Land O’Lakes Inc. is establishing a structured base program in the Midwest to help balance burgeoning milk production levels with processing and marketing capabilities.
“This is not a quota program,” said Leah Anderson, vice president of member relations for Land O’Lakes. “Our membership is free to produce as much milk as they choose, and Land O’Lakes will continue to pick that milk up and market it as we always have.”
What is different, Anderson said, regards who will bear the cost of excess milk production. Producers surpassing their base production will do so at some financial risk.
“Where in the past all members would subsidize the unmanaged overproduction of a few, our structured base program ensures that only those who exceed their base allocation bear the risk of any adverse financial costs caused by insufficient demand. There is no real change to how Land O'Lakes and its members are engaging except for better communication about on-farm growth plans. In the event member production growth creates a situation where the cooperative cannot profitably market the milk, we have created a system where only those who overproduce bear the costs.”
Under the program, members producing more than their base volume will be charged any incremental costs (freight, market discounts) associated with marketing that milk in less profitable channels.
West, Northeast programs already implemented
The cooperative, with 2,014 dairy producers nationwide, 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 dynamics.
Upper midwestern states have contributed substantially to U.S. milk production growth, and the pace has picked up over the past six months. During the last quarter of 2015, South Dakota production was up 13.3 percent compared to the same quarter in 2014; Minnesota output was up 2.2 percent, Michigan production was up 5.8 percent and Wisconsin output was up 4.6 percent.
Those trends continued during the first quarter of 2016, with South Dakota up 13.2 percent; Minnesota up 3.2 percent; Michigan up 8.3 percent and Wisconsin up 6.0 percent. That compares to a national average increase of 2.1 percent.
While the domestic U.S. dairy market remains remarkably strong, there’s a backup in the export pipeline. Managing growing supplies in a cost-effective manner is becoming a challenge.
With a spring flush already stretching milk processing and product storage capacities, there have been numerous reports of spot loads of milk being offered between $3 to $5 per hundredweight below class prices in the central U.S.
Land O’Lakes used 2016 spring meetings and the annual meeting to communicate details of the plan and work with producers to establish base levels of milk production.
“For 2016, our primary goal is to get members familiar and comfortable with the base program,” Anderson said. “To that end, all members have already received their base number and are working with us on refining their future plans.”
Under Land O’Lakes’ structured base program in the Midwest, each member’s “base” is determined by his or her actual production history. Member base allocations will be renewed each September based on actual September-through-August production. Bases will be evaluated on actual production levels, member growth plans and market demand. The base cannot be purchased or sold.
Both Land O’Lakes management and each individual member have the opportunity to monitor his or her actual production in relation to his or her base allocation on a daily basis in case they wish to make milk production management changes.
Land O’Lakes leaders have been meeting with members. Although details of those conversations weren’t available, Anderson explained they are working with producers to understand their business plans and work with those who have growth plans underway.
“Land O’Lakes staff representatives are meeting with members individually to better understand multi-year member production plans taking into special account the need to partner with members who have existing expansion plans where bank loans have been arranged and/or construction has already begun,” Anderson said.
“If market demands generate a need for additional milk beyond what is currently in the Land O’Lakes system, we will first offer incremental base to existing members who wish to grow before adding any new members,” she added.
In addition to managing supplies, Land O’Lakes is boosting its ability to take on more milk, Anderson said.
In Wisconsin, the co-op is expanding operating capacity at a cheese and whey operation in Kiel and acquired the Hillsboro Riverview Creamery in Hillsboro. Land O’Lakes also recently gained 100 percent ownership of a Melrose facility in central Minnesota.
“As an industry, milk production nationwide rose 23.1 percent from 2000 to 2014,” Anderson said. “This strong milk production has come at a time when the demand for dairy products globally is challenged. Despite these dynamics, we continue to manage through these challenges and maintain profitability and appropriate returns. In fact, in 2015 we delivered record earnings and near-record cash returns to our members.” PD
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