Ingredients for the Next Century of Dairy

3/23/2013 7:00 AM

I recently attended the 100th annual meeting of the Pennsylvania Holstein Association. One hundred years has seen a lot of change in this world. It has also seen a lot of change in the Pennsylvania dairy industry. I couldn’t help but wonder, “What will dairy production and dairy farming look like 100 years from now?”

Dairy farming is increasingly looking like most all other businesses. It is competitive, takes a great deal of hard work, and requires a great deal of business savvy to succeed. As recently as 1975, the average dairy herd in both the U.S. and Pennsylvania had fewer than 30 cows. Today, that number for Pennsylvania is nearing 80 cows and well over 150 cows for the U.S. This fact alone reflects how much and how fast the industry has changed.

I also had to wonder what it will require for an industry like dairy to avoid going the way of the pork industry where 80 percent of the U.S. pork production is produced by only a few organizations. Two recent articles published by “Harvard Business Review,” a leading entity for innovative business thinking, speak to this. These articles state that for individual businesses to compete, they need to be good at four basic functions of business management. These areas are finance, budgeting, marketing, and negotiating; each of which is becoming increasingly critical to success in dairy.

Financial management is working to assure the business has adequate cash flow and asset return for future capitalization. Budgeting cannot happen without marketing, something relatively new to dairy. Marketing is the science and art of using the tools to provide some protection from volatility of milk price and feed and input costs. Lastly, negotiating skills are critical when working with so many external stakeholders to our dairy farms. These include conservation and environmental groups, rental ground owners, bankers and lenders, consumers, and more.

Our production industry is dependent upon a growing demand for dairy products. If demand doesn’t grow, and the market for customers doesn’t grow, our industry will go the way of the pork industry. In our case, dairy is different from all other commodities in that milk is arguably the single most nutritious food humans can consume. As world population grows, and global incomes increase, world demand markets grow. So, how does the food manufacturer compete? The second article from “Harvard Business Review” speaks to this very well. Their recommendation is as follows:

“Focus on innovating to create superior value for your chosen customers, not on imitating and matching rivals. Give customers real choice, and price becomes only one competitive variable. But understand that doing this profitably means accepting limits and making tradeoffs — you can’t meet every need of every customer. Nothing is more absurd — and yet more widespread — than the belief that somehow you can do exactly what everyone else is doing and yet end up with superior results.”

We don’t have an industry if we don’t have dairy farmers; nor do we have an industry if we don’t have marketers. Fortunately for us, we have an exchange for dairy where product is traded. Using marketing tools allows us to budget and have some sense of changes and “course corrections,” which may need to happen mid-stream. Managing finances, controlling debt, and maximizing revenue on the income side of the ledger is an ongoing challenge in dairy. Competition drives down price to the low cost producer; challenging all of us to do those things “in the barn” which make a difference at the desk and in the bank.

So, what does dairy look like 100 years from now? I believe following this advice from Harvard Business School will enable individual dairy farm businesses to adapt and become more competitive, enabling them to differentiate themselves and their industry from the way of other agriculture entities. I personally am looking forward to the center playing a role in that change.

Editor’s Note: John Frey is the executive director for the Pennsylvania Center for Dairy Excellence.

Does milk have a lot of untapped potential in today’s competitive beverage market?

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