By Dave Natzke
Public knowledge of a Dairy Farmers of America (DFA) request for increased milk production bases in the co-op’s Western Marketing Area has drawn angry reactions from dairy farmers suffering through a period of prolonged low milk prices. Dairy Profit Weekly talked with DFA’s Glenn Wallace, Western Area chief operating officer, and John Wilson, DFA’s senior vice president, marketing and industry affairs, to discuss the rationale behind the request.
Wallace admitted the letter has struck a nerve at a period of severe economic stress in the dairy industry. At the same time, changing marketing conditions – and the anticipation of improved prices – warrants the call for more milk in California, he said.
DFA, like other California dairy co-ops, established production bases in late 2007 and early 2008 to address state milk production levels that were far exceeding processing and marketing capacity. More recently, DFA established a base program in Colorado (Mountain Area).
DFA’s base program doesn’t restrict a producer’s ability to produce milk, Wallace explained. Instead of spreading marketing costs of excess milk over all members, the base program subjects those who produce over their base to the true cost of marketing the excess milk.
“DFA, CDI, Land O’Lakes and Security Milk Producers established base programs for their California producers, capping how much milk they can produce individually without being subjected to costs associated with marketing excess milk,” Wallace said. “Production was so extremely high in California, there wasn’t a home for the milk. It was going on the ground, to calf ranches, and being condensed and shipped all over the country.”
“The base programs are driven by local supply relative to local plant capacity,” Wallace continued. “This wasn’t part of an effort to manage national supply. In early 2008, California was producing more milk than there was plant capacity. A lot of milk had to be hauled out of state to keep it off the ground. The base program has been effective.”
Bases were originally established – not on marketing needs – but on 2007 historical individual milk production levels. “We felt that was fair, because if producers wanted to grow beyond the base, we felt they should bear the added cost of marketing that milk,” he explained.
Since then, DFA’s milk and dairy product demand and sales have grown, without an adjustment in base.
“We now have more market than we have base,” Wallace said. “DFA’s Western Area is very short of milk to meet the commitments we have on a daily basis.”
As a result, DFA has been purchasing milk from other co-ops – including California Dairies Inc. (CDI) – to meet demand. However, CDI has a new 5 million pound-capacity plant coming on line by the end of January 2010, Wallace said, and DFA expects CDI to redirect milk currently supplied to DFA to its own plant, resulting in further DFA milk shortfalls.
Other conditions have also changed, the DFA leaders said.
Wallace said demand for Class 1, cheese and other value-added products is improving in California. At the same time, the decline in California milk production in areas where plant capacity is located has created an imbalance in demand and supply.
Wilson said DFA’s creation of an Ingredients Division means the co-op will resign from DairyAmerica – a nine-member federated company marketing nonfat dry milk powder – at the end of September. DFA will then begin marketing its own nonfat dry milk in an effort to provide a full line of dairy products to customers.
In response, a Sept. 3, 2009 letter to DFA’s 350 Western Area members asked them if they were interested in increasing individual milk bases. Members had until Sept. 18 to respond. Wallace said several members were caught in the middle of expansion plans when bases were established in early 2008, and some have expressed interest in higher bases. If producers request a base increase, they will have until June 2010 to meet that commitment. If they do, the adjusted base becomes permanent.
Bases were in the news earlier this year, in a different context. As recently as early June, CDI had proposed reducing California milk production by 5%, asking DFA, Land O’Lakes and Security Milk Producers to join in that effort. Collectively, the dairy organizations agreed California production would decline at least 5%, without base reductions.
California milk production was down 3.5% from year-earlier levels in the first quarter of 2009, and down about 3% in the second quarter. USDA estimated preliminary July 2009 production was down 5% from July 2008, and it will likely be down about 6% in August (USDA was scheduled to release August milk production estimates on Sept. 18). DFA Western Area member milk production was down 6.5% in August, Wallace said.
Wilson realizes a request for increased base might be sending mixed messages to U.S. dairy producers. He doesn’t, however, expect the request for more base to have a negative psychological impact on dairy prices.
“We don’t want to confuse the dairy situation today with the forward-looking plans for our members in California,” Wilson said. “We need better prices, and if we don’t get them soon, it will be a disaster. It already is a disaster. We’re looking for milk when prices improve into the future.
“Today’s milk supply and consumption is pretty much in balance nationally,” Wilson continued. “The problem is in inventories of American-style cheese and powder. If we got rid of 100 million pounds of cheese and 100 million pounds of powder, the price situation would be greatly different. Part of it is also the fact milk production per cow has been resilient. Summer temperatures in the middle part of the country were extremely mild.”
Given economic conditions, Wallace doesn’t anticipate an enormous rise in base, and expects the need to buy milk from other sources to continue.
“It’s all dependent on price,” Wallace said. “I don’t expect to get more milk if prices don’t improve. If we go another 90 days where we’re at today, in my opinion we’ll have dramatic fallout in California. I’m talking to dairy producers on a daily basis who have lost $4 million to $10 million this year so far in cash flow. They’ve also lost a lot in equity. We’re approaching a point of no return for many producers.
“In the future, we anticipate the milk price will improve,” Wallace added. “If it doesn’t, we won’t have any milk. We do not have any expectations producers will continue to produce at $10/cwt. But I have to give our members the opportunity to grow first.”