It’s a move forced upon many dairy farmers due to the incredibly sharp demand drop caused by the coronavirus pandemic.
In fact, the supply chain — the process by which a product is moved from point A to point B — pressure is similar to that which caused oil prices to plummet to record lows. There’s no demand to match the growing or steady supply.
Storage capacity is full, and consumption is waning for both goods. A big difference, however, is that oil doesn’t spoil like milk does. When there’s nowhere for the product to go, in proper storage oil can, for the most part, sit and wait. Dairy cannot.
There’s a limited time that milk can sit waiting to be moved to the next step. Also, cows must be milked.
The Texan spoke with Texas Association of Dairymen (TAD) executive director, Darren Turley.
“Most people don’t realize that the springtime is when the dairy industry ships the most milk, and so this pandemic couldn’t have come at a worse time,” Turley stated.
Cows tend to inseminate more often in the fall, Turley added, and so by spring they are, and have been, producing milk regularly as birthing rates increase.
Consequently, when the demand dissipated at their peak time of business, some dairymen in Texas had to dump raw milk that couldn’t be shipped to processing plants.
However, because the residential demand has remained steady, the harm beyond that initial hit to the industry has been largely mitigated. Turley added that the dumping of fresh milk is no longer happening in Texas and he does not foresee a need to do it again down the road.
Turley said that while milk has been affected, the markets for other product categories such as cheese and butter have been damaged even more.
The dairy industry’s production model, like most food industries, relies on not only a diversified mix of retail and commercial consumption, but on various product categories themselves: fluids (i.e. milk), cheese, butter, and powder.
While the demand for the retail-based product has never been higher, the commercial demand has evaporated as restaurants and schools have seen closures.
TAD says that restaurants consume half of the cheese and butter in America. And due to the lockdowns, that consumption has all-but vanished.
According to a market report, Turley said the demand decrease equates to 1,100 loads (between 7,000 and 8,000 gallons make up a load) of milk per day that would otherwise be used to make cheese.
And that doesn’t include the other product categories.
Because of this, the milk industry is looking at “flooring” the price through the summer months, or setting in place a price from which the tradeable value cannot drop below. The current proposal would institute a $15.68 per hundredweight (cwt) price, which is below the 10-year average of $17.53 but still well above the projected average price through the summer of $11.93.
Cwt is roughly equal to 100 pounds and is the measurement used for commodities trading of dairy.
Turley added, “Once things start to open back up, the demand and prices will begin to recover, but the question is how quickly will that happen?”
While Texas’ dairy farmers are certainly hurting, Turley says the burden has been cushioned because of how their supply chain is set up. Dairy farmers themselves typically sell their product to what is called a “cooperative” — put more simply, a middleman — which then negotiates contracts for distribution of the product to producers of the varying categories.
The reason for this model is that it balances revenue for the dairymen more evenly throughout the calendar year. For example, if one dairyman produces solely for ice cream, then his revenue would be high in the summer but low in the winter. The “cooperative” model levels that out.
In response to the demand plunge, Texas’ dairy producers are trying to reduce production any way they can, which, due to mother nature, is not as simple as turning off a spigot.
These efforts, Turley says, are working and should prevent any further dumping.
He added that the federal government is not compensating them for the dumped product, but because of the “cooperative” model, “no one dairy bears the economic load of the loss.”
According to Turley, an aid package from the Food and Drug Administration (FDA) — similar to other coronavirus relief-related packages — is in the works.
Whenever the demand does recover, Turley said that since the dairy industry has not been hit by the plant closures other food industries have, the readjustment time needed won’t be so extensive.
Dairy is not the only supply chain being affected by the coronavirus. Tyson Chicken’s CEO recently warned that “limited supply of our products available in grocery stores until we are able to reopen our facilities that are currently closed.”
Texas Farm Bureau president, Russell Boening, told The Texan, “Our nation’s food supply chain is not designed to withstand these unprecedented disruptions. Ripple effects throughout the food supply chain reverberate most intensely at the farm and ranch level where the raw product is produced.”
“Texas farm and ranch families are doing their best to survive this crisis, while remaining committed to producing food, fiber and fuel for our country,” Boening added.
Turley concluded by stressing that consumers should not be concerned about dairy product shortages on store shelves.
Since there is currently more than enough supply, Turley stated, “The consumer is really not going to feel this. We’re going to have plenty of cheese for your pizza and hamburgers.”
“But there’s no way for a dairy producer to all of a sudden decrease production by, say, 20 percent. And so, the producer’s profits will be hurt, but the consumer will be safe.”
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Brad Johnson is an Ohio native who graduated from the University of Cincinnati in 2017. He is an avid sports fan who most enjoys watching his favorite teams continue their title drought throughout his cognizant lifetime. In his free time, you may find Brad quoting Monty Python productions and trying to calculate the airspeed velocity of an unladen swallow.