Midwestern U.S. milk marketing cooperative Family Dairies USA implemented a temporary “base” program, effective May 1, to help manage growing milk supplies.
Imbalances in milk supply and demand have become a major issue in the Upper Midwest and elsewhere, both due to the ongoing increase in milk production, and the loss of the ultrafiltered (UF) milk export market in Canada. When Grassland Dairy of Greenwood, Wisconsin, first announced it no longer had room to process milk from about 75 farms in Wisconsin and Minnesota as of May 1, it sent ripples through the Midwest.
Read: Dairy fight with Canada escalates as U.S. farmers face loss of milk market access on May 1 and Search continues for available milk markets, solutions for orphaned milk
Nearly all Wisconsin and Minnesota producers impacted by the Grassland notice had found a home for their milk by May 1, even though most dairy processors in the region have milk-balancing issues of their own.
Family Dairies USA sought to find available capacity within its own portfolio of processors, according to co-op general manager David Cooper. The co-op sells milk to processors with about 15 manufacturing facilities throughout the Upper Midwest, representing a diverse dairy product mix.
However, it became apparent there was not only no available processing capacity to take on the milk from dairy farmers displaced by Grassland, but there was also no room to take on the growing milk supply from Family Dairies members.
“Our desire was to help in any way we could,” Cooper said. “However, we recognized as we were looking for markets for additional producers, a lot of those markets literally had no additional capacity and were unable to assist in any way.”
That prompted co-op leaders to look at proactively managing their own milk supplies.
Family Dairies base program
Under the Family Dairies’ program, member farms are not being asked to cut production. Instead, each farm establishes a three-month rolling average milk production base. The May base production will be the average monthly production for February-April (adjusted for a 30-day month); the June base is the rolling average of production during March-May, and so on. The monthly production base includes a 1 percent cushion above the rolling average.
“We’re not telling any of our producers they can’t produce over that level,” Cooper said. “What we are simply saying is that we’re establishing a level based on good solid markets for that milk. That level can grow as we grow those markets over time and as opportunity permits.
“If somebody wants to produce more milk, we may have the opportunity for more markets,” Cooper continued. “But, if we have to move milk further there will be additional costs, or the milk may have to be discounted for it to be sold. If we have to offer discounts or incur additional costs, we’ll look at those volumes of milk over the (base) levels, and that additional milk may not have an equal value.”
The program started with May 1 milk production and will be effective on milk checks issued on June 16. Prices farmers receive for milk production exceeding the base will depend on the market price available for spot loads at the time.
Cooper said current discounting of $3 to $4 per hundredweight is common. Typically, discounting and additional marketing costs would be borne by all individuals in the organization. However, due to the volume of milk growth, increases had to be managed in a reasonable fashion.
“Plants have options, and we would have to sell milk at dramatic discounts,” he said. “Once you start to have to discount loads, it impacts everybody.”
Cooper said the program is a balancing act between the production goals of dairy farmers with the processing capacity and product inventories and sales of processors.
He estimated Family Dairies’ member milk volume was up about 5 percent through the first three months of 2017, and estimated it would be up 8 percent by the end of April. Recent milk volumes are the largest in the co-op’s history.
A majority of Family Dairies’ customer plants are already running well above processing capacity. Even if they could keep up with growing milk production, increasing dairy product inventories in cold storage are also becoming burdensome.
“If you put a processing plant in a terrible position, it makes it difficult for them to operate, too,” he said. “We need each other. Our goal is to try to balance it at both ends.
“We felt comfortable with the markets we have, but those markets are based on milk volume agreements we already have,” Cooper said. “We want to maintain a fair price for our producers, and that we have a market for their milk. We can do that by ensuring our established markets can take the milk.”
The base program will impact about 230 Family Dairies USA patron farms located in Wisconsin. Established in 1971, Family Dairies USA is a milk marketing subsidiary of FarmFirst Dairy Cooperative, formed in 2013 with the merger of Family Dairies USA, Manitowoc Milk Producers Cooperative and Milwaukee Cooperative Milk Producers. FarmFirst represents about 3,800 dairy farms and 4,300 members in Wisconsin, Minnesota, South Dakota, Michigan, Iowa, Illinois and Indiana, offering a wide range of services.
