Increased demand for dairy products around the world, particularly in China, is doing for U.S. farmers what decades of farm policy could not: sell off all the milk their cows can produce at record-high prices.
The good fortune of U.S. dairy farmers is due to exploding demand from an emerging global middle class, but also to misfortunes elsewhere. In China, domestic dairy has been hampered by production problems and lingering distrust among consumers about safety. In New Zealand, the global leader in dairy exports, a 2013 drought reduced the country’s ability to meet foreign customers’ needs. In the first quarter of 2014, the value of U.S. dairy exports grew 39 percent.
“China buying has been through the roof,” says Alan Levitt, spokesman for the U.S. Dairy Export Council. “We shifted from a period of structural oversupply to structural undersupply.” Exports have been rising steadily during the past decade, but they surged in the past year—evidence that the U.S. can be a viable player in the global dairy market.
“We were principally focused on the domestic industry and tended to fear globalization rather than relish the opportunity,” says Richard Smith, chief executive and president of the Dairy Farmers of America, the largest such cooperative in the U.S. “In a short period of time, the industry did a 180.” Smith’s group opened a plant in Nevada in April designed to turn out whole-milk powder for foreign markets, the first of its kind in the U.S. American dairy plants typically produce nonfat-milk powder, which is not popular overseas.
Global demand has, at least for now, freed American dairy farmers from a decades-long cycle of sluggish U.S. sales, reliance on government support, and shuttered farms. There have been price crashes—most recently in 2009—and consolidation. As of 2012, the U.S. had 64,098 farms with milk cows, less than a quarter the number it had in 1982. Small farms have been replaced by much larger ones, some with thousands of cows.
For the farmers who have survived, the recent payoff has been substantial. The average price for raw milk in April was $25.30 per 100 pounds, an all-time high, even as feed prices have remained low. By comparison, the price was $13.15 in April 2009, in inflation-adjusted dollars. “This is a very nice turn of events,” says Ken Nobis, who runs a dairy farm in St. John’s, Mich., with his brother, Larry. “The outlook for dairy is very rosy right now.” Jay Waldvogel, senior vice president of strategy and international development at the Dairy Farmers of America, says an industry driven by market forces, not government support, will unleash growth and innovation: “Without export markets to create an outlet, the only way you could grow was if your neighbor disappeared.”
That foreign customers have revived U.S. dairy is no small irony. Since the 1930s, the federal government has deployed expensive, protectionist, and arguably self-defeating policies to prop up farmers, whose incomes were periodically depressed by milk surpluses.
The government’s solution was a price-support program. It purchased excess cheese, butter, and nonfat dry milk when prices fell to a certain level, and stored the cache in caves near Kansas City, Mo. The overproduction would eventually be sold, donated to government food programs, or in some instances left to rot. The program, costing as much as $2 billion a year, got too expensive in the 1980s, so the government started paying farmers to kill dairy cows to reduce the supply. It also imposed import quotas and tariffs to keep cheaper foreign products out of the U.S. One result was that American dairy became too expensive to compete in world markets. New Zealand and the European Union dominated global trade.
In the past decade, American dairy products have become more competitive, in part because those price supports were curbed and eventually eliminated. A 2009 study, prepared by the Innovation Center for U.S. Dairy, an industry group, recommended that farmers seize opportunities in emerging markets, in part because New Zealand and the EU couldn’t keep up with demand. “What that study showed us is we could really compete,” says Indiana-based Michael McCloskey, who runs one of the largest dairy operations in the U.S.
Most dairy farmers know that prices will not remain consistently high. In recent months, the pace of new business in China has slowed, and future dips in demand are inevitable. Farmers will surely increase production to take advantage of current prices, Nobis says.
What is good for American dairy farmers isn’t good news for the U.S. companies they do business with. Dean Foods (DF), the largest U.S. dairy processor, has been getting clobbered by sky-high costs for raw milk. Last month, it lowered its earnings forecast for the year, to reflect, in part, “historically high raw milk costs.” U.S. consumers are also hurting. The average price for a gallon of whole milk was $3.69 in April, up from $3.43 a year earlier, federal data show.
There’s some nostalgia for the subsidies. At the Interstate Underground Warehouse—one of the famous dairy caves in Kansas City—Wayne Reeder, who oversees the facility, says he misses the days when the coolers were stacked with 500-pound cubes of cheddar cheese. “We hated to lose that government business,” Reeder says, noting the government paid him as much as $800,000 a year to store the surplus. “With the USDA, you know you are going to get your money.”
Source: Bloomberg Businessweek