As prices drop and dairy farmers are forced to dump milk, industry is moving towards supply management as a possible solution.
As prices drop and dairy farmers are forced to dump milk, industry is moving towards supply management as a possible solution.
April 8, 2020
Long before coronavirus upended everyone’s lives, Pennsylvania dairy farmer Brenda Cochran had been living in near-perpetual crisis. Five years of low milk prices have had the farm operating in the red, the family avoiding calls from creditors, and sometimes struggling to buy groceries. “There has never been a period of worse financial losses and … hopelessness than the past six years,” she said.
The U.S. has been losing dairy farms like the Cochran’s at a rate of nearly nine per day since 2015. Milk prices were expected to rise in 2020 for the first time since then, but the forecasts made a u-turn two weeks ago as the impacts of the coronavirus pandemic began to upend the dairy supply chain. Now, dairy prices are in freefall. Even as grocery stores struggle to keep dairy cases stocked, farmers across the country have begun dumping milk that their processors have no room for. “There’s no one who can sustain this,” said Cochran. “It’s over.”
With dairy farmers’ reserves tapped out, the year that was supposed to be a catch-up is turning into a disaster.
And yet, the depth of the crisis also appears to be motivating big dairy industry players to consider a supply management approach that has the potential to reshape how dairy farmers emerge from the pandemic. The two largest U.S. dairy lobby groups released a plan on Tuesday morning to pay producers to reduce their production.
Pandemic Market Disruptions
As the nation stays home to slow the spread of COVID-19, fluid milk sales have increased by as much as one-third, stripping supermarket shelves and leading some stores to limit milk purchases. But the picture is more complicated: As shelter-in-place mandates went into effect, restaurants and schools canceled orders, leading to bottlenecks at processing plants and a larger overall milk surplus. Food service and institutional purchases alone account for about 30 percent of milk sales.
Like many processing plants, Ellsworth Cooperative Creamery in western Wisconsin had orders suddenly canceled; 350,000 pounds of milk were returned to the plant. “The food industry was that big [a percentage of our market] and it just stopped,” said co-op board member and farmer Martin Hallock in a recent interview. To cope with the increase in supply, the plant is now running 24 hours a day, but there is still too much milk.
While more of the lost food service demand could ultimately shift to retail, it will take time for the markets to retool. Some supply chain blockages are due to cold storage facilities being full of dairy products packaged in large restaurant-size containers that cannot be immediately repurposed for grocery shelves.
Working out those kinks will not restore dairy markets, however. “We can’t match the volume of those missing markets,” University of Wisconsin dairy economist Mark Stephenson said in a podcast. Even a 1-2 percent milk supply surplus can result in a major collapse in prices, he said, and we may already be past that amount, as about 8 percent of the nation’s beverage milk is sold to school systems, which are now mostly closed. (Although many school districts are offering grab-and-go meals for students, the volume is far lower than when school is in session.)
In the last week, the prices paid to dairy farmers have crashed to levels not seen in decades. It costs a farmer about $20 to produce 100 pounds of milk. Forecasts for May put the farmer price at $12–“an absolute train wreck,” wrote one industry forecast. The American Farm Bureau Federation calculated milk prices down as much as 36 percent from mid-January, and last week National Milk Producers Federation (NMPF), an industry group, estimated gross income for dairy farmers at $6 billion less than it looked two months ago.
As if the situation isn’t bad enough, many in the industry are concerned about further impacts on the supply chain as the virus spreads. There will be both bottlenecks and shortages as farmers, truckers, and processing plant workers fall ill, sending further ripples throughout the industry. The export market will be hit as well, as economies around the world contract as a result of the virus.
Already, farmers across the country are being asked to dump milk because their processors simply could not handle it all. Cochran’s farm got the call to dump milk last Friday—the first time their coop has ever asked them to do so at this scale. “We’re horrified. This is food,” she said. The family gave away what they could to neighbors, but have had to dispose of most of it. They do not know if they will be paid for the dumped milk.
Many dairy cooperatives have adopted quotas to keep milk production in line with what can be sold. Some are taking more extreme measures. In Wisconsin, Ellsworth Creamery sent a letter to its members on April 1 asking them to reduce their production by 7 percent and offering a buyout program to “encourage members to quit dairy farming.” Farmers must sell their cows by April 15 in order to benefit from the program, which agrees to pay out the farmer’s equity in the cooperative if they meet several criteria, including not selling their cows to another member of the co-op.
Already “Really Battered”
Losses from one event–even one at the scale and uncertainty of a global pandemic–can be weathered. But Lynne McBride, director of the California Dairy Campaign, says that dairy farmers have been “really battered for a number of years now,” by record-low prices, extreme weather, and a trade war.
Catherine de Ronde, a senior economist at northeastern dairy cooperative Agrimark, says that if this crisis had happened following years of high dairy prices, the impact could have been much different. Now, she says, “People don’t have any reserves left. They’ve been using them to sustain themselves for the last five years.”
Since 2015, milk prices paid to farmers have been well below their costs of production. As farmers struggled to keep milking even while losing money every month, many couldn’t make it. Farm debt and foreclosures rose, farm suicides increased, and the dairy crisis became front page news. From 2014 to 2019, 11,000 dairy farms shuttered, including 3,200 in 2019 alone—a rate of nearly nine per day. Meanwhile, overall milk production and the total number of milk cows increased, continuing a trend towards larger farms and a growing milk supply.
