How many cows makes a dairy farm viable?

Publisher's note: the newspaper will "clean this up" for full accuracy and will publish this - hopefully at its full length - in the April 12 issue.

At the February 26, 2018 joint hearing of the Senate Agriculture, Rural Development and Housing Finance and Policy Committee, Dr. Marin Bozic provided around 20 minutes' worth of testimony. The hearing was chaired by Senator Torrey Westrom of Elbow Lake. Dr. Bozic is an Assistant Professor of Applied Economics at the University of Minnesota specializing in Dairy Foods and Marketing Economics, including dairy markets and policy. His full biography can be found here:

Just prior to Bozic's testimony, Jeff Schmidt with Farm Credit Services talked about how three percent of their customers were currently in adverse situations. Schmidt has heard that unofficially, back in the 1980s farm crisis, that figure was upwards and even past 50 percent.

Below is Dr. Bozic's testimony:

"I am here to testify on behalf of Minnesota Milk and my employer on the state of the dairy economy in our state as well in our nation.

In one sentence, the state of the dairy economy in Minnesota is sour.

The fundamental reality of the dairy economy and other sectors of the ag economy as well is that our productivity is growing at a faster pace than our domestic market. That has manifested itself over many decades as a shrinking dairy herd not only in Minnesota but also the entire United States.

We finished World War II with over 20 million cows. We started this century with just over nine million cows. We produced 44 percent of the milk back then as we do today.

Our dairy herds stabilized in the early 2000s because our exports started to grow. We were producing more than we could sell domestically, but the exports were there to stabilize the herd.

"Blue line" - herd size (stabilized) when the "red line" - exports (started to grow)

We reached from four percent of exports in 2000 to 15 percent of exports in the year 2015.

The problem is that exports have now stabilized. If exports do not continue to grow as a percentage of milk production, then our dairy herd will become too big, and is becoming too big, because our cows are getting better and producing milk at a faster pace than our population is growing.

That is the core reason why we are seeing milk prices and milk premiums lower throughout the country, and one of the core reasons why we are seeing dire straights for many dairy farmers in Minnesota.

Sales of dairy products vary widely between the categories. We see conventional fluid milk pushed out, crowded out by new innovations, by other specialty, nut juices.

The silver lining is that milk fat is gaining popularity with dairy customers and consumers along with the consumption of whole milk, which is on the rise for the first time in a long time.

Cheese sales and butter sales are good. Butter prices are what's supporting farmers right now.

Milk powders currently have a glut in the market. Inventories are pretty high around the world.

As far as the production growth is concerned, Minnesota had just under one percent growth in 2017 (0.70%), and we're continuing to grow in 2018. We see a lot of shrinkage in the western states such as California and the Pacific Northwest. We see tremendous growth in the south, such as Texas (10.4%), New Mexico and Arizona.

I do expect that we will see large growth in dairy herds in South Dakota and western Minnesota over the next two to three years.

I just received today an invitation to a celebration near Lake Nora, South Dakota, that they will be expanding their plant. They will need another 50,000 cows to fill up that increased plant capacity within probably two years once it's online. This region is going to continue to grow.

In Minnesota, we continue to see consolidation. I'm showing what's been in the last 10 years.

In 2007, we had just over 5,000 dairy farms in Minnesota. By January / February this year, I believe, for the first time, we have crossed below 3,000 dairy farms. Our production is now slowed by that. We continue to see an increase, almost on a daily basis.

Ten years ago, we had about 23 to 24 million pounds of milk produced every day in Minnesota. We are now at between 27 and 28 million pounds every day.

That's the equivalent of adding one large cheese plant's capacity in the last 10 years in terms of milk production in this state.

If you remember one slide from my entire presentation, it's this.

Milk price premiums, which is what processors don't have to pay under federal policy, but what they choose to pay because of the competitiveness in the market. Milk price premiums are down to zero. For many, many years, milk price premiums were around a dollar per hundredweight. We see the steady decline in 2017.

