Monthly Archives: October 2013

Number of the Week: 19,200
The increased number of milking cows in three of the Minnesota counties located in the I-29 Dairy
Corridor from 2001 to 2013.

MiN20131025 - Graph HiResSince the year 2000, only a few milksheds in the U.S. were showing substantial growth in dairy herd size. In addition to the usual suspects (California, Idaho, Texas, eastern Wisconsin, etc.), the I-29 Dairy Corridor stands out in the Upper Midwest region with substantial promise for dairy development.

Encompassing a dozen counties in South Dakota, Minnesota and Iowa, the I-29 corridor has seen a net growth in dairy herd size of 50,200 cows between 2001 and 2013 (click the image to enlarge it). According to some projections, due to the growth in the dairy processing capacity, the region could easily add another 100,000 dairy cows over the next decade. The I-29 growth is often thought of as primarily a South Dakota and Northwest Iowa phenomenon, due to these states’ sustained and successful efforts in attracting relocating dairies from Europe and western U.S. states. However, a closer look at the county-level growth in dairy herds, reveals that the three Minnesota counties illustrated in this map actually grew more than either the seven counties in South Dakota or the three counties in Northwest Iowa.

Bottom-line, where local community is supportive of the dairy industry, Minnesota can be as successful as any state in dairy development.

Explore Further:

An article by Dr. Mark Stephenson on growing milksheds in the U.S.
Dairy Situation and Outlook in the I-29 Corridor – presentation I delivered by at the 2013 North Central Cheese Industry Association conference.
Agropur to Expand – an article in Dairy Star, Mar 11, 2013

This week’s Minnesota in Numbers was produced with financial support from Dairy Star and Minnesota Milk Producers Association. Data Source: National Agricultural Statistical Service, U.S. Department of Agriculture. Maggie Jennissen and Ali Bittinger assisted in making this week’s Minnesota in Numbers.

Number of the Week: -5.1%
Minnesota fluid milk sales were 5.75 million gallons for the 4 weeks ending September 8, a decline of 5.1% compared to the same period a year ago. 

MiN20131018 - Graph HiResFor many years, U.S. fluid milk sales per capita were declining, but total volume sales were stable due to population growth. Has that relationship broken down in the last three years, as the figure above seems to suggest (click to enlarge)? Consider a 12-month rolling monthly average of national fluid milk sales. Since the peak at 4.56 billion lbs in January 2010, sales declined by a quarter billion pounds per month to 4.31 billion lbs in June 2013, the last month for which USDA data is available.

In my opinion, there are really two effects at play here. First is a continuation of secular declining trend in fluid milk consumption, due to change in consumer preferences and demographic composition of the U.S. population. Second effect is due to consumer reaction to higher milk prices in recent years. Due to high feed costs over the last few years, milk prices have been historically high, and consumers reacted by buying less milk.

It needs to be pointed out that long-term trends and short-term price-effects have very different results for dairy producer milk checks. Long-run trend of declining milk consumption leads to reduction in dairy producer revenues from Class I utilization. To the contrary, recent decline in volume sold due to higher Class I prices is modest compared to price changes. While Minnesota fluid milk sales fell by 5.1%, total revenue from sales actually went up by 2.1%, benefiting dairy producers. This suggests that the recent decline in milk consumption is mostly due to historically high fluid milk prices, rather than accelerating change in consumer preferences.  If Class I prices moderate next year due to lower feed costs, I would expect fluid milk volume to show much more stability in the short run.

Explore Further:
Monthly Sales of Fluid Milk by Area
Multi-Outlet Retail Milk, Cheese and Yogurt Snapshots – August 2013

This week’s Minnesota in Numbers was produced with financial support from Dairy Star and Minnesota Milk Producers Association. Data for Minnesota fluid milk sales data extracted from September 2013 MilkPEP Monthly Sales Topline Report. Maggie Jennissen assisted in making this week’s Minnesota in Numbers.

Number of the Week: 130
There are 130 members of the University of Minnesota’s Gopher Dairy Club. That is 20% more than 5 years ago. 

Min20131011 - Graph HiResThe Gopher Dairy Club is one of the most active student organizations on the University of Minnesota’s Twin Cities campus (click image to enlarge it). The club’s major activities include supporting dairy challenge and dairy judging teams, financially supporting the Dairy Showcase at the state fair, sending seniors on a trip to visit dairy farms in another region, Gopher Dairy Camp for youth, and other on-campus events. Most of the club’s activities are financed through their malt stand at the Minnesota State Fair.

This week’s Minnesota in Numbers was produced with financial support from Minnesota Milk Producers Association. Help from Erin Daninger, Secretary of the Gopher Dairy Club is gratefully acknowledged. Data for dairy club membership in other states extracted from Pires, T. 2013. “Find the four-year program that’s best for you.” Hoard’s Dairyman (August 25, 2013). Maggie Jennissen produced this week’s Minnesota in Numbers.

On the day the new paper “The Land of MILC and Honey” by my dear friends Cam Thraen and John Newton came out, I got a call from a prominent dairy journalist: “Does this really make as much sense as it seems??” No doubt about it, the Ohio proposal intuitively resonates with most people. So let’s dig into it a bit, and see why that is the case, and what the strengths and weaknesses of the proposal are. Strengths first.

