“Our request would allow a handler to pool, or not pool, all or any portion of a delivery to a nonpool plant … without losing the ability to pool the producer the following month,” DFA said in a letter to Market Administrator Erik Rasmussen.
“Additionally, this would allow the handler the ability to pay for the milk delivered to the nonpool plant a return that reflects the value of the milk,” the letter said.
Brad Keating, senior vice president and chief operating officer for DFA’s Northeast Area, said some of the current market conditions can be attributed to the last boom in milk prices in 2014.
Those record high prices, coupled with lower feed costs and the yogurt boom in New York state, encouraged farmers to expand their dairy production.
That combined with increased milk production per cow led to the current surplus in milk, Keating said during Mount Joy Farmers Cooperative’s meeting on Feb. 1.
New York, Pennsylvania and Vermont have all seen a year-over-year growth in milk production, and the cooperative is projecting that will continue for the next two years.
DFA would have to build a new cheese plant each year that could process 70 million pounds of milk per month to keep up in the Northeast.
In the short term, Keating predicts that the region’s capacity to process milk will become overwhelmed within the next 30 days.
Ron Mong, a senior manager at Herbein+Co. Inc., said there are some foundational milk pricing differences between pool processing plants and nonpool processing plants.
A pool plant must pay the blend price set by the Federal Milk Marketing Order. All fluid plants within the order’s market area must pay the blend price. Manufacturing plants can choose whether to participate as a pool plant.
By contrast, the price paid for milk by plants outside the Federal Order, or nonpool plants, is set by the marketplace.
The production upticks are “stressing the model,” Keating said, and DFA is not the only cooperative feeling the pressure. All cooperatives are trying to add capacity and market their milk “and all are looking at price adjustments and policy adjustments.
“There is lots of talk in the Northeast,” he said.
DFA is a part of Dairy Marketing Services, which handles about 900 independent dairy farms in the Northeast milkshed.
Keating sent the independent, nonorganic dairy farmers a letter on Jan. 19 asking them to consider several options to remain in the DMS system.
The independents could move to another market, join a cooperative or remain an independent, but some of their milk could be depooled if the market administrator approves DFA’s request.
“We want to work with these farmers,” Keating said. “They are good farms, good families. They are not just numbers.”
Cooperative members have been receiving market adjustment fees on their milk checks to help manage the milk oversupply, but the Federal Order does not allow the cooperatives to assess the independents the same fees.
The proposal to depool the milk is designed to help balance the financial pain between cooperative members and independent producers.
James Dunn, a professor of ag economics at Penn State, said the Northeast has dealt with its supply problem over the past decade by shipping its excess milk to the Southeast.
“We had a lot of milk going to the Southeast, and that has pretty much ended,” he said. Michigan’s milk production has “expanded greatly, and their milk is coming in here, too.”
Last summer, the market administrator for Federal Order 1 issued an order allowing milk to be dumped to manage the surplus.
“When there was too much milk to process, it was dumped into lagoons and manure pits,” Mong said. The raw milk went to the plant, the cream was skimmed off, and about 200 tankers of skim milk were sent for disposal.
Nothing was wrong with the milk, except that there was no market.
The cooperatives bore the costs, Mong said. Their members were charged additional balancing fees, while the independent producers had to receive the minimum price.
In his view, Mong said, the system is unfair and DFA’s proposal would allow for both the cooperative members and independent producers to bear some of the losses.
Processing capacity has been tapped out, and Keating predicts the Northeast milkshed will have excess skim milk within the next month.
The cooperatives have struggled to keep some of their processors going when they are being undercut in the marketplace.
“The market is bidding down the price,” Keating said, and some milk has been sent out of the area to help balance the situation. The cooperative has not released any farms, he said. “It’s shared pain, shared gain.”
Fluid milk sales have been on the decline, Mong said, which has compounded the problem.
“Milk production on the farm is increasing, however consumer demand for milk continues to fall,” he said. “People love dairy foods, but they don’t choose to go to a glass of milk like they did 30 to 40 years ago.”
Dunn said the dairy marketplace is global and the U.S. needs to export about 16 percent of its milk production.
When the U.S. dollar is strong, it hinders milk prices. “The idea that we can’t export the cheese, powder and butter we are normally exporting is hard on milk prices,” he said.
DFA is making investments to help process some of the excess milk. It purchased the Batavia, New York, Quaker/Muller plant last year and is working to get a processor into the plant to get it running again. It has also authorized the expansion of its Middlebury Center, Pennsylvania, plant
DFA is working in partnership with several New York dairy farms and Arla to build a new plant in western New York. That plant should be operational at the end of the year and at full capacity in 2018.
Keating said there are other projects in the pipeline and DFA is “chasing opportunities” to increase demand.
He said independent farmers seeking additional information about DFA’s proposal can speak to their field representatives or contact the Syracuse office.