Dickrell's Diary: Who's to Blame for the Dairy Crisis?

The more stories and letters to the editor you read, the more culprits for the dairy crisis—now in its fifth year—emerge. Here are but a few: 3X milking, sexed semen, immigrant labor, expanding CAFOS, lack of processing capacity, stalled exports, world dairy prices, Canada’s Class 7 program, the European Union (EU), China, Mexico, Vladimir Putin and Donald Trump.

Which of these villains you view as culpable largely depends on your politics and whether you consider yourself a small or large dairy farmer. I’m not without my own biases, but I’d like to sort out some of the facts.

The Back Story

In 2014, when prices reached their zenith (in terms of non-adjusted inflationary value), total milk production in the United States was 206 billion pounds, a record level. Production per cow was 22,259 lb, and cow numbers totaled 9.257 million.

In 2018, total milk production grew to 217.5 billion pounds (another record). Production per cow rose to 23,173 lb and cow number grew to 9.385 million. In other words, total milk production grew 5.5% over those five years, cow numbers grew 1.4% and milk per cow grew 4.1%.

On the consumption side, commercial use of dairy products grew (on a skim/solids basis) from 170 billion lb in 2014 to 178 billion lb in 2018, a 4.5% increase. As such, domestic consumption was not keeping up with production, increasing the U.S. dependence on exports to whittle away the surplus. Note: Latest export figures show the U.S. exported a record level of dairy products in 2018, equal to 15.8% of U.S. milk production on a skim/solids basis. U.S. imports were about 3%.

But as they say, as in politics, milk prices (and margins) are locally dependent. Wisconsin is a good example. In the Badger State, milk production grew 10% from 2014 to 2018. But cow numbers grew by just 1,000 head to 1.271 million, an increase of 0.08%--practically a statistically rounding error. But Wisconsin dairy farm numbers fell by 17% to 8,500 in 2018, and cows per farm climbed from about 125 cows in 2014 to 150 in 2018. Milk per cow went from 21,885 lb to 24,059 lb, a 9.9% increase—accounting for just about all of the state’s increased production.

Capacity Stretched

At the same time, Wisconsin processors had not increased capacity much if at all, though they had switched to higher value, specialty cheese production. At about the same time, though, Michigan went on its expansion binge, adding 20,000 cows from 2014 to 2018 and increasing overall milk production 16%. With the state’s processing capacity already stretched, Michigan milk started flowing into Wisconsin at heavily discounted rates. At times, the only limit to how much milk Michigan was sending to Wisconsin was the turn-around of milk tankers through Chicago’s rush hour. 

The end result of increased production in both Wisconsin and Michigan was that Wisconsin processing capacity approached 100%. Quality and volume premiums eroded considerably, putting even more pressure on margins squeezed by low Class III prices.

2014 was also the year that world events overtook dairy markets. Recall that on March 31, 2014, dairy quotas ended in the European Union, unleashing pent up enthusiasm for growth that had been stymied for 30 years. 2014 was also the year of the Winter Olympics, which Russian President Vladimir Putin used as cover to invade and take control of the Crimea peninsula in Ukraine. That crisis precipitated Western sanctions on Russia; Russia reciprocated with sanctions on EU, U.S. and Australian dairy exports. The EU had been exporting about a third of cheese and butter to Russia. So that combination of events resulted in a mountain of milk powder being taken off the market in the EU, depressing powder prices almost to this day.

TPP and NAFTA/USMCA

In 2016, Donald Trump was elected president. On January 23, 2017, the first day of business President Trump was in office, the President pulled out of the Trans Pacific Partnership (TPP). TPP was a 12-country trade deal, and estimates by Purdue University economists projected a $1 billion increase in U.S. dairy exports had the U.S. signed on.

Nine days later, on February 1, 2017, Canada’s new Class 7 milk pricing regulation went into effect, and Canadian processors told U.S. exporters they would no longer accept diafilterd milk products (milk protein concentrates) on May 1. That left about 100 dairy farms in the Wisconsin, Minnesota and New York looking for a home for their milk production at a time when processing capacity was nearly full. Virtually all of these farms eventually found a home for their milk, but many had to take the base price minimum for their milk without any premiums.

