When final 2021 milk production numbers are in, overall growth in the five states will be up about 5% from 2020, with only Nebraska posting a small decline. On a percentage basis, South Dakota was the national growth leader, up more than 15%.
Mapping cows, the USDA’s semi-annual Cattle report estimates there were about 928,000 dairy cows in the I-29 Corridor on Jan. 1, 2022, with about half of them in Minnesota. Unlike national trends, dairy producers in the region started 2022 with about 37,000 more cows than the year before, 29,000 of those in South Dakota alone.
Creating the mood
Combined with higher milk prices, factors from inside and outside the region create an optimistic but cautious mood among producers and other dairy stakeholders. One reason for an improving outlook is that the full impact of the COVID pandemic is diminishing, making business decisions more predictable, said Lucas Sjostrom, executive director of the Minnesota Milk Producers Association. There will be many decisions to make to address a growing list of concerns.
According to Mitch Schulte, executive director of the Iowa State Dairy Association, the outlook among his organization’s members is hopeful, with a focus on the long term. “Our dairy farmers are optimistic that market disruptions will slow, business will continue to move forward, that input cost will come down, and supplies will become easier to obtain,” he said. There’s even optimism positive changes to Federal Milk Marketing Orders (FMMOs) are down the road.
Starting the year with relatively positive prices and solid demand, both domestically and in exports, the mood is cautiously optimistic in South Dakota, said Tom Peterson, executive director of the South Dakota Dairy Producers. Cost of inputs and a dry year that put a heavy drag on crop production, especially forages, are concerns.
“South Dakota has continued to be one of very few areas of the nation seeing a growth in the dairy industry, and we are optimistic this will continue,” Peterson said. “The balance of processing, willing farmers wishing to grow and continued demand for consumption of dairy products are key, and all efforts to maintain the growth trend keep all of these factors in mind.”
Headquartered in New Ulm, Minnesota, Associated Milk Producers Inc. is owned by dairy farm families from Wisconsin, Minnesota, Iowa, Nebraska, South Dakota and North Dakota. The supply-processing capacity balance in the region changes with the season, said Donn DeVelder, who serves as AMPI’s co-president.
“Today, the Midwest is fairly balanced with milk production and processing capacity,” he said. “Just six months ago, milk production was exceeding capacity.”
Widespread implementation of base-excess plans is holding milk supply in balance with processing and marketing capacity. Short-term, that’s helping processors and co-ops manage their supplies and plan for the future, Schulte said.
“We know that there is milk leaving Iowa to be processed in other states,” said Schulte, whose producer organization continues to work to bring new processors to Iowa while also seeking to provide incentives for local and on-farm processing.
“We are full in processing,” said Minnesota Milk’s Sjostrom. “Those farms looking to grow incrementally may be able to fill in the places where some farms are exiting. However, anyone building a new operation still needs to have a buyer. Further, cooperatives are protecting their owners, allowing current patron-owners to have openings for milk over a new farm.”
In South Dakota, the balance between available processing capacity and expanding milk production has been critical to the state’s significant dairy growth in recent years, Peterson said. “While excess capacity has been reduced, the state is very optimistic that additional processing will be identified to enable future growth and the positive trend the dairy industry has seen in South Dakota,” he said.
The list of concerns faced by dairy producers and allied industries in the region is long and complex. Last year was a tough year to make forages in many areas, and shorter supplies are a concern. Continued dry weather and lack of snow have many producers already worried about this year’s crops and feed supplies for 2023, said Jennifer Bentley, Iowa State Extension and Outreach dairy field specialist.
Anticipation of higher costs for feed and all inputs are contributing to the caution side of the scale in the region, said Jim Salfer, University of Minnesota Extension dairy educator. Financial health entering 2022 varies: Producers with adequate forage supplies and the ability to mitigate risk are the strongest; mid-sized and larger farms that purchased most of their own feed struggled to break even, and many lost money in 2021.
For Sjostrom, labor tops that list of concerns in every segment of the industry. “Whether the cooperative-processor plant, the farm, milk trucks or the many vendors that assist us, every sector needs people,” he said.
