Cheese wedges.
October 6, 2017

No Short-Term Fix to Lack of Processing Capacity

 |  By: Dairy Talk

Thre are no easy or short-term fixes to the lack of processing capacity in the Midwest or Northeast.  That message came out loud and clear here at the 2017 World Dairy Expo, which wraps up Oct. 7 in Madison, Wis.

Simply building plants to process more milk solves nothing if the resulting dairy products don’t have  a market. And therein lies the rub.

Chris Wolf, an economist with Michigan State University, notes that Michigan dairy farmers are producing about 33 million lb of milk per day. But since the state has only 26 million lb of processing capacity, that extra 6 million lb must be shipped elsewhere.

Consequently, hauling costs and distressed milk pricing on those 100-plus tanker loads of milk have depressed milk prices by about $1.50/cwt since 2015. Michigan has been adding milk production to the tune of 6% each year over the past three years. And while Michigan processors have expanded processing capacity somewhat, no one anticipated that kind of production growth, says Wolf.

Prior to the surge in milk production growth, the Michigan mailbox price was about 33¢/cwt less than the U.S. all-milk price. Since 2015, that difference has been $1.57. “So the basis has been $1.25 less than historical averages,” says Wolf. “If we could add that back in, the return on assets for the average Michigan farm would go from -1% to +0.5%. That’s still not a great number, but it would be better than today.”

Michigan’s excess production is also causing problems in Wisconsin, because some of it is being shipped to the Badger State and processed there. That milk has helped top off Wisconsin plants, depressing premiums and prices here as well. But adding processing capacity in Michigan without a market for those processed dairy products doesn’t really solve anything. “If Michigan builds a cheese plant, it will have implications for Wisconsin because those cheese products will compete with Wisconsin cheese,” says Mark Stephenson, a dairy economist with the University of Wisconsin.

Excess milk production and lack of plant capacity is not only a Michigan problem, Stephenson adds. Wisconsin has about six million lb of extra milk and New York has a surplus of about 3 million lb. The trade spat with Canada, which stopped the export of milk protein isolates to Canada last spring, has contributed about 2 million lb. of milk equivalent to the surplus.

The answer to these problems is increased exports. Currently, the U.S. is exporting 14 to 15% of its production on a milk equivalent basis. The U.S. Dairy Export Council (USDEC) and Dairy Management, Inc. are hoping to raise that number to 20%. If that could be achieved, it would represent a sales opportunity of $2 to $2.2 billion, says Tom Vilsack, USDEC CEO and the former Secretary of Agriculture under President Obama. And it would mean a new home for some 200,000 metric tons of cheese and 450,000 tons of dairy ingredients.

The good news is that increasing exports is based on more than hope alone. USDEC is implementing a strategic plan to grow exports and the industry is committing $4 million in global, targeted marketing to do so. The bad news is that it could take three to five years to get it all done.

“We hope to get there sooner,” says Vilsack. “But if we (the United States) pull out of trade agreements, that would have an impact. There are a lot of moving parts we don’t control.”