The dairy industry could lose $5 billion to $10 billion over the next six months, and farmers could dump a substantial amount of milk in April, as coronavirus shutdowns slash demand for milk products.
Though consumers in stock-up mode have sometimes caused grocery stores’ dairy cases to go empty in recent weeks, dairy farmers continue to produce plenty of milk to meet the country’s needs.
Well more than enough, in fact, because orders from restaurants and schools have largely dried up.
Before the pandemic, about half of all U.S. food spending went to meals away from home.
Retail demand for dairy remains strong, recently posting a 60% increase from the same weeks last year.
But so-called panic buying has tapered off, and the retail gains won’t be enough to make up for the loss of food service contracts, according to the International Dairy Foods Association.
Ominously, net demand for dairy products has fallen 12 to 15% nationally because of the pandemic, said Jennifer Huson, a spokeswoman for Dairy Farmers of America.
Dairy plants are shifting production to meet the changing demand — more jugs of milk, for example, and fewer little butter packets used at diners.
But processors are running short of the cold storage to keep excess inventory, and in some cases don’t have enough workers or the right equipment to meet current needs.
To make matters worse, the contraction in demand comes right as dairy farmers were expecting to dig out of a five-year price slump, and just in time for the spring flush, when cows naturally boost milk production.
Cooperatives are scrambling to find someplace to take their loads — to a powder, cheese or butter plant if not to fluid, just so the milk doesn’t go to waste.
“When you’re seeing the potential for those raw milk disposals, that’s usually a result of all of those avenues being explored,” Huson said.
That potential will be at its peak in the next month or two, and a grim peak it could be.
When milk is dumped in the Northeast, it usually tops out at 1% of that month’s production. “In this case the problem will likely be larger,” said Andrew Novakovic, a Cornell University ag economist.
How much larger is up in the air. In Wisconsin, some think dumping could reach a staggering 10% of production, but Novakovic thinks the problem will be far smaller in New York, where he’s based.
Dairy Farmers of America and Pennsylvania processor Clover Farms are among the entities that have already asked farmers to dump milk.
Mount Joy Farmers Cooperative Association has also dumped some trailers of milk, manager Gib Martin said.
A USDA spokesperson said on Monday that the agency did not yet have data on the volume of disposed milk and, to protect companies’ proprietary information, could not disclose which organizations had dumped.
Losses from dumping could quickly pile up.
The Northeast Dairy Foods Association, a processor trade group, said one load of raw milk is worth about $10,000 to the farmer and a similar amount to the plant and distributors.
“Dairy farmers and processors are having to dump hundreds of loads of milk and are bracing to continue dumping milk as uncertainty continues,” the group said.
Though the milk is going to waste, farmers are likely to get compensated for what they dump, according to economists and Pennsylvania ag officials.
Payment is possible because the losses can be both pooled — spread across all farmers in a federal milk marketing order — and reblended, or spread across the membership of a cooperative.
In short, a lot of dairy farmers will get a little less than they otherwise would have, but those whose milk couldn’t be used at least get something.
“Somebody’s going to have to absorb that cost,” said Marin Bozic, a dairy economist at the University of Minnesota. “For cooperatives, they’ll have to pass it on to dairy producers. They have no internal reserves of any magnitude that could cover this without jeopardizing their core business model.”
Pooled losses are paid at the lowest class price.
Pennsylvania Ag Secretary Russell Redding said he’s still working to verify the details of the pool payments with the federal orders.
Farmers who are told to dispose of milk should be sure to keep good records of the dates and volumes when they dump.
Those numbers will be important for getting compensated for that milk, Redding said on an April 7 conference call hosted by the Center for Dairy Excellence that drew 400 listeners.
With their industry awash in milk, many in dairy are fuming over the purchase limitations posted at many grocery stores.
The signs are an apparent attempt to manage the intense demand of recent weeks, including from supposed grocery hoarding, that has left retailers scrambling to restock.
Redding said he talks daily with food trade groups, CEOs and store managers to understand the supply-chain and decision-making structures that led to the limits — and to urge that the signs be taken down.
He asked Walmart, for instance, to allow its store managers to contact milk processors when dairy products are out of stock and will not be replenished quickly.
Redding said retailers have been apologetic about the purchase limits but see them as a way to keep steady in the chaotic market.
Pennsylvania’s dairy price regulator, the Milk Marketing Board, can’t block retail purchase limits, but Chairman Rob Barley said there’s still a powerful way to sway supermarkets.
