fedgazette

District dairying faces dramatic change

Edward Lotterman - Agricultural Economist

Published January 1, 1995  |  January 1995 issue

Black and white cows grazing contentedly on rolling green hills, scarlet or cherry barns standing shoulder to shoulder with silver- topped gray silos: These are images that we instinctively connect with the Ninth District's prime dairy areas of Wisconsin and Minnesota. But will those images still be true in another decade or two? Or will all the barns collapse and the silos crumble as dairy production shifts to cavernous metal sheds in semi-arid regions of New Mexico or Idaho, with thousands of cows ushered through industrialized milking parlors, where platoons of low-wage workers monotonously attach milking machines as another generation might have screwed in bolts on a 1930s' assembly line?

Ninth Federal Reserve District dairy producers are in the midst of a quiet crisis. It is a crisis in the sense that a large majority of producers must change their operations dramatically or they will fail. It is a quiet one in that there is little recognition by the general public or the media of the magnitude of change that will be required if milk production and processing are to retain their historic importance in the regional economy.

Unlike during more generalized farm financial problems of the mid-1980s, there are no large protests in front of state capitols, no televised sheriff's sales, no shotgun suicides in pickups parked in distant fields. The dairy farms that go out of business do so with whimpers, not bangs.

It should be made clear at the outset that problems are largely at the farm level. District consumers need not worry that milk will disappear from supermarket shelves or that there will not be any cheese to put on their nachos. If anything, as the U.S. dairy sector continues to become more productive, consumer dairy product prices should continue to decline in real terms. If the milk is not produced here, it will be produced somewhere else.

It is likely that dairy production will respond to this challenge by undergoing a transition that will change its structure and appearance more in the next decade than in the last 40 years. By 2010 Ninth District dairy farms are likely to follow one of two patterns.

The first group will consist of large operations in which 500 or more cows are milked by hired workers in very capital-intensive facilities. Such farms will be few—perhaps five percent of present dairy farm numbers—but will produce the bulk of milk output.

The second group will superficially resemble current dairy farms in that herd sizes will range from 50 to 150 cows and facilities will resemble those currently in use. But these operations will survive by cutting costs to the bone, and their operators will likely have off-farm employment. In some ways they will mark a return to century-old practices with heavy dependence on grazing, less feeding of concentrates and marked seasonality in milk production. This group will be more numerous than the first, but will deliver a smaller proportion of total output.

Some observers would contest the assertion that dramatic changes are necessarily coming down the pike. Dairying is merely continuing a process of declining numbers and growing farm size that has been going on for a century, they say. Upper Midwest dairy farming will be fine in the end, just structured in a slightly different way.

Any way you look at it, district dairies lose edge

Skepticism about the depth and extent of dairy producers' problems may result from incomplete perceptions of the situation, like the elephant examined by a group of blind men in the old Indian fable. "It is like a spear," says the one touching the tusk. "No, a snake," retorts his colleague holding the trunk, and so on.

"Minnesota loses three dairy farms a day," says one group. "Dairy prices are too low." "We need bigger dairy farms," say others. "Minnesota farms average less than a tenth the size of successful competitors in states where dairying is growing." "Federal policies are biased against the Midwest," Midwestern congressmen complain. "Milk prices in Idaho or New Mexico are much higher than in Minnesota and Wisconsin." "Milk production is falling," note dairy cooperative managers. "We need to move into other regions or we will lose product market share."

Like trunk, tusks and tail, all these observations are correct, but also part of the same animal. Farm numbers, size, policies and production are all facets of a single complex problem: The dairy sector in the Upper Midwest has failed to innovate or to adapt to change rapidly enough.

The bulk of dairying in the Ninth District takes place in Minnesota and Wisconsin. There are dairy farms in each of the district states, but the combined milk production of Montana, North Dakota, South Dakota and the Upper Peninsula of Michigan is less than one-fourth that of Minnesota and the 26 Wisconsin counties in the district. Moreover, while Minnesota-Wisconsin output grew until recently, production in the district's other states has stagnated for decades. Therefore this analysis will focus largely on Minnesota and Wisconsin, though many of the general patterns visible there also are valid in the rest of the District.

A first glance at dairy statistics for the dairy industry seems to support the view that changes in the district's dairy sector are simply the continuation of a long-term trend. The number of district farms with milk cows has declined since early in this century, but especially in the last 50 years. In 1992, there were only 17 percent as many dairy farms in the 26 Ninth District counties of Wisconsin as in 1940.