At this point, the base program strategy is temporary, although no end date has been set, Cooper said. Market conditions will determine both the duration and whether the 1 percent cushion is adjusted up or down.
Cooper said seasonal production declines due to summer heat stress and other factors are likely. Many parts of the Upper Midwest are receiving excessive rainfall this spring, hampering cropping progress and planting season. There are also widespread reports of heavy alfalfa winterkill.
Base program praised
Wisconsin Farmers Union president Darin Von Ruden, a third-generation dairy farmer from Westby, applauded Family Dairies USA for “working with farmers to limit the milk that comes in, rather than dumping it or selling it for below-market prices after the fact.”
Citing Land O’Lakes, Organic Valley Co-op and Westby Cooperative Creamery, Von Ruden noted cooperatives have been more pro-active in working with members to manage oversupply. He asked dairy producers to apply pressure on their processors to follow the lead of Family Dairies USA and other cooperatives in establishing supply management programs.
“I urge farmers to get in touch with their processors and advocate for them to adopt forward-thinking policies to manage oversupply,” Von Ruden said. “These are proven strategies, and we urge more processors, especially cooperatives, to consider them. It’s just good business to take market demand into account when gauging production levels.”
Land O’Lakes established a base program in the West in 2008, adding a Northeast program in January 2016. While similar, each program is managed independently to account for regional supply and demand.
Read: Land O’Lakes base program migrating to Midwest
Industry better equipped to manage supply?
Addressing the Cooperative Network 2017 Spring Dairy Issues Conference, April 19, in Eau Claire, Wisconsin, Ben Brancel, secretary of the Wisconsin Department of Agriculture, Trade and Consumer Protection (DATCP), said dairy co-ops were better equipped to manage supplies through base programs versus the establishment of governmental policies calling for mandatory quotas on milk production.
“There are huge volumes of milk, and there is limited processing capacity,” Brancel said. “There is an open marketplace, and the last thing I need is a federal quota system. It can’t move fast enough. It won’t recognize the marketplace fast enough, and it will send the wrong signals at the wrong time to the wrong people.
”However, Land O’Lakes and some other marketing co-ops have set in place their own structure of informing their members about how much milk they can handle,” Brancel said. “The processing community has the best structure, because they know how much milk they can market. They know the market. If they can’t get it into the market at a profit, then they are reluctant to produce that product. Overproduction causes a failure in the marketplace.”
”On the other hand, processors also have a responsibility to let farmers know how much product they can take and use,” Brancel said. “We’ve been reluctant to set up schematics on helping farmers recognize when we’re headed down the wrong direction.”
Farmers frequently get a message from lenders to milk more cows to meet revenue needs, he noted.
”In the past, (Wisconsin) farmers have never had a problem getting their milk picked up,” Brancel said. “This is the first time in Wisconsin, ever, that nobody is willing to pick up more milk.
“We must have processors communicating with their farmers early on, letting them know they have limited capability to handle (established) milk volumes,” Brancel said. “There will have to be more of a structure.”
That structure, including milk contracts, will not only impact access to milk markets, but may also be a factor in determining a dairy farmer’s access to agricultural credit.
U.S. Rep. Collin Peterson (D-Minnesota) helped spearhead dairy policy changes in the 2014 Farm Bill, including implementation of the Margin Protection Program for Dairy (MPP-Dairy). At one point, MPP-Dairy had a “market stabilization” program to manage milk supply growth. After a bruising political fight, that provision was eliminated from the 2014 Farm Bill. Peterson, who is Ranking Member on the House Agriculture Committee, has said federal dairy supply management is a “non-starter” in the 2018 Farm Bill.
Family Dairies’ Cooper said he was joining leaders from 11 other dairy organizations in Washington, D.C. during the first week of May to meet with U.S. trade, congressional and Trump administration leaders to discuss the dairy situation, especially as it relates to the North American Free Trade Agreement (NAFTA). The group will seek to emphasize the importance of exports on the U.S. dairy market, and seek to preserve critical milk powder markets in Mexico, while seeking to resolve trade issues with Canada.
PHOTO: Illustration by Corey Lewis.
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