Production Overload

May 28, 2012 07:30 PM
Production Overload

Western processors implement supply control programs

What do you do with an extra 5.7 billion pounds of milk?

That’s what the U.S. dairy industry has wrestled with this year as the nation’s dairies churn out a record volume of milk. USDA’s projected 201.9 billion pounds of milk for 2012 means the nation will produce 5.7 billion pounds, or 5.2%, more than last year.

To curb the flood of milk that has filled many plants to capacity, several dairy processors implemented supply control programs or cut volume premiums this spring.

"Normally there’s more capacity in the Midwest, but this year, plants are full all over," says Robin Schmahl, dairy marketing specialist with AgDairy LLC in Wisconsin.

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Utah Producer Speaks Out

The Idaho Dairymen’s Association reported in April that milk from California had been "hitting the road and traveling as far as Iowa looking for a home."

"Plants in the Upper Midwest are full because of milk shipments from California and Idaho," says Bob LeFebvre of Minnesota Milk Producers Association.

In California, where the situation has been particularly acute—March 2012 output alone rose 221 million pounds over year-earlier levels—Land O’Lakes took unusual action. Rather than ship its excess California milk elsewhere and accept heavy discounts from other processors, it implemented a three-option plan to cut production among its 235 Golden State members, says Tom Barcellos, a Central California dairy producer and Land O’Lakes delegate.

The effort, which took effect on April 1, extends to June 30. The goal? To reduce daily milk flow into Land O’Lakes’ Tulare, Calif., plant by more than 1.1 million pounds.

One option gave members a premium of 30¢ per cwt. if they reduced their modified temporary base by 6%. That reduced daily milk receipts by 285,000 lb. A second option, which offered an incentive to terminate membership, resulted in Land O’Lakes buying out 17 dairies in Tulare and Kings Counties and cutting the milk flow by 765,000 lb., Barcellos says. Under the third option, members could abide by their March 1 modified base rate and face a penalty of $10 per cwt. on anything over that production amount.

In March, California Dairies Inc. (CDI), the state’s largest dairy processing co-op, sent notices urging members to abide by its internal supply program, in place since 2008.

Producers were reminded they faced over-base charges if they exceeded their allotted CDI production base. Dairy Farmers of America has also put curbs on members’ milk output in Utah.

Increased volume from its members helped fill United Dairymen of Arizona’s (UDA) Tempe plant "to very efficient levels," says CEO Keith Murfield. "Normally, we can handle 200 million pounds of outside milk a year, but this year we’ll only be able to help on a limited scale."

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Land O’Lakes has reduced daily milk flow into its Tulare, Calif., plant by more than 1.1 million pounds.

The heavy U.S. milk supply is largely due to the mild winter, an earlier-than-normal spring flush among herds and high per-cow output. Worsening the West’s strained processing capacity was the closure of a dryer at a Darigold powder plant in Lynden, Wash., after a February explosion. That forced the Northwest dairy co-op to cut operations by 50%. The dryer, one of two at the plant, won’t be operational until spring 2013.

Even before the Lynden plant explosion, Darigold’s parent co-op, Northwest Dairy Association (NDA), had implemented in January a "wildly unpopular" interim production management program, says Jeremy Visser, an NDA board member who operates five dairies in Washington.

NDA normally receives 7.2 billion pounds of milk annually from its 550 members. Recently, NDA’s
milk receipts rose to 8 billion pounds for its fiscal year, which ended in March.

Initially, NDA’s interim program penalized producers $1.50 per cwt. for delivering up to 1.5% above their base amount. If they went over 1.5%, they were fined $5 per cwt. But by late April, NDA "couldn’t ship the additional milk to anyone else because of the steep discounts," Visser says.

Pressured by the Lynden dryer closure and continuing milk surplus, NDA intensified its penalties. In what the Seattle-based co-op says was an "unavoidable and difficult" decision, it announced to members that, during June and July, they will be assessed 100% of the value of any milk that exceeds their base limit.

"Members are angry at the board because we didn’t see it coming," Visser says.

Struggling like many producers with this year’s price downturn, Visser supports NDA’s move. "The market is sending a strong economic message that we can’t process all this milk," he says. "I’m hopeful this [program] will shorten the down period."

Reaction to the supply control options among Land O’Lakes’ California members, Barcellos says, has ranged from anger and frustration over the harsh limits imposed with less than a month’s notice to acceptance and understanding that the controls were needed.

CDI officials say their internal supply management program helped the co-op avoid tough penalties. "CDI’s program was controversial when it was implemented in April 2008, but today members are thankful it’s in place," says Marie teVelde, the co-op’s communications director. "So far this year, CDI has been able to handle all its members’ milk and hasn’t imposed any penalties on members."

The co-op last fall anticipated the ramp-up in milk production and worked to improve the efficiency of its six California plants, notes John Azevedo, CDI’s first vice chairman. CDI did not ship milk out of state for processing, he adds, and its plants ran "flawlessly."

"Production is down to below 50 million pounds of milk per day. It was as high as 51 million pounds," says Azevedo, a Patterson, Calif., dairy producer. "The worst is over."

But for how long? Utah dairy producer John Nye says U.S. dairy producers "must have a growth management [plan] in place or the race to the bottom will continue." UDA’s Murfield thinks the proposed Dairy Security Act, with its voluntary margin protection and supply management provisions, may now appeal to more producers. Schmahl, on the other hand, says, "If we limit production, we’ll limit our share in the world market." Whatever the impact of 2012’s production overload, it isn’t likely to end the debate about a lasting cure anytime soon.

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