AP NEWS

Farmers, banker, researcher explain economics of milking cows

March 31, 2019

From Marin Bozic’s perspective, there are three ways to fix the dairy industry: Americans need to consume more cheese and milk, the county’s exports of milk need to grow, or, frankly, dairy farmers need to milk fewer cows.

Bozic, an assistant professor of applied economics who studies dairy foods marketing and economics at the University of Minnesota, said dairies have been economically upside down for the past five years, and there are plenty of macro-level reasons why.

For starters, he said, “In the United States, productivity per cow is growing faster than population size.”

Each year, dairy farmers are getting 1.5 percent to 2 percent more milk per cow, whereas the U.S. population is growing at just less than 1 percent annually.

Until about 10 to 12 years ago, Bozic said, Minnesota was not an export superpower on the global dairy market. Bu that has changed, and dairies saw the benefit. But now, even with exports continuing to grow, though at a slower pace, it’s not enough to put the U.S. dairy farmer in the black.

“We are seeing more milk chasing (processing) plants rather than plants chasing milk,” he said. That means fewer premiums for volume or the SCC health score. In addition, the gap in price between a 40-pound block of fresh cheddar and a 500-pound barrel of cheese has widened steadily over the last two years. That price gap has hurt Minnesota dairy farmers a lot, and policy changes may be needed to address the issue. “As the premiums decline, it’s more difficult for producers just getting by to breaking even.”

While Bozic, who has written dozens of articles — including 13 journal articles — on dairy economics has his view, things look slightly different in the milking parlor.

“The worst thing that happened to farms is rising price inputs,” said Kevin Siewert, who owns Hyde Park Holsteins near Zumbro Falls. Siewert, a third-generation dairy farmer, milks 520 head a day. “That’s why dairies are getting bigger. That’s why our farm needs to grow.”

The growth of individual dairies, Bozic said, has come at a time when the overall number of dairies is shrinking in the United States. Overall, dairy numbers contract about 3 percent to 5 percent a year, though the overall number of cows being milked has remained fairly stable since 2005.

That hasn’t always been the case. After World War II, there were more than 22 million dairy cows in the county. Now, about 9 million cows are milked annually, he said.

“Consolidation has been happening for a long, long time because our productivity has grown,” Bozic said.

Locally, dairies are an economic engine for rural communities, said Chris Stelling, vice president of ForeSight Bank in Plainview.

“One dairy farmer exiting the industry mentioned they’ve written in excess of 70,000 checks during their dairy career,” Stelling said.

Another dairy farmer estimated he did business with more than 80 local companies while operating his dairy, he said. In fact, a 2015 study by the Plainview Ag Center News estimated each dairy cow provides $34,000 of economic activity.

“I think many will be surprised how big the impact is on our communities if we continue to lose dairy farms,” he said.

Siewert said the economics for the farmer are simple. If you need to buy a $30,000 car, and you milk 100 cows, that $30,000 cost is spread over just 100 cows. But if the farmer milks 1,000, the $30,000 is spread over 10 times as many cows. “That’s where the economy of scale comes in,” Siewert said.

Stelling said it’s more of an issue of cash flow. If the cash flow doesn’t allow the dairy to keep pace with the business’ bills, like any business, that is troubling to a lender.

“All dairy farms, regardless of size, are feeling the effects of depressed milk prices,” Stelling said. “We’re heading into the fifth year of negative margins for many dairy farms.”

At Little Red Dairy near Millville, Bill Miller, who owns and operates the dairy with his son, Alan Miller, said the key is watching your debt load.

“If you strap yourself with things in the good times, you’ll be under when the times are bad,” Bill Miller said. When he took over the dairy from his own father, Miller said there were costs such as tractor fuel or the electric bill he didn’t even figure into the balance sheet.

Today, every penny counts, and the hard part of transitioning a farm to the next generation is the “artificial value they have on things these days.”

“If we tried to sell the farm and everything, we can’t get that (price) for it,” Bill Miller said. “But you can’t get that through anyone’s head that it doesn’t work that way.”

For the Millers, who don’t plan to grow their herd, the dairy has sought new revenue through a value-add program: producing, packaging, marketing and selling cheese curds.

That, said Stelling, is one of the options dairies are pursuing to make ends meet.

“Producers are exploring all options to increase revenue and, or decrease expenses, and banks are exploring all options to restructure debt,” he said. “Many operations are reaching a point where no additional options are available other than selling assets and exiting the industry.”

The most common solution, Bozic said, is to grow a herd size in order to benefit from the economy of scale. Spreading the cost of labor — including the farmer’s own labor and salary — and input costs over more cows means those costs are cheaper per hundred weight of milk, the unit by which dairy farmers are paid from processors.

From the community standpoint, Bozic said, smaller dairies matter a lot, as they buy inputs locally. However, larger dairies are more likely to be passed on to the next generation. “The best dairy for a local community,” Bozic said, “is the one that is there, operating and circulating cash through the local business community.”

One hurdle with promoting smaller dairies, he said, is finding enough people willing to work a small dairy. Or, even a mid-sized dairy.

“There are few people who want to run 600-cow dairies,” Bozic said. “It’s too big that it’s not just a family business, but you’re not large enough that you’re gaining the full benefit of the economies of scale. Whoever is adding a few hundred cows is probably seeing that as a stepping stone to something larger.”

Stelling said the consolidation in the dairy industry is, in large part, due to the hard work involved in running a dairy, particularly a small dairy.

“Dairy farmers are some of the hardest working people on the planet, and with each new generation there are fewer individuals willing to do the work and lifestyle when returns can be minimal or negative,” he said.

Bozic added that families entering the business have to be passionate about the lifestyle to stick it out.

“You have to be willing to tolerate lower returns on investment and not quit,” he said. That toleration comes from benefits like being your own boss, working to produce something tangible and useful to society, rising with the sun, and raising a family in an environment that promotes good values.

That, he said, is what started the dairy industry in the upper Midwest when Scandinavian settlers came to Wisconsin and Minnesota in the 1800s.

“What has built this country is entrepreneurial spirit,” Bozic said. “Dairymen are bold people.”