Dairy at a Crossroads Part I: 2018 Turning point?


Number of farms, robust infrastructure are interdependent. The ripple spreads wide and the pain in rural communities, deep.

 By Sherry Bunting, reprinted from Farmshine, February 23, 2018

BROWNSTOWN, Pa. — Dr. David Kohl recently said he is still bullish on the small farms that populate the eastern dairy industry, that there will always be a place for them, but they will change their focus.

Still, lenders and industry participants confide they are concerned about a large number of dairy exits in 2018. They are encouraging producers to work with advisors, and urging the industry to work together in the embattled eastern U.S., because the whole infrastructure depends on the number of farms as much as — if not more than — the number of cows and amount of milk produced.

While lenders like Dale Hershey, director of ag lending for Univest Bank and Trust, say they have already seen many diversify and change how they operate, others are in the process of re-thinking their futures.

The biggest concern for Hershey is when farms decide to sell the cows, seldom do the cows come back to the farm.

“Some of those farms will stay empty. That, I do see,” he asserts. “Occasionally they’ll come back in and milk, but mostly they will go into something else, or if the farm is sold, we’ll see most of them stay dark in terms of dairy production.

“I think we’ll look back 10 years from now and see 2018 as a turning point.”

Mike Peachey of Acuity Advisors and CPAs agrees. He sees dairy at a crossroads similar to the hog industry in the 1990s: “My concern is that we will see a dairy industry 10 years from now that looks very different from how it looks today, and we are helping our dairy customers take stock of that.”

Peachey observes that as the number of farms decreases, “This puts a lot of pressure on the dairy infrastructure and the ag businesses that support the dairy farms. One of Pennsylvania’s competitive advantages is that there is a lot of infrastructure and support in the whole supply chain that is very beneficial for competitive pricing for our dairy farmers.”

He cites the region’s multiple feed companies, multiple points of expertise, nutritional perspectives and a bidding process, multiple veterinarians, the strong ag lending infrastructure, equipment dealers, and expertise in different specialties.

“My concern is that if the number of dairy farms decreases, and if the infrastructure goes away, then it changes that competitive advantage,” he says, observing that the number of cows or the amount of milk produced does not necessarily make up for what is lost when the quantity of individual farms is reduced by consolidation.

Yes, the dairy industry is at a crossroads, and no where is this perhaps more evident than in eastern states, like Pennsylvania.

The Northeast was a fluid milk market in the past, close to 50% of utilization. Today it is less than 30%. As more milk is produced — even if per capita fluid milk consumption stayed the same — not enough other products are made here, so mailbox prices are falling under the coinciding weight of increased hauling costs and losses in competitive and quality premiums.

Meanwhile, the Class IV utilization has increased as a percentage in the blend price, leading many to believe the Northeast model of dairy pricing may be broken.

In fact, so concerned are states and dairy organizations that state-wide analyses are being conducted in top tier “notably fluid” states like Pennsylvania and New York in the Northeast as well as in Georgia, in the Southeast. The states of Michigan and Wisconsin are also looking at their state’s production, processing and infrastructure to improve their future competitiveness.

In Wisconsin, milk prices are driven off the cheese market — a growing market that has been cultivated to generate variety, demand and competitive premiums — whereas the Northeast model is built off Class I, which is not competitive, nor is it growing. And, unlike cheese with its diverse growth in specialties and brands, the Class I milk at the store is treated like a base commodity against which all newcomers and imitations are compared and premium-priced.

Dairy producers and industry participants also say they are concerned about the Pennsylvania Milk Marketing Board’s role in terms of the costs associated with milk assembly vs. where the state premiums are going.

Meanwhile, store inventories are kept close to the bone. If they throw a gallon of milk away, the margin on every other gallon is affected, and so stocking depth is being reduced.

These are the kinds of issues that states like Pennsylvania, Georgia, New York and Michigan, among others, are actively looking at as they study capacity and market needs and trends.

Producers don’t control these decisions, but their input is vital.

From farm to table, technology and workforce are two other big pieces with immigration reform being a double-edged sword.

