“Whereas each of the last two years have begun with cautious optimism, many dairy farmers in the Southeast are entering 2021 beaten up pretty badly,” said Travis Senn, market analyst for Southeast Milk Inc. (SMI), a cooperative with about 150 members in Florida, Georgia, Alabama, South Carolina, Mississippi and Louisiana. “Between high market balancing expenses and broken pricing mechanisms, our members really felt the pinch last year.”
Senn estimates the new Federal Milk Marketing Order (FMMO) Class I milk pricing mechanism, adopted in May 2019, failed any farmers sending milk to fluid milk bottlers in 2020. “Talk to the dairy farmers in the Southeast and you feel a sense of urgency – if meaningful reform is not accomplished soon, many may be forced out of business,” he said.
Calvin Covington, a retired dairy cooperative CEO who now does some farming, consulting, writing and public speaking, estimates the change in the “Class I mover” calculation from the “higher of” to “average” Class III-Class IV prices resulted in lowering the 2020 average blend price about $1 per hundredweight (cwt) in the Appalachian, Florida and Southeast FMMOs.
With that as the backdrop, dairying in the Southeast begins 2021 under darker clouds. On the farm front, the outlook for lower milk prices, combined with climbing energy and feed prices, point to tighter dairy producer income margins in 2021, said Covington. The government’s role is also expected to change in the year ahead, with more regulations anticipated, along with a decline in direct dairy payments and dairy product purchases.
For Farrah Newberry, executive director of Georgia Milk Producers Inc., larger producers have eased some of their worry through risk management tools. However, smaller producers faced with price pressures and volatility and growing input costs are more apprehensive; they’re losing confidence in future opportunities. Both large and small face escalating feed costs and labor shortfalls.
“It doesn’t take a rocket scientist to know that is not a winning combination,” Senn said. “While there are some cost-hedging opportunities for managing a farmer’s basis risk, you’re at the mercy of national averages. They don’t often account for regionality, which hurts farmers in areas like the Southeast where cost of production is very high.”
National challenges, regional implications
The COVID-19-related market disruptions, combined with government intervention, have created unintended consequences. Nationally, growth in cow numbers and milk production are outpacing demand, resulting in a buildup of product inventories.
“It would appear the chickens have come home to roost in 2021,” Senn said. “With the markets artificially inflated by government purchases, there were no true economic signals to dairies in markets heavily producing cheese. They viewed high Class III prices as a signal to make more milk and responded in kind. Now that things have cooled off, milk production is likely to weigh down milk prices until such a time that product is moved off the market or milk production comes back down.”
While dairy growth is occurring elsewhere, it’s a different story in the Southeast, where milk production is flat or on the decline and the drop in fluid sales is even steeper. Dairy alternatives are a growing concern, especially in a heavy fluid milk market.
Daily Class I producer milk sales in 2020 (within regulated areas covered by the Appalachian, Florida and Southeast FMMOs and Virginia Milk Commission) averaged 536 tanker loads per day, according to Covington. The good news: That’s only three fewer tanker loads per day compared to 2019. However, that compares to 608 tankers per day of Class I sales in 2015 and 680 tankers per day in 2010.
The decline is creating excess fluid milk processing capacity, Covington said, and many Southeast plants are processing and packaging non-dairy products to maintain plants.
“As you evaluate the Southeast’s capacity, you begin to see the impacts the last five years have had on dairy farmers in this region,” Senn said. “While milk production elsewhere in the country has begun to boom with high cheese prices, the Southeast has been in either a holding pattern or decline for some time now. Today, milk supply has slipped back due to low margins and high market balancing fees. If milk production can’t catch up because the incentives aren’t strong enough, you may see more and more processing capacity available as farms sell out.”
Like dairy producers throughout the U.S., Southeast dairy producer income was supported by government programs in 2020. Covington estimates the average direct payment to dairy farmers last year was about $2.80 per cwt. Government dairy product purchases through the Farmers to Families Food Box program, in terms of milk equivalent, were at least 1.75% of total milk production.
“Many of the dairy farmers I talk to tell me 2020 was an OK year,” Covington said. “However, direct government dairy payments and the Payroll Protection Program were a major contributor.”
Even with that support, there is little excess money to carry forward to cover a poor year. “I do not expect direct payments or large government dairy purchases in 2021,” Covington said. “It will make a difference on dairy farmer income.”
