Have we charted a path to accelerate consolidation?
Most forecasts focus on the moment. When will supply chain bottlenecks be resolved? When will inflation calm down? When will barrel prices of cheese catch up with the blocks?
To answer “when” questions, professional market analysts examine hundreds of data sources and gather indirect intelligence through dozens of phone calls and emails with industry contacts.
There is another type of inquiry that is just as critical to the long term survival of the dairy farm: the “what” questions.
What are the events, structural changes, political developments and other influencing factors that are likely to occur? What will be the impact on the dairy sector? What about the timing of these events?
The temporal answer is perhaps the most elusive of all. That being noted, this Milk Check outlook will take a long-term approach.
Two game changers
In this article, I want to draw attention to two recent developments in the U.S. dairy sector that have the potential to cause unwanted structural change – faster and more severe consolidation in the U.S. dairy sector. The first measure is the Dairy Margin Coverage (DMC) program, and the second are basic programs or growth management measures implemented by many dairy processors. Individually, these measures are well intentioned and carefully designed.
The DMC is designed to bring stability to farm finances for producers of a few hundred cows. Growth management programs seek to coordinate milk supply with demand. My concern is that, when combined, these programs can have unintended consequences, which can be irreversible.
Different a decade ago
Just 10 years ago, the social contract in the American dairy sector provided that any member of a cooperative dairy farm could grow as they pleased, and the cooperative’s main mission was to find a home for that milk. . Today, the social norm is that the main advantage of joining a cooperative is that a producer does not have to worry about losing access to the existing market. Being able to grow is now a privilege, no longer a guaranteed right.
Producers who contract directly with a private processor suffer a similar fate, with even less guarantees of long-term market access. This change has allowed cooperatives to focus their financial resources more deliberately rather than having to prioritize the capacity to process raw milk into bulk products with low added value.
Two groups of farmers
At the same time, however, this shift has further concentrated the growth of US milk production in only a few milk sheds. This trend, if continued, threatens to create two categories of dairy farmers: those who have the know-how and the financial resources to build the next facility in a remote location, and others locked in their current location.
When a large national processor wants to build a whole new factory, he no longer asks where the abundance of milk is, but where the milk supply can most easily and economically be increased quickly. Producers who can choose where to milk can also choose how much to grow. Others, locked in their location, face constraints. Policy instruments that can solve this problem exist and are being used elsewhere.
In Australia, a recently passed dairy regulation gives dairy processors a choice: if they require the farmer to deliver milk exclusively to them, they cannot impose two-tier volume or price limits. Alternatively, if a processor wishes to impose volume limits or base / premium prices, he must allow producers to sell milk to another buyer as well.
At the same time, Dairy Margin Coverage has significantly improved the financial situation of small dairy farms. The 2018 Farm Bill increased the available coverage from $ 8 per cwt to $ 9.50 per cwt, reduced the Tier 1 premium, and replaced the average with Supreme Alfalfa hay in the cost of food. These changes have made the program extremely beneficial for small dairies.
A higher cost forecast
For 2021, the expected payment is $ 2.54 per cwt. If DMC had existed since 2006, the average benefit, net of premiums, over the past 15 years would have been as high as $ 1.63 per cwt. Under the DMC, Tier 1 premiums covering the first 5 million pounds have been set as low as deemed necessary to convince even the most skeptical dairy farmers that this is a generous net of income security.
In contrast, level 2 bonuses are set as high as necessary to ensure that few people would want to use it. DMC has succeeded in reducing the dispersal of dairy herds. In 2021, the exit rate from dairy farms in Wisconsin was 5.4%, up from 11.2% in 2019. However, I am concerned that a side effect may reduce the incentive to seek efficiency gains through to growth due to a steep and significant risk wedge once the herd exceeds 250 cows.
What does the future hold?
Farm Bills authorize dairy programs for five years. When deciding whether to return to the family farm, young adults from dairy families need to think about what is likely to happen over the next 40 years. This represents eight farm bills.
More members of the next generation will want to carry on the family legacy if they believe their family farm has a chance and the will to remain competitive throughout their lives than if they see their farm’s business plan. centers on a safety net that can be dissolved in a few years. This problem can be addressed through a more dynamic grant structure, applied either to the DMC or to programs administered by the USDA Risk Management Agency. Current programs include dairy income protection and livestock gross margin – dairy products.
The number of dairy farms in the United States has been declining for at least three generations. However, unless policy instruments are implemented to strengthen competition for farm-gate milk and give the dairy farmer the freedom to pursue innovation and growth, in 15 years we could look back to 2021 and find a hyper-consolidated dairy sector. Political choices exist today to modify this potential result.