If you think of major recessions, such as in 2009, as a major blow to the head or a stab in the back, where you can hardly survive, this is a death by a thousand cuts. We are going to see a number of dairy farmers struggle under this premium structure. Unfortunately, my forecast is not that premiums will recover any time soon.

I anticipate that out of the 3,000 dairy farms left in Minnesota, probably over 80 percent are what I'd call "last generation" farms. I don't have the regression models or published work on this, but speaking informally, that would be my anticipation.

In 2018, the gross milk price premium has almost bottomed out at zero.

Nationally, in the last few weeks, we saw a lot of policy developments: Farm Bill Title I program - margin protection program for dairy producers; this was reformed in February 2019 to reduce premiums for small producers (up to 200 cows) by 70 percent. I do expect they will get considerable help in 2018. Dairy is finally getting crop insurance programs, and livestock gross margin for dairy cattle is no longer just a pilot program; and Dairy Revenue Protection - new area revenue insurance, currently under development.

In terms of NAFTA, losing market access to Mexico would be a major blow to the U.S. dairy sector.

In the foreseeable future, we are going to see continued consolidation. If you do decide to act and implement some activities in this legislative session to help this sector, my recommendation would be to focus on those struggling dairies that nevertheless have a bright long-term outlook and maybe just need a helping hand to weather this crisis. We are going to see a number of dairy farmers that are no longer competitive, and the sooner they exit the sector, the more equity they will preserve. We will be doing them a disservice by offering some handouts that would prolong their hope, but really, there is nothing there to hope for.

The market has changed. Minnesota will continue to have a thriving milk production. Unfortunately, the sector has changed, and many of the current dairy producers will not be able to survive in that environment."

When asked what a 'dairy with a bright future' looks like, Bozic replied, "I would hope I'm not the one who picks winners and losers. However, maybe this is a framework to think about these issues. Over 100 years ago, dairy producers came together and decided if they wanted to sell their milk on the East Coast, they should not do it alone. They should come together. Land O' Lakes was formed, and they shipped butter.

In today's economy, the capital need to build a dairy with sufficient economies of scale to be competitive is in the order of $30 to $50 million. Not a single family, or very few families, can muster that type of capital of their own.

What we need to encourage are new business models that bring multiple families together to form new partnerships and new business models that, maybe, not just two brothers or a few family members coming together, but maybe 10, 12, maybe 15 families bringing their financial wherewithal together to be competitive.

We see examples of such business models in Minnesota, as well as in Wisconsin and in other states. Our prime example in Minnesota is Riverview, LLC, with over 350 partners. Very few of them would be competitive on their own, but because they came together, they are a powerhouse.

As of January 1, rBST is no longer being used in Minnesota. The consequences that we may see over the next few quarters is slightly lower milk production statewide. We can't see what influence that will have overall. Dairy coops expect to be up 1 to 2 percent year over year instead of a half percent with use of it."

In terms of the trade war with Canada, Dr. Bozic said, "Canada is a fortress, however, they've been short of milk - in the last 5 years they've been importing fluid milk from Wisconsin and the Northeast. They've had more domestic milk recently. They haven't done that to injure us, but they've seen different demand for milk. They've increased production.

It used to be, if you create wholesome milk, there would be a home for that milk. On April 1, 2017 - processors in Wisconsin sent letters to their patrons who said "we don't have a home for their milk" - then on May 1 they said the farmers were on their own."

Senator Westrom asked, "When you say 'don't prolong the inevitable for others', what do you mean? What can the state do to help dairies weather the storm? What are some constructive ideas?"

Dr. Bozic replied, "I can offer advice and analysis - but I don't want to advocate for different expenses of taxpayer money. I do believe that some help in forms of guarantees for loans, or creative financing options. They should be designed in concert with Minnesota Milk and other trade associations' - I understand that Minnesota Milk will convene a group of bankers to ask for input in designing legislative proposals that will be brought before this body in just a few short weeks."

"Unfortunately, for smaller dairies, the business model is no longer viable. If we can communicate that gently but still firmly, and not even as your job, but unfortunately, my job, as an educator, their families would be better off. They'd preserve more equity."


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