Dairy farmers and the dairy industry can’t seem to catch a break.
The decimation of the foodservice market due to the national coronavirus pandemic shutdown has once again put dairy’s struggles in the national spotlight.
The closure of schools, restaurants, cafes and other institutional venues, all of which comprise about 50 percent of the fluid milk, butter and cheese products sold in the U.S., has resulted in a dramatic decrease in demand for milk and other dairy products. Therefore, dairy processors have been telling dairy farmers to dump their milk, and many of the processors have been donating much of their already processed milk and value-added dairy products to food banks.
It’s a difficult time for dairy farmers and dairy processors. Today’s difficulties also are compounded by the fact that the dairy industry has been in serious trouble for well over a decade. The primary cause of this trouble is a dramatic decrease in consumer demand for fluid milk, which is the most profitable commodity for dairy farmers.
Dairy milk consumption has declined in the U.S. by 25% since the 1980s, according to USDA. Meanwhile, production today is at higher levels than it was then. There’s also been an overall decrease in demand globally for dairy milk, which means an oversupply internationally as well, which makes export opportunities less than favorable.
Dumping milk is the last resort for a dairy farmer, and the images we’ve seen of dairy farmers in Wisconsin, California and elsewhere dumping gallons and gallons of milk down the drain is heart wrenching — but it isn’t anything new.
In 2017, according to USDA, 78 million gallons of milk were dumped, which was a significant increase over the 43 gallons dumped in 2016. USDA hasn’t released similar data for 2018 and 2019 but the estimates are about the same.
Hundreds of millions of pounds of cheese and butter have also been purchased by the federal government over the last few years and stored in warehouses. The same problem – more production than there is demand.
The amount of milk dumped in 2020 will likely exceed the numbers noted above because dairy processors like DFA (Dairy Farmers of America) and others are estimating that dairy farmers have been dumping over 3 million gallons a day as a direct result of the loss of the majority of the foodservice channel business.
June is Dairy Month, normally a time when the industry celebrates its successes — and there are some successes in dairy, such as the numerous innovative dairy farmers who are doing well because they’ve vertically integrated and produce their own brands of milk and dairy products, along with the progressive cooperatives like Land O Lakes, Organic Valley and Cabot Creamery, to name three.
Additionally, there are many companies in the dairy space, big ones like Chobani, for example, and smaller innovative entrepreneurial companies and brands focusing on milk, butter, cheese and other value-added products like yogurt, that are successfully leading a renewed charge in dairy-based product development and marketing.
What I want to do here though for Dairy Month is to point out what I see as the three major problems plaguing dairy today, and offer some potential solutions.
First, there’s clearly an oversupply of milk — too much production chasing not enough consumer demand. This is ironic because as dairy farmers have become more productive over the years, consumer demand has decreased.
Dairy farmers also have gotten bigger as a way to survive. These mega-dairies now find themselves (and this includes pre-pandemic) producing more milk than processors can take and that consumers are demanding. Demand for butter, cheese, yogurt and some other value-added dairy products have increased in recent years but not enough to keep up with milk production on the farm.
In my analysis the only solution to the supply-demand problem is for milk production to be reduced. The only way this can be achieved in my view is for the federal government to step in and create a fund to be used to buyout dairy farmers, essentially paying them to get out of the dairy business. At this point I think many, particularly family dairy farms, would do so because it beats the alternative, which is to go out of business.
According to USDA, 2,700 dairy farms went out of business in 2018, and another 3,200 folded operations in 2019. Similar numbers are expected for this year. This is production reduction in the harshest way. At least a buyout program like I describe would provide an opportunity for those dairy farmers that choose to get out of the business the option to do so with a softer landing. Dairy farmers have been encouraged for decades to increase production. As such I think the creation of such a fund is fair.
Additionally, there’s that lack of consumer demand for milk, which is the most difficult of the three problems to address. Americans simply aren’t drinking as much milk as they once did, largely because there are so many beverage choices available. For example, in the same three decades dairy milk consumption has declined, sales of plant-based milk alternatives like almond, soy, oat and others have gone from nearly zero to $1.7 billion in annual sales, representing about 14 percent of the milk category. Consumers also have turned to bottled water and a myriad of other drinks instead of dairy milk.
The dairy industry needs an Apollo Moon Shot-like program of innovation to increase consumer demand, which has been flat for a number of years now. A generic “drink more milk” marketing campaign isn’t the answer, nor is playing defense against the growing plant-based milk alternative market and brands. Instead, what’s needed is coordinated and combined innovation from the big processors, cooperatives and branded companies in the dairy space.
Perhaps some of this effort can be funded by USDA but the majority needs to come from private investment. The dairy industry and its numerous trade groups must play the major role in bringing these investors — venture capital and private equity firms, for example — to the table.
Some of this is starting to happen. DFA for example has launched an accelerator program in which it’s helping innovative startups focusing on dairy. This year’s group includes five dairy food companies, all of which have created diary-based food and drink brands and products. The future of dairy in my view is in value-added products rather than fluid milk, which is a declining category.
The last of the big three problems I see facing dairy is the consolidation of the processing industry into only a few players, which isn’t good for dairy farmers or the industry as a whole.
The recent bankruptcy of Dean Foods and it’s acquisition by DFA points the overconsolidation problem up in spades. In fact, the Food Lion grocery chain and the Maryland and Virginia Milk Producers Cooperative Association filed a class action lawsuit in federal court against DFA on May 19, challenging the acquisition. The lawsuit claims DFA is “an aspiring monopolist” that will compel cooperatives and independent dairy farmers to either join DFA or cease to exist.
My suggestion is more dairy cooperatives on the order of Land O Lakes, Organic Valley and Cabot Creamery need to be created because they are much more in tune with the changing consumer and operate much more like food companies than they do like old school dairy processors. Land O Lakes has the leading brand of butter in the U.S., for example, and Organic Valley is a pioneer in creating branded milk and dairy products for the modern consumer. Cabot Creamery has been an innovator in dairy over the last few years, operating more like an entrepreneurial food marketer than a farmer-owned cooperative of old.
I’d like to see an effort from USDA to expand the dairy cooperative movement in the U.S. The models and paradigms are there. What’s needed is the initiative and the financing. Perhaps the supply chain travails caused by the coronavirus pandemic shutdown will open the door to a new cooperative movement in the U.S. as it did following the Great Depression?
Some good things are happening in dairy but the problems currently outweigh the success stories. My hope is renewed effort in these three areas can usher in a brighter future of dairy.
Ag Expo Magazine columnist and contributing editor Victor Martino is founder/CEO of Third Wave Strategies, a marketing, sales and business development firm specializing in the food and agribusiness industries. You can contact him at victormartino415@gmail.com.