If the Congress and the Trump administration are able to legalize immigrant worker status, what will that really do for the dairy workforce? A National Milk Producers Federation study with Texas A&M reveals that 80% of the nation’s milk was harvested by immigrant workers — up from 60% in 2009.

With general unemployment now falling below 5%, which many economists consider to be full employment, a legalized immigrant workforce may be lost to jobs in industries with better margins.

Workforce issues are also affecting trucking and other infrastructure employment.

Labor is fast replacing environmental as the number one issue facing the dairy industry, and against that background, farms will do things differently over the next 10 years to systemize their production, say various experts.

Builders, lenders and others are seeing the emphasis for this in three areas: wet calves, dry cows and post fresh, as well as through investments in technologies that improve management, specifically by their impacts on cost of production because this is the criteria that will drive farm-level investments into the future.

Technologies may help solve it, but this requires investment. The right answer, policy-wise, is elusive, but for individual farms, the right answer comes, again, from knowing cost of production from which to weigh out the options and run projections and scenarios based on where the farm is now and where it wants to be in the future.

While some see opportunities to drive milk output per cow higher with more cow comfort and better heifer programs, pointing out that Pennsylvania lags behind other states in its milk output per cow, others in the industry point to imposed restraints pushing the focus toward managing risk.

Complicating the marginal milk model for improvement in Pennsylvania is the Land O’Lakes base program. When producers are over base — because they’ve improved their management — they take a penalty when the base is enforced, depending on the eastern region’s total production.

Learning to manage through this intermittent penalty seems to be affecting mainly the producers in the East, despite more substantial growth in the West. In addition, DFA has started a base program for portions of its membership in parts of the Southeast U.S., where milk is already regionally deficit.

How will this push-pull play out at the farm level?

Some producers will carry a lunch. Hershey is seeing a trend toward small farm operators finding seasonal off-farm employment to keep their dairy farms running.

Others have and will become diversified, which can reveal two pathways: Getting successful in another area and exiting the dairy, or seeing the dairy as a lifestyle to keep, and using other income streams to weather the storm.

In addition to diversifying, lenders note niche processing will be a path for some. There are a number of niche producers in this part of the country. Some have been doing this a long time, others are just getting in.

“The good economy has really helped those operations. Tourists are traveling, coming to our county, dining out, and packing the places we deal with,” Hershey observes about Lancaster County, Pennsylvania. Some of our cheesemaking stores are flourishing right now, but that business is not for the faint of heart. It requires deep pockets to get into.”

Connecting dots for consumers is essential for eastern states, like Pennsylvania. For example, in Lancaster County, Pennsylvania, there is this dichotomy. The county — like other parts of the eastern U.S. — has grown in produce and other specialty crops to become a great hub of food. To some degree this includes dairy, but more stimulation is needed.

As will be further discussed in part two of this dairy-at-a-crossroads series, knowing the cost of production for the farm business and knowing where lie the passions, strengths and weaknesses of the farm family are keys to finding each farm’s own path — whether that means keeping the cows and diversifying, investing in niche marketing, getting more competitive on cost of production or giving the cows up and channeling that valuable positive experience and energy to new pursuits.

This industry is about the milk and the cows, but even moreso, it is about the people.

“We can do it here,” says Peachey. “When we know our farm’s cost of production, we know the weak spot in our model and can figure out how to compensate for that and find where our opportunities are.”

As these changing tides and issues sort themselves out, Peachey observes how dairymen are making these “tremendous strides to improve their operations,” and he believes the next wave of improvement is figuring out how to do risk management well, how to capture margins when they are available, and how to protect operations from downside risk.

“We can take an operation so far and continue to improve, but the next wave of significant profitability and improvement is in managing the top line price and the input costs and locking in those good margins when they are there,” says Peachey.

“A generation ago, with price supports, dairy farmers could work hard and do okay or very well. Now it is a business requiring an approach to management for the long run,” he adds.

In part two of this series, we’ll examine the map for navigating the dairy crossroads.