It is a fact of dairy life that cows don't make milk at exactly the same time and amounts that consumers want milk and dairy products. One of the major responsibilities of the cooperatives, processors, stores and restaurants that sit in between cows and consumers is to somehow sort out the natural imbalances that are going to occur between supply and demand. Mostly it has been cooperatives that do the tricky work in this balancing act.
When supply and demand are out of whack for months in a row, there is a systemic imbalance. It's what causes milk prices to swing up, shortage, or down, surplus. When this situation occurs, it is reasonable to talk about a milk shortage or surplus.
We also have seasonal fluctuations — long in the spring, short in the fall. This has seasonal price implications, but they are very different from the longer-term imbalances that give us big price swings over a three year period.
This is why cooperative-owned plants that make butter and nonfat dry milk, or powder, are called balancing plants. What these cooperatives do is maintain costly plant capacity in times of the year when it is not needed — fall — so that it is available in times of the year when supply is long and demand is short — spring.
The cost of making butter or nonfat dry milk is high when a plant is not fully utilized. This is a cost the farmer-owners bear, and it is not so easy to recoup it in the market.
A very different kind of balancing problem has been plaguing the Northeast and other traditional milk producing states in the Upper Midwest over the last two years. This is sometimes called daily or weekly balancing. This happens when a plant decides to not receive milk on the weekend, perhaps because they want to give their employees the time off or because their customers don't want deliveries.
Think about grocery shopping. Most people buy their groceries on the weekend. Fluid milk plants don't want to process milk on Sunday that their customers can't sell on Monday or Tuesday.
Major imbalances also occur around major holidays when employees want a day off and no one wants to go grocery shopping.
When a cooperative knows well in advance that it will have to find alternatives for a weekend or holiday closing by one of their customers, they can make alternative plans. This isn't necessarily easy or free of added costs, but it is manageable.
When a customer says "oh, did I mention we decided to give our employees Thursday and Friday off for Christmas, as well as shut down the weekend," that's when the cooperative has to really scramble. This is what happened in 2014 and 2015.
Figure 1 shows the total pounds of producer milk dumped or used for animal feed in the Northeast Federal Order from 2009 to 2015. As is shown by the averages for 2011-13, there is a small amount of milk that routinely can't be used for human consumption — it is found tainted with a contaminant or the truck runs in the ditch or something to that effect. This amounts to about one-fourth of 1 percent per year.
Some years this relative amount edges up a bit for economic reasons that don't relate to daily or seasonal balancing issues. The average for 2009 and 2010 shows the bump up during those years impacted by the Great Recession.
The wild changes that reflect a very unusual daily balancing problem occurred in 2014 and 2015. In both those years, some cooperatives were caught off guard by unplanned plant closures that were further compounded by declines in Class I sales across the market and surplus conditions across the Great Lakes states, as well as strong production trends.
There are three solutions available to cooperative marketers when they have a balancing problem:
1. Put the surplus milk in your balancing plant. In this model every farmer shares in the cost of owning that plant.
2. Offer the milk to someone else to use in their plant. This could be a local or distant alternative. This milk is typically sold at a deep discount because chances are good if we didn't really want the milk, other people don't really want it either. The cooperative bears the loss of the discounted sale, knowing they will pay their farmers a full price or as close to it as they can afford. Every farmer shares in this burden, even if it means taking a small hit in their price to ensure all farmers get paid.
3. Don't sell the milk at all, i.e. dump it. This is the last choice and occurs when you have no plant capacity of your own and that the cost of moving to a distant plant is greater than the price you can receive for the sale. Again, every cooperative farmer shares in the cost that comes from not being able to sell all the milk produced.
Owning plants that have low profitability is a tough choice for a cooperative in a highly competitive environment. Financially, dumping milk can be the least-loss choice, but it obviously gets the most public attention. No one writes newspaper articles when a cooperative's butter/powder plant is sitting idle in September, even though it is racking up fixed costs that need to be paid anyway and that may be just as big a financial cost to its farmers.
There is plenty of plant capacity in the Northeast. We don't have a surplus of milk. The challenge is to make it profitable for the processors to use their capacity every day.
We could also talk about whether balancing costs are a burden only a cooperative's farmer members should bear.
Andrew Novakovic is The E.V. Baker Professor of Agricultural Economics at Cornell University. In 1988, he initiated a multi-university program that is now known as the National Program on Dairy Markets and Policy, which he currently co-directs with Dr. Mark Stephenson at the University of Wisconsin. His primary focus is on the economics of dairy markets and policy.