Managing Over-Supply: Is your dairy cooperative stepping up?

November 14, 2016

 

CHIPPEWA FALLS, Wis. — Followers of dairy news have probably heard that Land O’Lakes Cooperative is instituting an over-supply management plan (they call it a “base plan”) for its member dairy farms, to make sure that the supply of milk coming in aligns with their processing capacity. Some Land O’ Lakes members are upset with their cooperative for asking member farms to hold steady at their current level of production rather than expanding.

 

I think the anger at Land O’Lakes is mis-directed. Instead, Land O’ Lakes members should direct their frustration toward Republicans in Congress who, bowing to pressure from dairy processors, stripped supply management from 2014 Farm Bill dairy provisions. If Congress had done its job of managing supply on the market, maybe Land O’ Lakes wouldn’t have had to take this step.

 

Now that Federal dairy policy creates no disincentive for unmitigated expansion, U.S. farmers have collectively added 40,000 cows in the last year, with the most rapid growth happening in the 1,000+ farm size. Average production per cow is also increasing. The result is a lot more milk on the market. Somewhat predictably, prices have plummeted, declining 33 percent since 2014. As a result, U.S. farmers and dairy processors have dumped 43 million gallons of milk this year, and hundreds of farms have gone out of business.

 

I think it’s also fair for Land O’ Lakes members to be a little frustrated with some of their fellow dairy farmers who are responding to the current oversupply problem in the most absurd way possible – by adding more cows. When you’ve dug yourself a hole, the first step in getting yourself out is to stop digging.

 

There are two philosophies with regard to how we as dairy farmers comport ourselves. One is that we can all accept a little market discipline to keep the markets working for all of us, and balance the good of the “we” with the good of the “me.” The other approach is a crazy game of chicken: let’s all produce full speed ahead, every farmer for himself, and see who’s left standing at the end. As one dairy industry insider recently said: “There are farms out there dumping milk and adding cows at the same time,” in the belief that the market will “correct itself” soon enough and then they’ll be on top. Friends, make no mistake: the quickest way for the market to “correct itself” is for small farms to go out of business. Maybe that’s OK with some in the dairy industry, like the DBA lobbyist who told me, “our position is that the market will correct itself eventually, and the less the government intervenes, the sooner that will happen.” As for me, watching Wisconsin lose a dairy farm every day for the first half of the year was not OK.

There is another way. What if we were to accept the idea that if we all sacrifice a little, we would all gain a lot? What if all of our processors and cooperatives adopted a plan similar to Land O’ Lakes, to ensure that we don’t produce way more milk than we need? I think a lot of farmers would be quite content to hold their herd size steady, as long as the pay price was keeping up with the cost of production. How about we don’t shoot ourselves in the foot, and our neighbors in the chest, by producing more milk than consumers want, and driving the price down in the process?

 

It seems to me that any supply management program implemented by a co-op or other processor needs certain elements to ensure fairness for farmer members. A lot of these elements have to do with reasonable advance notice, giving farmers time to plan and adapt:

  • Twelve months advance notice if a co-op is thinking of implementing a base program, and 6 months notice confirming the details of the plan

  • Transparency in contract terms, and assurance in writing that additional transportation or other fees will not be added during the time when a supply management/base program is in effect

  • Equal treatment for all co-op members – no sweetheart deals for high-volume producers

It seems to me that processors also have a right to expect that their member farms will give them some advance notice if they plan to expand. In what other business does a processor say to a supplier, “I’ll buy everything you produce, even if you double your output and have nowhere to process or sell it?”

 

In exchange, farmers who helped to build a cooperative have a right to expect that they will not be dropped from a milk route because they are suddenly too small to be worth coming down the road. Co-op members may want to think about changes to their co-op bylaws that provide for:

  • A certain amount of notice before a farm is dropped from a route

  • An appeal process to the co-op board if a farm is going to be dropped

  • A vote of the membership or a farmer-led advisory board before any farmer is dropped from a route

  • The opportunity for a farmer to recruit other potential members nearby, to make the route more profitable

  • The opportunity for the farm to modernize in order to make the stop more profitable. In the cooperative spirit of self-help, co-ops could even create a revolving loan fund to extend low-interest loans to fellow members who would like to modernize.

And… co-op members might want to make sure that their cooperatives are not going to Washington and advocating against the very supply management that could stabilize dairy prices and make dairy farming profits more steady over the long term.

These are just some ideas that have resulted from my conversations with dairy farmers. I am very interested to know your thoughts! Dairy farmers, please contact me to let me know what dairy cooperatives could do to improve profitability for their members. Is your co-op doing a good job on your behalf, or is there room for improvement?

 

Lastly, be sure to attend the Dairy Issues session at the WFU Annual Convention, Jan. 27-29 at Chula Vista Resort in Wisconsin Dells.

 

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