No Short-term Fix to Lack of Processing Capacity

There are no easy or shortterm fixes to the lack of processing capacity in the Midwest or Northeast. Building plants to process more milk solves nothing if the resulting dairy products don’t have market. And therein lies the rub.

Chris Wolf, an economist with Michigan State University, notes Michigan dairy farmers are producing about 33 million pounds of milk per day. But because the state only has 26 million pounds of processing capacity, that extra 6 million pounds must be shipped somewhere else.

Consequently, hauling and distressed milk pricing on those 120 tanker loads of milk have depressed milk prices by about $1.50 per cwt since 2015. Michigan has been adding milk production to the tune of 6% each year over the past three years. And while Michigan processors have expanded processing capacity somewhat, no one anticipated that kind of production growth, Wolf says.

Prior to the surge in milk production growth, the Michigan mailbox price was about 33¢ per cwt less than the U.S. All-Milk price. Since 2015, that difference has been $1.57.

“So the basis has been $1.25 less than historical averages,” Wolf says. “If we could add that back in, the return on assets for the average Michigan farm would go from -1% to +0.5%. That’s still not a great number, but it would be better than today.” 

Spillover Effects

Michigan’s excess production is also a problem for Wisconsin because some of the milk is being shipped to the Badger State and processed there. That milk has helped top off Wisconsin plants, depressing premiums and prices as well. But adding processing capacity in Michigan without a market for those processed dairy products doesn’t solve anything.

“If Michigan builds a cheese plant, it will have implications for Wisconsin because those cheese products will compete with Wisconsin cheese,” says Mark Stephenson, a dairy economist with the University of Wisconsin.

Excess milk production and lack of plant capacity is not only a Michigan problem, Stephenson adds. Wisconsin has about 6 million pounds of extra milk and New York has a surplus of about 3 million pounds. The trade spat with Canada, which stopped the export of milk protein isolates, has contributed about 2 million pounds of milk equivalent to the surplus.

Exports to the Rescue

The answer to these problems is increased exports. The U.S. is exporting 14% to 15% of its production on a milk equivalent basis. The U.S. Dairy Export Council (USDEC) and Dairy Management Inc., are hoping to raise that number to 20%.

If that could be achieved, it would represent a sales opportunity of $2 to $2.2 billion, says Tom Vilsack, USDEC CEO and former Secretary of Agriculture under former President Barack Obama. And it would mean a new home for some 200,000 metric tons of cheese and 450,000 tons of dairy ingredients.

The good news is increasing exports is based on more than hope alone. USDEC is implementing a strategic plan to grow exports and the industry is committing $4 million in global, targeted marketing to do so. The bad news is that could take three to five years to get it done.

“We hope to get there sooner,” Vilsack says. “But if we (the U.S.) pull out of trade agreements, that would have an impact. There are a lot of moving parts we don’t control.”

Note: This story appeared in the November issue of Dairy Herd Management.