Labor issues off the farm have the potential to disrupt dairy markets. In January, a major milk distributor in North Dakota went out of business, due in part to a lack of certified drivers, putting rural consumers and more than 50 school districts at risk of losing milk deliveries.
One comfort in the list of concerns is that regional and U.S. producers are not alone. “Globally, milk production is stunted as dairy farmers address higher feed and construction costs, labor shortages and new environmental regulations,” said Sheryl Meshke, co-president of AMPI. “This could slow the rate of growth compared to just a few years ago and have a positive impact on price.”
With the pandemic’s immediate impacts still fresh in their memories, fears of “black swan” events linger. “The biggest concern is the unknown – those things or events for which we are not able to plan and largely outside of our control,” said AMPI’s DeVelder.
FMMO, policy reforms
As calls for FMMO reform grow louder, a regional task force involving groups throughout the I-29 Corridor and Wisconsin has worked to explore many issues built on the federal order platform. Admittedly, uncomfortable situations arise when leaders of cooperatives and producer-only groups see things differently.
“We believe that we need to, first and foremost, examine those benefits federal orders have and preserve them,” Sjostrom said. “If we do not incentivize use of federal orders, we will lose dollars for dairy farmers.
“Minnesota, a very high cooperative state by any measure, needs to keep and encourage strong cooperatives,” he said. “We need to find the federal order structure that is best for farmers, but we’ll also need our cooperative leadership to help us see that and ultimately vote for it.”
Regardless of a reform timeline, Sjostrom hopes the process goes beyond preserving the status quo and creates “disruptions” leading to change and innovation.
The South Dakota Dairy Producers also have a seat at the table involving that coalition, monitoring discussions and providing input on possible FMMO reform.
“Overall, there is a sense the orders need reform and updating, but South Dakota is taking a collaborative and cautious approach on how this looks,” Peterson said.
“To succeed in dairy, investment at every level – on the farm and in the manufacturing plant – must continue,” Meshke said. “We believe the dairy industry needs to move toward a full-scale, holistic FMMO hearing to address the whole spectrum of FMMO formulas and pricing factors, including make allowances, yields, relationships between block and barrel cheese, overarching price discovery mechanisms and the Class I mover. Most of those factors have not been updated for over a decade or more.”
The improved milk price outlook for 2022 is creating the perception that risk management may not be necessary. Market conditions and high premium costs are making programs such as Dairy Revenue Protection (Dairy-RP) look less beneficial. Across the nation, enrollment in the 2022 Dairy Margin Coverage (DMC) program is down, and the USDA has extended the sign-up deadline until March 25.
“All inputs are going to be higher, which means milk prices need to be even higher for farmers to profit without risk management,” Sjostrom said. “As we’ve seen in the past, the worldwide shocks and supply chain issues continue to surprise us.”
Looking ahead, dairy demand remains strong, both home and abroad. What impact higher dairy product prices have on demand remains to be seen. Due to nutrition, convenience and affordability, Meshke is confident consumers will continue to be drawn to dairy products.
“The pandemic showed us that when the going gets tough, consumers seek comfort foods and what is familiar to them,” she said. “To maintain relevance, we must explore all the ways we can continue to prove cows, the dairy products they produce and the dairy farmers who care for them and the land are a solution and necessity in consumers’ lives, that dairy is a critical piece to achieving a thriving, regenerative circular economy.”
Beyond milk, one byproduct of dairy farming largely seen as an environmental threat in the past, manure, is getting another look as a revenue source with increased application of digester technology. With higher input costs and limitations on the ability to manage milk price risks, Sjostrom poses a question of his own: “Is this the year manure begins to be the most valuable commodity on a dairy farm?”
Whether through capture of methane and conversion to renewable natural gas, or through on-farm applications of practices to capture carbon credits, there may be opportunities to tap into additional revenue streams while meeting consumer demands for sustainability.
“As an industry, we have an opportunity to participate in the climate change conversation in a proactive, farmer-friendly manner,” said Pete Kappelman, senior vice president of member and government relations with Minnesota-based Land O’Lakes. “We believe farmers have a unique role to play in helping create solutions, so we are working with our member-owners to drive on-farm stewardship and create market opportunities for their efforts.”
ILLUSTRATION: Illustration by Corey Lewis.