The Class 7 controversy got embroiled in the North American Free Trade Agreement (NAFTA). On May 18, 2017, the Trump Administration announced its intention to renegotiate NAFTA. Eventually, NAFTA became the U.S. Mexico Canada agreement (USMCA), and was signed by all parties on Nov. 30, 2018. It has yet to be ratified by Congress. While the Class 7 controversy was somewhat resolved by USMCA, questions remain. The USMCA also opened Canada to 3.59% of its dairy market to U.S. dairy products, slightly more than the 3.25% that would have been allowed under TPP.

Other problems remain, however. To “encourage” Mexico to re-negotiate NAFTA, President Trump imposed tariffs on Mexico’s steel and aluminum exports to the U.S. in the spring of 2018. In turn, Mexico imposed tariffs on U.S. products, including cheese. Those remain in place, though cheese sales to Mexico were up fractionally in 2018 as some exporters themselves offset the tariffs in their pricing.

Finally, there is the U.S.-China trade dispute. On July 6, 2018, the Trump Administration imposed 25% tariffs on about $34 billion worth of Chinese products. The Chinese reciprocated, including tariffs on U.S. cheese exports. Up until that point, U.S. dairy sales to China had grown 17% in 2018. But they plummeted by a third in the final six months of the year. At this writing, that dispute is on-going. But there is some hope of resolution soon.

In the end, it is safe to say there is no one villain who is culpable for the dairy crisis. It’s also safe to say there is no one solution.

 
Comments
Submitted by Gary McHenry on Thu, 04/18/2019 - 05:43

It’s really important Jim Dickrell that the facts and figures you quote are accurate, otherwise you lose credibility.

Milk Quotas in EU actually ended on midnight 31st March 2015.
Kind regards
Gary

Submitted by CANRANCHER on Thu, 04/18/2019 - 06:06

For some reason we in Ag believe that we can continually ramp up production and sell it all at a profitable price. It doesn't matter what segment of Ag production you are in, this is the prevailing attitude.
No other industry in this country follows this insane policy-just us. Way too many have swallowed the bull shit that we "must feed those 9 billion people" that are coming by 2050. Unless it is profitable, that's not American Ag's problem. And, until we understand that, we will continue to get the scraps that fall off the "table" of the economics of the money spent on food.

Submitted by Scott Munes on Thu, 04/18/2019 - 06:12

Nice timeline of events explaining what has happened in dairy over the last 5 years. Well done!

Submitted by Craig on Thu, 04/18/2019 - 09:37

Seems the increased amount of manufactured "milk" is having a big enough impact to at least deserved a mention.

Submitted by Walter Schuette , Wisconsin on Thu, 04/18/2019 - 09:48

Tell me why Real Wisconsin Cheese in not available to consumers in Every State?
I was just in Georgia and found local cheeses for 7 to over 10 dollars per pound.
The 1936 Orders need to be redone and simplified. Roughly 30 percent of milk produced is bottled in a decreasing fluid market. We only need 2 classes now. Class 1 for bottling and Class 2 for processed dairy products. The money is in the processed market and the formulas should be based on that marked. Too simple to believe.

Submitted by Linda A. on Thu, 04/18/2019 - 12:16

If there is no ONE culprit, then the dairy industry as a whole, needs a President to address each and every issue, just like any other industry/business. How can dairymen be allowed expansion when immigrate labor is already used on their farm for staffing? Milking 3X a day, with as big as some of the cow utters can be, might need to be done but not forced upon the cow. The sexed semen should have no impact if used under control. Lack of processing capacity is yet another reason for the control of the supply of milk. Stalled exports? Don't give away so much dairy at losing prices. World dairy prices can't do as well as the US who practically give it away. Canada’s Class 7 program is protecting their own dairy farmers. Canada knows the true worth of a real dairy farmer. The European Union (EU), China, Mexico all want trading fairness whatever the product. Vladimir Putin and Donald Trump have so many industry concerns on their plate, so the dairy industry needs to solve their own problem. If any "real" farmers have better ideas than to quit and throw in the towel for all their hard labor, share it out loud and help to enact a solution.