Positives from 2020
Despite the struggles, Senn, Covington and Newberry can identify positives from 2020 that will carry into the future. All three point to the increased awareness and understanding among more consumers about the importance of a strong food supply chain, from dairy farmers to dairy processors and manufacturers to distributors to retail grocers.
A second positive is the recognition of the vital role of dairy cooperatives, according to Covington. “During the early days of government shutdowns, cooperatives did their best to handle all of their members’ milk production,” he said. “When there was no market for a portion of the milk, all members shared equitably in the loss. Then when consumers rushed to the grocery stores and loaded up on milk and other dairy products, cooperatives went the extra mile to see that plants had the milk needed to meet consumer demand.”
With the virtual shutdown of food service channels early in the pandemic, the industry’s ability to pivot quickly is another bright spot. “In 2020, we learned how to completely adapt the supply chain to meet a rapidly evolving demand shift,” Senn explained. “Processors were able to adapt their manufacturing lines to meet increased retail demand. In addition, we learned how to develop a food distribution program to avoid massive amounts of food waste while people were going hungry.”
Senn said he believes people developed a new appreciation for the hardworking men and women of agriculture working to put food on their tables, elevating farmers to the “most trusted” occupation last year.
“From the farmers working in the fields to the milkers in the barn to the drivers on the road to those stocking shelves in the stores, we truly learned who was essential during this year,” he said. “That signals to those in agriculture a renewed sense of appreciation for the toils they pour into every drop of milk produced on their farm.”
Back on the farm, adaptation of technology is another positive, Newberry said. A second Georgia dairy is coming online with milking robots this spring. As that and other technologies become more affordable for smaller and mid-size operations, dairy opportunity will emerge.
In addition to technology, a new administration in Washington, D.C., may open the door to immigration reform that can help address the region’s labor shortfalls, giving dairy access to seasonal workers who are already available to producers of other ag commodities, said Newberry.
Covington is further encouraged by what he sees as dairy farmers who continue to become better managers and CEOs of their dairy farms. “Be it leading and motivating their team of employees, lowering milk production costs, implementing better dairy and crop husbandry practices which make them better stewards of their cows and land, and seeking additional revenue sources, dairy farmers themselves are the best innovators I see,” he said.
For Covington, optimism for 2021 will come if and when the COVID-19 pandemic gets closer to ending, creating improved and more consistent domestic dairy sales through food service establishments.
“The pandemic showed the dairy industry how dependent it is on food service sales,” Covington said. “When the food service pipeline starts re-filling, it may provide a boost to dairy sales.”
Even while dairy’s food service sector sales suffer, Senn finds optimism in booming retail dairy demand. He expects those retail trends to continue through the first six months of 2021 as the U.S. tries to vaccinate its way out of the COVID-19 pandemic. “With expanded retail demand, food service demand bouncing back and exports continuing to strengthen, dairy demand for 2021 should continue to deliver,” he said.
Senn also finds hope in research investments into dairy innovation to serve a changing customer. “The consumer demand has shifted to low-sugar, high-protein drinks and products,” he said. “Other trends include shelf-stable dairy products that allow for longer storage and less spoilage. We need to continue finding new products to offer consumers if we hope to continue driving demand forward.”
Newberry agrees: Innovation is necessary to offset fluid milk consumption declines. “Producers must convince processors, cooperatives and investors that new dairy product processing facilities are needed to build a stronger future for the Southeast dairy industry,” she said.
FMMO reform needed
Circling back to FMMO reforms, Senn said the lessons of 2020 have created a better understanding on all levels of the supply chain and its weaknesses. He called for further emphasis on the value of fluid milk.
“The entire purpose of the federal order system is to ensure fresh fluid milk for the consumer. If dairy farmers cannot stay in business because the cost of producing milk exceeds the assigned value, there is no sustainable business model there. The weight of balancing the market has been born by the dairy farmer for a long time, and it feels like 2020 doubled that burden. With rapidly fluctuating milk prices and demand, farmers in a fluid market cannot continue to solely bear those expenses, especially not when those producing a less perishable product can receive a higher price. I don’t believe anyone has yet come up with a perfect solution, but it is clear that the current system is not serving its primary mission.”
“Federal Milk Market Order reform is desperately needed here to fix a system that continues to work against us,” Newberry said. “While we seek reform, we do not want to rush into changes. The Class I price formula disaster this year is a good example of the need to thoroughly analyze proposed changes to the order system before they are implemented.”