Furthermore, this decline reflects a drop in the total number of all farms and increasing specialization in livestock raising. Instead of each farm having milk cows, hogs, beef and poultry, farms became progressively more specialized in one, or perhaps two, livestock enterprises. Thus total numbers of milk cows did not decline at the same pace as farm numbers. Moreover, improvements in dairy management and technology meant that total milk production continued to climb until quite recently.

But when one delves deeper, Minnesota and Wisconsin's fundamental problems become more apparent. The average California cow produces 30 percent more milk than her counterpart in Wisconsin. This disparity results from the Upper Midwest lagging behind in a technological race.While overall milk output in the district continued to grow in absolute terms until 1985, the district had begun to lose its relative edge earlier. Wisconsin and Minnesota had historically enjoyed greater technical efficiency than the national average; production per cow was substantially higher than the national average. But by the 1930s, dairy farms in Southern California had higher output per cow and more cows per farm than those in the Upper Midwest.

Enjoying a dry, mild climate and ample supplies of high quality alfalfa hay grown under irrigation, California milkers set a standard that Midwestern farmers could not meet. California's output largely went for fluid consumption in San Francisco and Los Angeles, and did not compete in the manufactured product market until well after World War II. But the large-scale, hired-labor, purchased-feed model typical in California set size and efficiency standards that the Midwest has yet to match.

As long as these large operations met mostly local needs, the absolute and relative dominance of Wisconsin-Minnesota dairying was not threatened. But this Southwestern dairy model proliferated while milking in the Upper Midwest stagnated.

Not only did Ninth District milkers slip relative to California, but they lost ground relative to the US as a whole. Once among the highest in the nation, over time output per cow in Wisconsin-Minnesota declined relative to the national average. Output per cow dipped below the US average for the first time in 1977, and stayed there from 1985 through 1991. This relative decline occurred even as absolute output per cow rose modestly in the district. The decline occurred for two reasons.

First, the national average rose as small, inefficient operations in regions ill-suited to dairying fell by the wayside. Such farms often existed solely to meet local markets, and as transportation costs fell and dairy processing firms became larger and more integrated, small, inefficient dairies could no longer compete. With the demise of the least efficient firms in many states, the national average would have risen even if more efficient operations in other states had not improved.

But these operations also did improve, and they grew in number. While output per cow in the Upper Midwest was falling relative to the US average, output in the newly emerging dairy states was rising relative to national and Midwest trends. In other words, dairy farmers in California, and increasingly in other Western and Southern states, were innovating and improving at a faster rate then their counterparts in Minnesota and Wisconsin.

The picture is striking. In 1948, output per cow in the large-herd states was at best 1 percent better than Wisconsin-Minnesota. By 1992 that edge had widened to 20 percent. Moreover, the total number of cows in large-herd regions grew. As Southern California milkers were displaced by successive waves of urbanization, most moved to other agricultural areas of the state. But some moved to irrigated land near Phoenix and Tucson, Ariz., Roswell, N.M., and Twin Falls, Idaho. Using the basic technology perfected in what were now Los Angeles suburbs, they pushed these new states onto the national stage in terms of dairy output. Meanwhile, very similar operations were springing up rapidly in Florida and a few other parts of the South and Southeast.

Tradition and policies dull dairy innovation in Midwest

Why did the Upper Midwest slip so badly? Two factors seem clear. First, the ethos of the family farm is powerful in the region. Long- standing traditions and a broad consensus that society was best served by farms of a size where most labor came from family members mitigated against the establishment of the large units that came to dominate the Southwest. Ironically, many large operations in California were started by people who grew up on Minnesota and Wisconsin dairies and went to work in Southern California during World War II. When laid off after VJ Day, they found they could return to the occupation they knew best without going back to the cold and snow of the Upper Midwest. But in a region where the family farm ethic did not prevail so strongly, they quickly moved to large-scale units.

Secondly and most importantly, these changes in the structure, location and productivity of the US dairy industry did not take place in a policy vacuum. Federal dairy support policies effectively shielded Upper Midwest dairy farmers from competition. The market order system was an inherent barrier to inter-regional competition. Even more importantly, federal policies long embodied an implicit promise to support milk prices at levels where most farmers in every region could survive. Legislation in effect since the Great Depression directed the US Department of Agriculture to buy "surplus" dairy products in an effort to maintain farm milk prices at statutorily-specified levels. Throughout the 1950s and '60s, these purchases were episodically large, but government stocks were trimmed through transfers to the school lunch programs or were dumped overseas under Public Law 480, better known as Food for Peace. As long as the federal government stood ready to buy cheese and butter at prices that would ensure the survival, if not prosperity, of most dairy farmers in all regions of the country, Ninth District milkers did not face the consequences of falling behind in the productivity race.

