Cady is a dairy technical manager with Monsanto.



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