Submitted by CA dairyman on Thu, 04/18/2019 - 22:25

I’ve come to the conclusion that the way milk is sold is the problem. The dairy industry will continue to consolidate to a point where one of the remain few possibly less than 1000 remaining dairies will decide that, since business is about marketing and relationships, maybe should just produce the milk that our consumers( creameries) want and then negotiate a fair price for that milk. We should produce a slight bit extra milk so our customers are never short and only that milk would be sold at the cme or other clearing sources a discount. Currently if milk is slightly in surplus, all the milk is discounted. As a DFA member, I think we should slowly implement a plan like that now instead of keep whittling down dairies that our current, “last man standing “system is doing. We should compete other large co-ops but not sell milk below the cost of production. Obviously an inter co-op base plan wouldn’t be popular, but expanding dairies would pay a premium to exiting dairymen to obtain that base which in my opinion is better than buying to expand at super low discount price that has made this industry a disaster.

Submitted by Jn on Fri, 04/19/2019 - 00:40

Why do we have milk from other countries brought into the United States when we have enough milk producers here to provide for all we need? Why can’t every country take care of there own and be self sufficient? Put everyone to work.

Submitted by Guedo on Fri, 04/19/2019 - 10:23

Wow Jim you failed to address the use of immigrant labor, both legal and illegal. Hummm see your bias is showing.

Submitted by Wes Moechnig on Wed, 04/24/2019 - 19:26

You set forth numbers upon numbers that both mean a lot and yet mean nothing. .The problem is that we have a socialist system of pricing milk in this country. Ask any dairyman how their milk price is determined and they just shrug their shoulders. There may have been a need at a point in time in the past that required the use of federal orders to create an incentive to move milk to milk deficient areas but in today's world such arrangements are counterproductive. The organic dairy industry is an example of how dairy can function in a federal orderless environment. When supply is pushing up against sluggish sales the farm price drops until the demand returns. In the conventional markets there is no mechanism to trigger reduced production. The milk prices are determined by decisions absent the consumer demand and as a result we produce into a forward month that has no price established. This is no way to run a business and until the pricing systems are changed we will losing producers to those that try to game the system by increasing production even more.

Submitted by Tom Wing on Mon, 05/27/2019 - 07:35

Mr. Dickrell, would you consider doing a similar history of the Canadian system and why it came to be? As a small Dairy Farmer from Michigan I have a special appreciation for the loss from over production. As you well know, the 200,000 dollar loss I have from 'market adjustment' fees are not my fault. They are a product of an unorganized system designed a long time ago.
I appreciate your writing about pertinent issues and concern for socialism but there is more than one interest at work and has been for a long time, which you and others in the dairy media have ignored.
I point my 200,000 bill at the media, university elites and dairy economists who have simplified the reasons and failed government policy of the past. The Canadians learned a long time ago that industries like dairy, poultry and turkeys need a marketing system that helps families make a good living.
The carbon footprint of hauling Michigan milk to Wisconsin is expensive and this expansion in production has come at a cost. Besides the loss of large numbers of farms and the consolidation one must ask, are we better off? And, how are the remainder of our dairy farmers doing? Is this consolidation good for the industry and why?
Are 5000 cow dairy's really more efficient or just a step away from being listed on the DOJ and so a good thing for investors like Wal-Mart and Costco?
Do you really like the idea of dairy production in the USA going down the road of not only consolidation but vertical integration?

How much money has the US government contributed in real and insurance premium dollars to dairy in the last 10 years? The Canadian system?

I am no fan of quota's but would appreciate a discussion on the licensing or permitting process for the right to produce and market milk.

Thank you for your time