But this isolation from the harsh winds of competition was brought to an end by the cheese and butter mountains of the 1980s and the increasingly restricted federal budget environment of the 1990s. In the 1970s and '80s, government stocks grew to unmanageably high levels, in spite of school lunches, foreign sales and cheese distributions at nearly every senior citizen's center between the Rio Grande and the 49th parallel. Congress cast about for an alternative. Quota systems similar to those used in Canada and the European Union were considered. Ultimately, Congress authorized a buy-out program to reduce dairy output as part of the 1985 Farm Bill. More importantly, the price support level was reduced substantially and was effectively frozen at $10.10 per hundred pounds of milk. Adjusted for inflation, the current support level is less than half of what it was in 1981. Moreover, given the large federal budget deficits, no one expects the Congress elected in 1994 to increase support levels. The harsh reality is that if Upper Midwest dairy farmers cannot make it at current milk price levels, they will probably fail.

Most dairy farms in the South and Southwest evidently will be able to make it at prevailing milk prices; many farms in the Ninth District evidently cannot. Dairying in the district will thrive—or even survive—only if Minnesota and Wisconsin dairy farmers can significantly improve productivity or lower costs or both.

For years, the conventional wisdom was that while Upper Midwest averages were pulled down by small and inefficient producers, the best milkers in the Midwest could compete with the best anywhere else. Cornell University economist Harry Kaiser examined that assumption. "My hypothesis was that the best 20 percent of Minnesota dairymen would be as efficient as top producers elsewhere," he says. "I was really wrong." Furthermore, while the large Western dairies had more workers, their hours of labor per cow were lower.

This combination of higher output per cow and more cows per worker meant that large milking operations in the emerging dairy states could break even at lower milk prices than could farmers in the Ninth District. But in most of these emerging dairy states, milk prices were higher, not lower, than in the district.

The upshot has been that output in the West, Southwest and South has burgeoned, while that of the Upper Midwest has stagnated. Minnesota-Wisconsin production peaked in 1985, and has trended sideways since 1988.

Still time to change

Can Ninth District dairying regain not only financial soundness, but also its national predominance? University of Wisconsin economist Ed Jesse thinks it can. "We are seeing more new operations in the 500 to 600 cow range," he says, "and these operations can compete with any in the Southwest." Cornell's Kaiser agrees, "Changes are moving from east to west," he says, "a significant restructuring in Michigan is already well under way, and it is starting in Wisconsin. Minnesota may be a few years down the road."

Ross Anderson, vice-president for Credit at Agribank, the St. Paul-based farm credit bank, sees a similar trend. "There are more big units going in, in eastern Wisconsin, but they may be moving toward here." Anderson also describes innovative activity by smaller producers. "Around Wausau [Wis.], a number of smaller guys are getting together to build a large operation that they will run together."

The apparent consensus is that 500 to 600 cow operations in the Upper Midwest can be as profitable as any competitors in other parts of the nation. Such operations are three to four times the size of what, until very recently, was considered a large dairy farm for the Midwest. "The economies of scale are such that you really have to get to that size," comments Anderson.

More importantly, the new facilities generally have full-time managers who do nothing but tend to dairy matters. "It turns out that the operations in the West are just managed better," Kaiser says. "The diversified farmer in the Midwest has to take care of crops and perhaps even other livestock enterprises. They are spread too thin, and it just becomes impossible to do as good a job of nutrition and herd health management as someone who does it full time."

Is the traditional single-proprietor, family-labor, diversified dairy farm thus doomed to be a thing of the past? Jesse thinks not: "The traditional dairy farm can compete by cutting costs to the bone. Low input use, rotational grazing and low-cost facilities are all part of some low-cost approaches that seem to be able to make it." Dan Halbach, a University of Minnesota research fellow who has close relatives dairying in both Wisconsin and Arizona, echoes this view. "Up here, we are going to see very large units with mostly hired labor or smaller units where they use rotational grazing, dry the whole herd up the same time each winter, and probably milk the cows before and after going to work.

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