Dairy outlook remains bleak

Dairy Spotlight: Butter has been the one bright spot.

According to Steve Cooper, president of Select Milk Dairy Manufacturing Operations, “There’s a few bright spots out there in the commodity markets. But as a whole, we’re seeing projected low milk prices, because the commodity prices overall are some of the lowest prices we’ve seen in over a decade.” At the same time he anticipates a continued 1.6 to 2% annual growth for U.S. milk production in 2018.

Cooper oversees Select Milk Producers processing at the Coopersville, Mich., Continental Dairy Facilities plant, as well as Continental Dairy Facilities Southwest, which is an identical nonfat dry milk processing plant in Texas.

He says the United States and European Union are largely behind high inventories of nonfat dry milk powder stocks and depressed prices. “If we look at the combined holdings of powder in the EU and U.S., it’s 600,000 tons,” he says. “That’s about triple the normal working level of inventory we have in powder at any given time globally.”

Cooper says those high inventories are also getting older in the EU and will most likely end up as animal feed. He adds, “It’s driving down the whey markets as well.”

New Zealand’s production, he says, is starting to slow, which is helpful to the market, but may not be enough to provide a bump to prices. “We’re kind of working in that mid-60’s to mid-70’s [cents] range in powder,” he says. “That’s some of the lowest powder prices we’ve had in over a decade.”

Canada’s increasing production also adds to market pressures, and he expects dairy markets to continue to be tight in 2018. “Our producers [Select Milk Producers] have held production. We haven’t really expanded at all. We’ve had kind of a moratorium on expansion with our producers,” he says.

Michigan’s dairy production has continued to expand over the past five years at the same time production has been growing in the Upper Midwest, which Cooper says has meant all plants are running out of space, including theirs.

“Between us and the other operation that’s here on-site, we’ve added about six and a half million pounds of plant capacity, and the plants are running full,” he says.

When the plants are full, raw milk has to travel farther to be processed, which equates to large discounts on the raw milk price for Michigan farmers. “We’re seeing anywhere from $2 to $4 a hundredweight discounts, and they’ve got to pay for the freight as well,” he says.

Most of the increases in milk production in the Great Lakes are coming from improved efficiencies rather than increases in the cow herd.

The FairLife plant on the shared Coopersville site processes about 2.5 million pounds of members’ milk each day, and the Continental plant processes up to 4 million pounds a day, with three-quarters of it coming from other cooperatives. “We’re basically regionally balancing this area for not only our co-op but others, which, in turn, gets put into nonfat dry milk,” he says.

At the same time cream markets are also slumping, which makes the cooperative’s $50 million investment in butter processing in 2016 vital to members’ bottom line. Cooper says with the depressed markets, they’re processing a lot more cream into butter this year. “This time last year we were shipping 49 loads of cream a week,” he says.  “Right now we’re shipping 10 loads of cream a week, and we’re churning 39, which goes into bulk butter and butter milk powder.”

Butter has been the one bright spot in the dairy markets, “I feel we’re going to be supporting somewhere between a $2 and $2.20 price on butter at least through midyear,” says Cooper, who points to research supporting the benefits of butter compared to partially hydrogenated oils. It has added to butter demand. And had butter markets not remained high, milk prices would be a lot lower, he contends.

For cheese, Cooper says markets have stayed strong domestically. But if the EU were to become more competitive, it would drive prices lower.

Is now time for expansion?
According to Cooper, Michigan’s dairy processing capacity needs to grow, but the capital costs to build continue to go up. “Since what we built here a few years ago, the costs have gone up substantially with the plant we’re building in Texas, which is a mirror image to the plant in Michigan,” he says.

For a processor to build in Michigan, Cooper says there needs to be local infrastructure to support facilities. “A lot of the municipalities don’t have the wherewithal to invest the money into the infrastructure for water and wastewater needs that these plants have,” he explains.

For their plant in Texas, the local community can’t afford to upgrade its wastewater treatment plant, so Select Milk Producers is building its own. It’s costing $28 million, in addition to the $280 million it will take to build a facility that can process up to 4 million pounds of milk per day. “It is prohibitive to building a new plant at times, and not everybody is willing to take on that kind of investment to build a new plant,” he adds.

While Michigan isn’t the only state maxing out dairy processing capacity, Cooper says it has one of the lowest producer pay prices in the nation. Wisconsin and New York are also facing a lag between processing and production. Pennsylvania — with 100,000 more head of dairy cattle than Michigan, but slightly less total production — has started the process of rolling out the red carpet to attract new dairy processors to the state.

Jayne Sebright, executive director of Pennsylvania’s Center for Dairy Excellence, says Pennsylvania’s dairy farmers have typically received a higher milk price, about $2 more per hundredweight above the Class III price. Most of the state’s raw milk goes into the fluid milk market, but there hasn’t been a lot of investment in other dairy product categories in the state.

“With fluid milk sales continuing to decline, we haven’t seen the growth in the fluid milk market, and many of our fluid milk processors are not operating at capacity. Some of them have shut down,” she says.

A new study commissioned by the center and the state of Pennsylvania finds two new plants in Pennsylvania for processing “other” cheeses — or non-American types, including Italian and specialty cheeses — could significantly reduce overall supply chain costs, enhance the marginal value of milk for producers, and create more than 1,000 jobs, while also adding $1.5 billion in economic activity to the state. “Milk moves across state lines, so any processing investment whether it’s here in Pennsylvania or in New York or in Michigan, is beneficial to the whole region,” Sebright says.

The center is working with Pennsylvania’s Department of Economic and Community Development and Department of Environmental Protection to coordinate efforts to support a new processing facility. A governor’s action team and others are trying to identify what types of incentives are available such as low interest loans, infrastructure build outs or tax credits to help attract processors.

Michigan’s Department of Agriculture and Rural Development has commissioned its own study to identify what types of food and agricultural processing would benefit the state. Dairy tops the list according to Peter Anastor, director of Michigan’s agriculture development division. “The state of Michigan is focused on increasing the growth of food and agriculture processing in Michigan by finding opportunities to increase processing of products we grow and produce right here in Michigan,” he says. “We are one of the top dairy producing states in the country and increasing processing opportunities for that milk is one of our top priorities.”

To do this, Michigan has created a new incentive called the Food and Agriculture Investment Fund that is focused specifically on the growth of food and agriculture companies and the development of value-added processing in Michigan.

In the interim, Sebright says at least some cooperatives in Pennsylvania have disincentives for farmers to expand and expects marketers to be more strategic before encouraging farmers to increase production in the future. “We do think the next four to six months are going to be incredibly challenging for dairy farms and it’s going to limit opportunities here in the state as well as in the nation as a whole,” she says.

Heslip is the Michigan anchor and reporter for Brownfield Ag News.




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