“Customers need to tell them that, ‘Hey, I understand your struggle, but we need the product, we want the product,’” he said.
Weis Markets lifted its limits on dairy purchases close to two weeks ago, and demand for milk remains strong, said Dennis Curtin, a spokesman for the grocery chain.
The National Grocers Association considers purchasing limits on high-demand items and household staples to be a best practice during the COVID-19 emergency.
Read a follow-up interview with the Pennsylvania Food Merchants Association, which represents grocery stores, here.
Hank Wagner, a Wisconsin dairy farmer, thinks consumers have not really been hoarding groceries but have simply been adjusting their buying habits in response to the restaurant closures.
“There’s this dramatic increased demand because more people need to get this food through the grocery stores,” Wagner said in a widely circulated Facebook video.
In Pennsylvania, the Milk Marketing Board is taking suggestions for actions it could take to ease the dairy crisis.
The board has made a few moves, such as maintaining March’s price schedule through April to provide some continuity.
And when the governor announced on a Friday that schools would be closed starting the next week, most of the school-bound half-pints had already been filled for the following week. The board allowed that milk to be sold below the minimum price.
Most of the other ideas floated so far have fizzled.
“They don’t really solve the problem. They just kind of change the focus of where the pain is being felt,” Barley said.
Between the lost food service orders and cooperatives’ mad dash to find new outlets for their milk, dairy processors have had a hectic few weeks.
One processor saw its demand double one week and fall to just one-third of normal the next, Barley said.
In some cases, processors have had to dump loads of milk just like farmers, according to the Northeast Dairy Foods Association.
Some dairy manufacturers — such as restaurant-dependent specialty cheese plants — have shut down, though plants that cut big blocks of cheese and package them in consumer portions are running overtime, said Novakovic, the Cornell economist.
In other cases, processing has slowed as companies use social distancing strategies to protect their workers, according to the Pennsylvania Ag Department.
Still other dairy processors are hiring — either to meet booming demand or, as Bozic suggested recently, to be ready in case some of their workers have to stay home because of the virus.
In late March, Byrne Dairy announced that it was seeking full-time workers for all shifts at its plants in Syracuse and Cortland, New York.
“We are extremely grateful to be able to make candy and bless lives during this time of need in our community,” said Wolfgang Confectioners, a dairy-consuming food manufacturer that is hiring in York, Pennsylvania.
Years ago, dairy plants often maintained excess capacity to cover seasonality and balancing needs.
But as the economics have changed, that wiggle room has disappeared.
“If you’re building a plant, you have to keep it full. Otherwise you’re losing money,” Bozic said in a Facebook Live event last weekend.
A rumor has been floating around that Pennsylvania dairy plants were overwhelmed because milk had initially been brought in from outside the area to meet demand. A spokeswoman for Dairy Farmers of America said that the co-op did not do that.
Neil Messick hates to think of farmers dumping milk while supermarkets are less than fully stocked with milk.
After chewing on this paradox with his colleagues at the Messick’s equipment dealership, Messick happened to be given the phone number for Harrisburg Dairies, a nearby independent processor.
He called up and within three minutes he had placed an order for 500 gallons of milk to be delivered to the dealership in Elizabethtown, Pennsylvania.
The plan was to hand out milk to everyone on the staff — a show of support for the dairy industry, where many employees have their roots — and give the excess to a food bank in town.
The experience made Messick wonder if people have been overestimating the difficulty of connecting milk to the people who need it.
“I couldn’t believe how easy it was,” he said.
And indeed, surplus milk might do a lot of good for the growing number of people who have been laid off or seen their hours or wages cut in response to the pandemic.
Since March 15, over 1.2 million people have filed unemployment claims in Pennsylvania alone.
Cooperatives and government agencies are keen to meet the needs at food banks, but there are some challenges.
The Pennsylvania Agricultural Surplus System, or PASS, funds the processing of donated milk and the purchase of other excess agricultural products that would otherwise go to waste.
“The program relies on the same distribution and supply chain that is backed up and lacking sufficient refrigerated storage and workers,” said Shannon Powers, an Ag Department spokeswoman.
Some food banks in the state are using PASS funding to get donated milk processed into cheese, but pantries can only store so much perishable food, and many have spent their state money for this fiscal year, Powers said.
The Ag Department is trying to determine how much money is still available from the PASS appropriation, Redding said.
Blessings of Hope, a food distribution ministry based in Leola, Pennsylvania, is one of the groups that has been getting surplus milk to people in need.