The last five years have roiled the entire industry, forcing out some huge players along with the thousands of family farmers. Dean Foods filed for bankruptcy last November, followed by Borden. Dairy Farmers of America (DFA), the country’s largest dairy cooperative, was just approved to buy many of Dean’s assets. Family farmers and advocates have vigorously opposed the merger as anti-competitive, fearing it will drive farmer prices down even more and leave many with only one buyer, and the Justice Department began an investigation of the merger. In the last 15 years, Dean and DFA have faced multiple lawsuits, both individually and jointly, from farmers alleging price manipulation and other anti-competitive conduct.
Even with much continued uncertainty, early 2020 looked like it would bring some relief, with farmer prices predicted to climb. More than half of dairy farmers chose not to enroll in Dairy Margin Coverage (DMC), the government dairy insurance program, estimating that higher milk prices would mean they wouldn’t see a payout.
Vance Haugen, a third-generation dairy farmer in Canton Township, Minnesota, looked at the 2020 price forecasts a few months back and thought he would be able to “do some catch-up.” In actuality, his farm had $7,000 more in bills than income in March. The disparity itself is not unusual; farmers often rely on credit, borrowing money early in the season and recouping it when they sell their product.
But this year, the farm’s savings are tapped out and its alternative income streams have dried up. When milk prices were low in the past, the farm could sell calves or temporarily bump up milk production. Now, cattle prices have dropped by as much as two-thirds, and Haugen’s milk cooperative has instituted a quota to keep its members from overproducing. He supports the quota, but it cuts off one of his options.
“We’ve used savings… we’re juggling credit cards. Knock on wood, we’ve been able to make everything work,” he said. “But you can’t keep doing this year after year after year.” Looking at the new future, he said, “things are looking pretty bleak.”
Advocating for Solutions
As the scale of the price drops have become clear in the last week, relief proposals have also come from many corners.
Some provisions in the $2.2 trillion CARES Act pandemic relief package and previous stimulus bills will help dairy farmers, including additional funding for the Supplemental Nutrition Assistance Program (SNAP) and other nutrition programs and relaxed rules on to-go school meals, all of which could result in increased dairy purchases. The CARES Act also earmarks $9.5 billion for the hardest hit farm sectors: dairy, livestock, and farmers who sell in local markets, and allocates another $14 billion to the U.S. Department of Agriculture (USDA), to be spent at the discretion of Secretary Sonny Perdue.
The unrestricted nature of the $14 billion portion has raised concerns among family farmers. USDA dispersed $28 billion in similar funding in 2018 and 2019 to make up for farm losses caused by the trade war. The payments were based on production levels and bigger payments went to larger farms. Corporations like meat giant JBS also received millions. One analysis found that just 100,000 individuals collected 70 percent of the money. Many farmer advocates are issuing recommendations for how funds should be allocated this year to best help struggling dairy farmers in light of the pandemic.
In the last two weeks, senators, industry groups, dairy cooperatives, and others have urged USDA to address the crisis by reopening the Dairy Margin Coverage insurance program, using government funding to purchase dairy products for food banks, and supporting supply chain stabilization. But as the crisis has escalated, advocates say these measures don’t go nearly far enough.
Agrimark, which represents 1,200 farmers in the northeast, proposes establishing a temporary floor price for milk, set at a level that would keep farmers in business and ensure milk plants can continue processing. New England agriculture commissioners are asking for the same. Agrimark’s de Ronde says that bold solutions are needed given the scale of the crisis. The co-op supports reopening DMC and other policies, but, she says, those measures are “not going to keep people from going out of business.”
Lynne McBride, director of the California Dairy Campaign (CDC), agrees. “Our current farm policy is lowering milk prices and increasing production, which is the last thing that we need, especially now,” she said. “We need a change in direction.”
CDC has been part of a growing movement for federal dairy supply management, a policy that balances milk production with national demand to ensure that farmer prices do not fall below a certain level. In some systems, this floor price is based on average costs of production. U.S. farm policy was based on this approach for decades and many other countries have a version of the program, but it has been out of fashion in U.S. farm circles for years. Agriculture Secretary Perdue said last year that the program was not in line with “the spirit of entrepreneurship and economic liberty in the United States.” The last vestiges of dairy supply management in the U.S. were ended in the 2014 farm bill, just before the five-year price crash.
In 2018, with no relief in sight for struggling dairy farmers, a grassroots movement began to educate farmers and policy-makers about the policy. As farms have continued to fail, support has grown quickly, even among large dairy farmers, who McBride says are tired of losing money even as they grow. Senators Elizabeth Warren and Bernie Sanders both included versions of supply management in their presidential candidate platforms.
CDC and Wisconsin Farmers Union (WFU) have circulated letters calling for a supply management program to manage the current crisis. Amidst this rising tide, the biggest dairy cooperatives and trade groups representing processors have continued to oppose the idea, saying the practice would distort trade.
So it was a surprise to many observers when International Dairy Foods Association (IDFA) and National Milk Producers Federation (NMPF), the two largest U.S. dairy lobby groups, released a new plan calling for temporary supply management this week. The plan, which the groups are presenting to Congress and USDA, would run from April to September and pay producers to reduce production by 10 percent.
“I’m delighted that groups like NMPF and IDFA are coming together to support dairy farmers,” said WFU Policy Director Kara O’Connor, in a phone interview. However, WFU, National Family Farm Coalition (NFFC), and others are cautious about the proposal, raising initial concerns that it may not raise prices adequately for farmers. (Full disclosure: I consult with NFFC on dairy policy.)
Even with the catastrophic predictions for the industry, Lynne McBride remains hopeful about the potential for change. “There are ways to build incentives so you don’t continue to see 90,000-cow dairies continue to grow while smaller farms go out of business,” she says. The crisis is revealing long-standing problems with the industry. “As bad as things are, it points to a need to get a handle on production and figure out what the best and most resilient food system looks like for the long term.”
Photo courtesy USDA/Preston Keres.
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