Lack of Dairy Processing is Everyone's Problem
Dec 14, 2015
Minnesota might be the poster child for being careful about what you wish. Michigan isn’t far behind.
Just last winter, the Minnesota Milk Producers Association and the Midwest Dairy Association commissioned a study that showed Minnesota was not keeping pace with neighboring states’ milk production. Though milk production was climbing, it wasn’t climbing as fast as neighbors or the country as a whole.
Last summer, the Minnesota Legislature asked the Minnesota Department of Agriculture (MDA) to conduct an all-species assessment of the relative growth or decline of livestock in the state versus its neighbors. The dairy portion of that study was released to me last Friday.
Over the last five years, Minnesota’s dairy processing capacity grew a respectable 1.2 billion lb., or roughly 3.2 million lb./day. That’s nearly a 20% increase in processing capacity.
But regional milk production is growing even faster. In 2010, cheese plant utilization was 93%. This year, it’s running at 96% .
“At over 96% utilization, it is fair to say that cheese plants in Minnesota are essentially full,” says Marin Bozic, a University of Minnesota dairy economist and one of the authors of the MDA study.
There is some under-utilized capacity in fluid milk plants and one Class IV powder plant. But if there’s not a nearby market that wants these products or, more importantly, will pay for them, there’s little sense in manufacturing them.
And here’s the kicker, says Bozic: Minnesota milk production grew nearly 1.5 billion lb. in the last decade. Minnesota’s processing safety valve has always been cheese plants in Wisconsin, South Dakota and Iowa. But milk production is growing even faster in these states.
So everyone is full, and consequently everyone’s basis (the difference between mailbox prices and the Federal Order Class III price) is shrinking. In Minnesota, it has been $1.75 since 2012. In July, it had shrunk to 73¢/cwt.
Enter Michigan. Basis in the “Great Lakes State” is now $2 below what it has historically been, says Chris Wolf, a Michigan State University dairy economist. “It now is 75¢/cwt below the Class III price, and Greenstone Farm Credit is recommending Michigan farmers budget for a 50¢ to $1 basis below Class III for 2016.”
Lack of processing capacity is also the issue. Milk production has grown dramatically in Michigan, up 77% between 1992 and 2014. Plus producers in Indiana and Ohio have also kicked up output. And this past summer, Florida didn’t need nearly as much help to fill dairy cases with fluid milk jugs as normal. So milk from Ohio, Indiana and Michigan that historically headed south to Florida had to find new dairy cases to fill.
Some of that milk did find cheese vats available in Wisconsin. But then the issue became transportation and navigating Chicago’s nefarious freeways. Some Michigan plants had an issue with even getting milk trucks back from Wisconsin before silos at their sites were full again, says Wolf.
There are no short-term fixes to this problem. Yes, some plants can add some capacity. But it will be filled almost as quickly as the concrete dries and the stainless steel welds cool.
Most plants are facing $60 to $100 million plant expansions to add any meaningful capacity, says Bozic. Modern, greenfield plants have price tags of $300 million with another $100 million needed to process the co- and by-products, says Wolf.
A rebound in exports would certainly help the price situation. But bottlenecks across the country are going to limit how much milk can be processed, marketed and sold these next few years.