The group accepted milk last week from the Pioneer Milk Producers Co-op in southern Lancaster County, and was getting a shipment this week from the Mount Joy Farmers Cooperative Association.
Two Lancaster County processors, Oregon Dairy and Oasis of Bird-in-Hand, have assisted with the processing, said David Lapp, the ministry’s CEO.
Blessings of Hope is distributing 130 skids of milk a week, up from 40 or 50 before the coronavirus hit.
The organization has also been receiving close to two semi loads of produce a day, and total food distributions have risen threefold or more.
The biggest challenge is getting the money to process the milk donated by the farmer. Processing 10,000 gallons of milk costs about $8,000.
“The food’s available, people that need it are available, but the cash to get it out is where our focus is,” Lapp said.
On top of state and private action, Redding said, USDA needs to make a big purchase of dairy products to trim the surplus.
“We are not prescriptive of what that is. It could be fluid. It could be cheese. It could be any number of products,” he said.
Buying dairy products for food banks is part of the industry’s main request for federal aid, which was released on Monday by the National Milk Producers Federation and the International Dairy Foods Association.
The proposal includes compensation for milk dumped from April to June, forgivable loans to allow processors to keep accepting milk when sales are down, temporary lifting of milk fat restrictions in federal food programs, and permission to serve milk larger than 8 ounces at summertime school feeding sites.
The dumped-milk compensation needs to be enacted as soon as possible, said Bozic, the Minnesota economist. He wants to stem the bleeding and allow time to formulate a more complex response.
Bozic said he generally prefers free-market approaches, but he’s wary of treating the current crisis in the same way as the price slump of the last five years.
“When we ration supply through price, basically we open up everybody’s veins and then figure out who bleeds out first, and then when they retire, then the prices start lifting for others,” he said. “And we’ve lost so much blood the last few years that if we have to do it that way again this year, it’s going to be really painful.”
The dairy trade groups also proposed paying farmers $3 per hundredweight on 90% of their production if they cut output by 10% of their March baseline.
The American Dairy Coalition said this proposal needs to be adjusted by season and region because milk production typically declines in the summer anyway.
Arden Tewksbury, manager of the Progressive Agriculture Organization, thinks the national proposal could help but isn’t the answer.
“The only way we’re going to ever solve this problem is to price milk on the dairy farmer’s cost of production,” he said.
Time to Sign Up?
The plank of the dairy aid proposal that has perhaps gained the most support so far is the reopening of enrollment for Dairy Margin Coverage.
Only one-third of dairy farmers nationally, and just 14% in Pennsylvania, signed up for 2020 coverage under that Farm Bill program.
When the enrollment period was held late last year, the program was expected to pay little or nothing in 2020, but that has changed significantly because of the coronavirus disruption.
Average margins are now expected to be low enough to generate a payment from March to December.
For the year, the projected payment on 1 million pounds of covered production history is about $15,500, or about $14,000 after the premiums are paid, said Zach Myers, risk education manager at the Center for Dairy Excellence.
Nationwide, Dairy Margin Coverage is expected to pay farmers about $450 million this year.
And Dairy Revenue Protection, a USDA-approved insurance plan, could pay over $900 million on roughly a quarter of the nation’s milk production.
“Imagine if we had 50 or 60% of it covered through programs like this, how much more help it would be in a situation like this,” Bozic said. “The infrastructure is there. It just needs to be used.”
Dairy Revenue Protection is probably too expensive right now and will not cover the cost of production for most Pennsylvania dairies, but farmers should learn more about it so they are ready if policies become more affordable, Myers said.
USDA can’t reopen Dairy Margin Coverage on its own. That will take an act of Congress.
And given that lawmakers have already passed a $2.2 trillion stimulus that includes billions for agriculture, it’s not clear that Washington will be ready to dish out more for dairy, Myers said.
Bozic is more optimistic. Fueled by the U.S. government’s ability to borrow huge amounts of money at interest rates of basically zero, the American stimulus package is already far larger than other countries’ efforts.
The scale of current spending signals to him that Congress is ready to do whatever it takes to help industries recover quickly from the pandemic.
While Redding supports reopening the sign-up period, he wants steps that USDA could take immediately to shore up the industry.
He fears the legislative process could take too long for the farmers who find themselves plunging into yet another dairy crisis.
“Time is not our friend at the moment,” he said.
This story has been updated to include a link to a follow-up interview with the Pennsylvania Food Merchants Association.