Milk producers and handlers supplying the Appalachian Federal Milk Marketing Order (FMMO) cover five states: Kentucky, North Carolina, South Carolina, Tennessee and Virginia. Like their neighbors to the south, they share similar concerns and diverse outlooks.
By the numbers
Of the five states, only one (Virginia) is on the USDA’s list of 24 “major” dairy states. Preliminary 2022 production data showed Kentucky and South Carolina posted small increases in milk production in 2022, but across the entire region annual milk production was down about 1.1%, with average cow numbers down about 5,600.
Combining all five states, cow numbers to start 2023 were estimated at 186,000, down 4,000 from a year earlier, with only Kentucky up slightly. The number of replacement heifers (greater than 500 pounds) were estimated at 105,000, also down 4,000.
Like Southeast and Florida FMMOs, the Appalachian FMMO is heavily dependent on the Class I fluid milk market. Class I utilization in 2022 represented about 70.4% of all milk pooled last year, boosting uniform prices but also having a bigger negative impact from the 2019 change in the “Class I mover” pricing formula. A second round of payments under the USDA’s Pandemic Market Volatility Assistance Program (PMVAP) will help offset some of that.
And, like Southeast and Florida FMMOs, the Appalachian FMMO faces dwindling markets. In 2000, there were 26 pool distributing (fluid milk) plants; by 2022 there were only 16, according to Calvin Covington, a retired dairy cooperative CEO who now does some farming, consulting, writing and public speaking. On the production side, milk marketed through the Appalachian FMMO has held fairly steady over the past three years, averaging about 296 loads per day in 2022. However, that’s down from 312 loads per day in 2015 and 334 loads in 2010.
Producers supplying the Appalachian FMMO saw a statistical uniform weighted average milk price of $26.39 per hundredweight (cwt) in 2022, up from $19.31 per cwt in 2021.
There’s a wide range of emotions among the region’s dairy producers as a new year gets underway.
Tennessee: Monitoring capital
In Tennessee, the outlook is “opportunistic” relative to a year ago, according to University of Tennessee Extension dairy specialist Elizabeth Eckelkamp and agricultural economics specialist Charley Martinez. Higher milk prices helped offset pressures of inflation, increased input costs and interest rates, leaving producers with some, but not much, capital in their financial statements.
“While we have some optimism, producers need to monitor risk exposure and try to be as efficient as possible with capital usage,” they say.
Producers are meeting financial challenges through multiple channels. Some are increasing herd sizes and robot capacity. Some are considering or expanding value-added enterprises, connecting with consumers wanting to shop for dairy products locally. In recent years, dairy-beef crossbred market opportunities have been increasing, creating the ability to sell calves and feeder cattle for drastically higher premiums.
“There’s been growing interest in the carbon credit market, and 2023 is squaring up to be a huge year with regards to implementation and potential income for dairy producers,” Martinez says.
One way the University of Tennessee directly impacts regional dairy businesses is through the Southeast Dairy Business Innovation Initiative (SDBII), providing competitive grants to dairy businesses in 12 states in the Appalachian, Southeast and Florida FMMOs. The funding is focused on improving production, processing and marketing, seeking holistic approaches to understanding value-added dairy opportunities, dairy finances and decision-support tools, food safety and product innovation projects, marketing and training tools, and leadership and workforce development.
“Regional growth in production to meet processing capacity needs is always a balancing act in the Southeast and in Tennessee in particular,” Eckelkamp says. “Through involvement of cooperatives, processing plants, marketing groups, state government, allied industries and university research, extension and teaching efforts, we hope to find new solutions to this issue.”
Kentucky: Economic concerns growing
In Kentucky, producers are very concerned with the recent weakness in milk prices in relation to other economic conditions, including higher feed costs and interest rates, says H. H. Barlow, executive director of the Kentucky Dairy Development Council (KDDC). As a result, optimism is in short supply. “Last year’s excellent prices definitely improved financial positions for producers,” he says. “However, with very little drop in input costs, producers are asking how they will make up the shortfall.”
If there’s a window of opportunity for Kentucky producers, it is that plant closures and transportation costs in the Southeast could add to the need for supplemental milk to serve that market. Kentucky producers are closely aligned with FMMO reform proposals put forth by the American Farm Bureau Federation (AFBF), Barlow says. Those include a return of the Class I mover to a higher-of formula, increased Class I differentials, simplify tightened pooling provisions and use of modified bloc voting on referendums.
One tool that will buffer tightening margins is the Dairy Margin Coverage (DMC) program, he says.
“I’m old enough to have seen these kinds of times before, and things can change quickly,” Barlow says. “I’m very concerned about the smaller family dairies weathering the economic storm.”
That storm also includes producers being forced to address “zero carbon” practices that increase costs just to maintain markets.
North Carolina: Pensive
At the far eastern side of the Appalachian FMMO, North Carolina producers are “pensive,” while utilizing financial resources from higher milk prices and pandemic-related assistance to cautiously move forward with infrastructure and other changes, according to North Carolina State University Extension dairy specialists Brittany Whitmire and Stephanie Ward.
“Higher milk revenues, coupled with strategic risk management, helped producers end 2022 in fairly strong financial positions despite input challenges,” Whitmire says. Looking ahead, milk prices receding at a faster rate than input costs are a concern. “Without planned revenue protection with upside potential as well as input contracts, margins will likely see continued pressure.”
Labor availability, as well as the increased cost of qualified and reliable labor, continues to be a top concern for dairy businesses throughout the supply chain, from farms to trucking and processing. Adoption of on-farm automation is helping alleviate some of that burden.
“It does not make sense to have more cows if nobody shows up to milk and care for them,” Ward says. “Likewise, a decrease in milk haulers and processing capacity has backed up the pipeline and limits growth.”
Population growth is leading to residential and commercial development, adding pressure to dairy farm operations. “From a dairy perspective, more people buying milk and cheese is fantastic, but rising land costs and urban encroachment is really becoming a limiting factor to dairy growth,” Ward says.
North Carolina remains deficit in terms of production to processing capacity. That’s opened the door for some producers to expand, and also resulted in some consolidation. There are some plans already underway for significant expansions in 2023.
Opportunity also lies in innovation. With fluid milk consumption continuing to decline, regional producers are looking for diversified processing. Participation in the SDBII has strengthened that part of the industry, enabling them to recruit mid-scale processing through value-added programs. It also supports targeted farm improvements and precision technology to improve production performance and economic efficiencies, Whitmire says.
With potential FMMO reforms ahead, the Appalachian FMMO has challenges similar to those in the Southeast and Florida. “Addressing balancing costs that are borne by dairy farmers in deficit regions is, perhaps, the most critical need in terms of dairy policy edits in the greater Southeast to help reduce the inequity that currently exists,” Whitmire says.