November 10, 2019

Three Economists Challenge Thinking About Dairy's Future

 |  By: admin

With the ups and downs of the dairy industry, and the growing influence of export markets, predicting what dairy prices will do even six months from now is risky business. 

However, that forecasting becomes less risky when we look at past economic pathways, adjacent markets and emerging consumer trends. Three economists will look at where the industry is heading at the 2019 MILK Business Conference, held November 11 – 13 at the Luxor Hotel in Las Vegas.

“If you’re not innovating along the lines of convenience, you’re starting from behind,” says Phil Plourd, president of Blimling Associates, who will kick off the presentations on Tuesday morning. Looking at emerging consumer trends, Plourd will take a look at what dairy needs to do to meet emerging consumer preferences. 

“The stock market tells you, if you look at the relative performance of various companies, what’s working and what’s not,” Plourd says. He says stocks like Netflix, Amazon, Domino’s and others have outperformed the S&P 500 by a wide margin over the past five years. “What that says is what’s working is what allows us to sit in our house, in our living room, push buttons on our phone and have stuff appear.”

In his presentation Plourd will look at what the dairy industry needs to do to fit into that picture. Given the complexity of dairy policy, it is difficult for the dairy industry to be agile enough to change to fit emerging markets. 

“As someone told me many years ago, we’ve taken something that should be pretty simple and made it really hard,” says Mike McCully, owner of The McCully Group, who will follow Plourd on the agenda. The focus of his presentation will be on how dairy policy can change to meet the demands of the next generation. 

“How can the dairy industry transition away from regulated classified pricing to a place where prices for milk or components are established in a free market?” he McCully asks. He says such deregulation would be scary for some, but not for those willing to take risks. “If the milk pricing system allowed for greater rewards, more risks would be taken and farmers, processors and consumers could all benefit.”

The dairy industry is also facing a fork in the road, according to McCully.

“Will the focus be on high volume, low margin commodity products or value-added, higher-margin products with smaller volumes?” he asks. “Or can it achieve both?” 

He looks toward Europe as an example, where milk prices are higher than what U.S. producers receive and dairy exports are nearly 27% higher than the average value of U.S. dairy exports. When Europe transitioned to a less regulated market, McCully says, dairy companies invested in value-added products like infant formula and dairy proteins. Cheese and butter from EU companies also commanded a higher price on the world market.  “Why can’t U.S. dairy companies do the same? They would create a higher return for farmers and processors.”

The role of the U.S. dairy industry on the world stage adds a different context to how producers need to view their business, according to Marin Bozic, economist in the department of applied economics at the University of Minnesota. 

“It’s so important for producers to expand their vision and understand what’s going on in a broader environment,” he says. “It’s important to understand what’s going on in a macro economy and society, and the global picture as well.”
Within that big-picture thinking it’s important to understand what influences our markets as well, Bozic says. 

“It’s important to ask yourself, for the various influencers and decision makers, what are their incentives?” he says. This includes consumers, other producers, regulators, even foreign governments that impact the price producers receive for their milk.

Once context is understood, and we have a better understanding of what influences the decision of people who impact the dairy market, then we can begin to make more accurate assumptions of where the dairy marketplace is headed, Bozic says. Will there always be a market for our milk, globally and domestically? Can we sustain a quality milk price with our current national herd size? What impact will the current safety net have on the industry?  These are just a few of the questions Bozic will address in his presentation at the MILK Business Conference.