Silver Lining among the Clouds for Idaho’s Dairies

August 21, 2012 08:13 AM
Silver Lining among the Clouds for Idaho’s Dairies

Despite high feed costs and narrow profit margins, there’s good news for Idaho’s dairies.

First, the bad news regarding the nation’s No. 3 milk-producing state.

In Idaho, dairies representing more than 50% of the state’s milk production are in special-asset status with lenders, says Rick Naerebout with the Idaho Dairymen’s Association (IDA).

Special-asset status means the bank has transferred a loan to its “workout” department for closer scrutiny, which sometimes leads to pulling the loan or liquidating collateral.

Idaho dairies are wrestling with the double whammy of high feed costs and milk prices that are among the nation’s lowest. Feed availability and affordability are particularly big concerns for dairies in the wake of 2012’s record drought, which has gripped much of the nation, shrinking crops and sending corn prices through the roof at $8 per bu.

“Dairy margins are narrow, if existent,” says Naerebout.

2012’s downturn comes on the heels of 2009’s brutal economic downturn, which hit dairies nationwide, says Dr. Scott Brown, agricultural economist with the University of Missouri. “Even today, many dairy producers are still trying to recover from the economic hit they endured during [2009],” Brown says.

Idaho’s dairy industry is not a part of the Federal Order pricing system, and its milk prices don’t reach the levels of many other states. In 2010, Idaho’s All-Milk price trailed the Texas All-Milk price by $2.90 per cwt., says Brown. By 2011, the gap widened even further.

One factor in Idaho’s lower milk prices is its pricing formula. Producers are paid on a cheese yield formula that doesn’t take into account the value of whey in a similar fashion to the federal order minimum Class III price, says Brown. Another reason for the state’s lower prices is that Idaho milk is primarily used for producing cheese, and prices have lagged behind other dairy commodity levels. In addition, Brown says, Idaho’s milk output rate has outpaced milk growth in other parts of the U.S. The local supply and demand situation in Idaho may be contributing to the state’s lower milk prices.

Further, “the distance from Idaho to demand centers for milk and milk products is among the farthest in the country,” Brown says.

But that distance is narrowing, and that’s where things are starting to look up for Idaho’s 560 dairies.

Dairy food manufacturers recently have built new plants or expanded existing operations in the Gem State. Jerome Cheese (part of Davisco Foods), Sorrento, and Gossner Foods all have invested capital to increase the capacity of their Idaho plants, says Naerebout.

“The additional capacity will build competition and ideally will help increase the price of milk,” he says.

Yogurt-maker Chobani broke ground in December 2011 on a $100 million plant in Twin Falls. The company has another U.S. manufacturing plant in South Edmeston, N.Y.

The state-of-the-art, high-capacity production facility in Idaho covers 200 acres and spans 940,000 square feet.

“Chobani’s new plant means new competition from a new player,” Naerebout says. “It brings a value-added product from a company that’s more than a commodity cheese manufacturer.”

Hamdi Ulukaya, Chobani’s CEO and founder, says the company visited numerous possible sites before it decided on Idaho’s Magic Valley. “It was a hard decision to make, but in the end, we chose Twin Falls due to its abundant milk supply, skilled labor force and tight knit local community,” Ulukaya says.

Chobani’s Idaho plant will begin production in October. “The plant’s construction has had a huge community impact,” Naerebout says. “The plant will handle a significant volume of milk.”

In addition, cheese-maker Glanbia Foods broke ground in July on a Cheese Innovation Center and corporate headquarters. Based in Twin Falls for over 20 years, Glanbia will invest $15 million to build a three-story, 35,000 square foot office complex and a 14,000-square-foot research center to support the company’s growing export and new cheese product innovation efforts. The site, slated to open in spring 2013, will initially employ 100 workers with room for expansion.

“Glanbia has a bright future in southern Idaho and we are here to stay,” says Jeff Williams, the company’s president and CEO.

Another part of Idaho’s silver lining, Naerebout says, is that milk processors recently have changed the way they price milk.

“In January of this year, Jerome Cheese significantly increased the prices it pays for milk,” he says. “In April, Glanbia Foods followed suit. Those have been a big help.”

Through the first six months of 2012, Idaho produced 6.69 billion pounds of milk from 553,218 cows. That’s putting production on track to reach last year’s record output of 13.23 billion pounds. Even with the state’s heavy production, its newly added processing capacity and the slowing milk output across the U.S. seem to point to higher milk prices.

“Milk supplies are going to be tight,” says Naerebout. “If there’s any room for optimism, it’s in the hope that milk prices will outpace the increases in input costs.” 

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