1. The Ohio proposal removes the fear of a new dairy policy.

The truth is, we don’t really know how margin insurance or dairy stabilization programs are going to work. We can model likely consequences, and several research groups have done that (see my earlier post (“What we (think we) know about the effects of new dairy policy”). But unless we give it a try, we will not know if stabilization program was a good idea that resolves production coordination problems and helps accelerate margin recovery – or a bad idea that will give just headaches to dairy producers as they try to adjust their farm management practices to avoid periodic penalties for growing milk production. Similar pro and contra can be listed for margin insurance too… The genius of the Ohio proposal is that it offers a choice – those that like MILC can have it. Those that want something different, perhaps better but untested, they can try out new programs.

2.  The Ohio proposal recognizes that many small farmers grow their own feed.

Purchased FeedTake a look at this map. The map shows the percentages of total feed costs that are due to purchased feed costs when homegrown feed is valued at market prices. For many Midwestern states, only about half of total feed costs are due to purchased feed, the rest is grown at the farm. MILC primarily protects against decline in milk prices. Both current mainstream proposals, the Dairy Freedom Act and the Dairy Security Act operate with a single income-over-feed-costs margin that is built on the notion that ALL feed is purchased on the market (for details see my post on how the new IOFC margin formula was developed). That is a good approximation for western states, where 75-80% of feed is purchased. But it does not work well at all for majority of farms in the Midwest and the Northeast quadrant. By keeping MILC as a safety net option, the Ohio proposal recognizes and appreciates the difference in regional farm structures.

3) The Ohio proposal makes the program focus on its main advertised purpose – catastrophic risk protection

8.00The figure to the right shows the IOFC margin since 2004. The average margin was about $8.30, and the gaps below $8.00 are shaded. In my talks with dairy lenders, I have come to appreciate that about $6.00-$6.50 is a “Big Hurt Point”, i.e. the margin level that is very corrosive for dairy balance sheets if it persists for an extended period of time. We have experienced some very low margin periods over the last five years, and the rational for new dairy policy was that we need a better catastrophic risk protection. What sense does it make then that both DSA and DFA offer margin coverage as high as $8.00, or 96% of long-run average? Can you buy any government-supported crop insurance product that offers that high level of protection? Why should the government be in the business of protecting revenues that are only 4% less than the long-run average margins? The courage of the Ohio proposal is that it realigns the proposed policy with the originally advertised purpose – protect against deep losses that cannot be insured at large scale by private instruments.  And make people have some skin in the game.

 4) The Ohio proposal does not fully address the main conundrum – is the Dairy Market Stabilization Program needed or not?

There are a few minor glitches in this paper, but really only one logical error that merits public attention. Cam and John write:

“Finally, by offering insurance coverage only up to $6.50 a stand-alone margin insurance program may not mute market signals implicit during low IOFC margin events compared to an $8.00 insurance option. By directing market signals to the dairy farmers they can respond to negative price signals not by liquidating their herd completely, but by reducing output.”

The authors are correct in stating that market signals are less muted when maximal coverage is $6.50. However, this does not imply that the original reasons that led to perceived need for the stabilization program are somehow addressed by their alternative policy design. MILC-Insurance program is reasonable enough to keep the average dairy farm costs above the milk price received in trouble times, which preserves market signals and eventually market equilibrium would be restored as some farms exit the industry or adjust the herd size due to liquidity constraints. But marginal costs are not increased by MILC-Insurance policy. That means that while you are losing money producing milk, you are still losing less money by producing a bit more milk. That was the problem that DMSP was trying to solve – trying to induce production coordination that would benefit all producers more than when each pursues his or her own profit maximization.

Now, If you have followed my work, you know already that I have neither endorsed nor advocated against this stabilization program. I simply stated that it has a good potential, but also that important uncertainties exist. My critique of this aspect of Thraan and Newton’s proposal should not be interpreted as endorsement of DMSP. I’m simply saying that if the objective of DMSP was to disincentivize excess milk production when we have a milk glut, so that margins may recover more quickly – well, MILC-Insurance proposal simply won’t do that. Return to market equilibrium is still going to be slower than under current policy, as larger farms are going to have much better protection than they had under past policies.

On the other hand, if the main argument for DMSP was that while unpleasant, it was unfortunately necessary if insurance premiums are to be kept low, then yes, the Ohio program largely removes that need, and I trust them when they state that MILC-Insurance has a lower expected cost than either of the currently debated proposals (DFA and DSA).

Bottom line, there is a lot to like in the proposal Thraen and Newton put out. While I do not believe it solves the main conundrum (should we have the stabilization program or not), policy makers would be wise to look into ideas the Ohio proposal puts forward.

Number of the Week: 3808
As of early September 2013, there were 3808 licensed dairy herds in Minnesota.

Min20131004 - Graph HiResSince 2003, number of Minnesota dairy farms has decreased by 37%, from 5884 to 3808. The table above shows the number of herds in five size categories (note: 2013 herd size information was not available for 213 farms). The decline is most pronunced in 1-50 cows category. Number of dairy herds with 1000-2000 cows increased from 12 to 20, and number of herds with over 2000 cows increased from 2 to 12. Since 2007, about 200 Minnesota dairy farms exited the dairy industry each year.

This week’s Minnesota in Numbers was produced with financial support from Minnesota Milk Producers Association. Help from David Weinand, MN Department of Agriculture is gratefully acknowledged. Maggie Jennissen assisted in making this week’s Minnesota in Numbers.