Cheese Affects the Geographic Future of Dairy Farming in the United States
According to Ben Laine, dairy analyst at RaboResearch, the location of future growth in US dairy production will be closely tied to regional capacity for large-scale cheese processing. Laine discussed a recent RaboResearch article, “Dairy Cow Migration Boosted by Processing Capacity,” in an interview at the World Dairy Expo.
Historically, U.S. production and the location of the dairy herd has been driven by the need for fluid milk from processors serving consumers in high population areas, Laine said. This has changed as the domestic consumption of dairy products has evolved. And while more recent cow movements are driven by multiple factors, one of the main reasons has to do with the growth in processing capacity and cheese production.
Cheese, the driving force behind the dairy’s expansion
Citing the opening of the large cheese-making plant in Michigan, Laine noted that cheese processing capacity was a bit of a “chicken and egg” situation, with processing capacity moving to areas offering large quantities of milk at lower cost.
Now and in the future, the “sweet spot” for expansion of dairy farms and cheese makers will be economies of scale for milk production and buyer availability and processing capacity.
Successful cheesemakers will find “the right balance” between proximity to customers and sources of milk, Laine said. Other factors determining location will include energy costs and availability, labor, environmental regulations, and taxes.
A move to the center
Following USDA’s milk production reports, RaboResearch dairy analysts have mapped geographic shifts in cow numbers across the United States. Their analysis suggests that the American dairy herd is migrating to the center of the country. With the ability to make, store and move cheese over longer distances, the expansion of dairy products is being driven in the Upper Midwestern and Plains states, Laine explained.
He cites two examples: large-scale cheese factories in Clovis, Mew Mexico and St. Johns, Michigan. Both are partnerships with Select Milk Producers, Dairy Farmers of America and Glanbia Cheese. Each absorbs 8 to 14 million pounds of milk per day, the equivalent of the production of 300,000 cows combined. Other Midwestern factories have increased processing capacity, and new large-scale cheese factories are also planned in western New York and Kansas.
“Cheese factories benefit from scale and perform best when operating near full capacity with a constant supply of milk,” Laine said. This indicates large scale operations located in the center.
Growth in cheese capacity extends opportunities for on-farm expansion, also linked to economies of scale. The co-location of manufacturing plants sourcing milk from smaller but larger farms is also changing the dynamics and roles of cooperatives. Economic factors will increase the pressure for a review of Federal Milk Marketing Orders (FMMOs), especially as fluid milk becomes less of a priority in the structure of FMMOs, Laine said.
“Market forces will work through these federal formulas, but not without some challenges and obstacles along the way,” he said.
Laine said that while much attention is often paid to the high capital investment required to build a new cheese factory, the on-farm capital investments for facilities and livestock to meet this demand for milk supply. are also important.
In the United States, implementing core surplus programs within individual co-ops and other processors – or a move to a large-scale national supply management program – could complicate geographic growth.
“In an age of basic excess programs and restrictions on milk production, the geography of the dairy sector depends on where the willing milk buyers are located,” Laine said.
Changing geography does not necessarily mean that those outside the main growth areas will not be able to thrive. However, in the absence of the benefits of economies of scale, growth will require technology to find ways to optimize production on a smaller scale, rather than competing on a commodity basis with the center of the country.
“This will open up more room for innovation, technology and modernization in different ways,” Laine said.
Short term outlook
Laine has identified other short-term factors that will impact the dairy industry as we head into 2022. One of the main areas of focus will be the strength of exports, and more specifically sales to China.
“The strong exports since the start of the COVID-19 pandemic have been one of the factors that have helped support [U.S.] prices. In general, the more we export, the more these markets rely on our domestic prices, ”Laine said. “The big problem we’re seeing now and next year is China. We cannot take this for granted in the future.
“[China will] will never be self-sufficient, but they are increasing their own production and building stocks through imports, so they are due to a slowdown in imports, ”Laine said.
While the impact on the United States is not immediate, it does add a risk of lower prices for powdered milk and Class IV milk in early 2022, he said.
Beyond China, US exports to all markets face challenges, related to more rigid lockdowns and restrictions on coronavirus variants and the impact on local economies.
“Export markets are temperamental, volatile and price competitive,” Laine said. “We can’t be too comfortable assuming this will continue indefinitely.”
Laine noted that the United States was somewhat unique among global dairy competitors, with an increase in cow numbers that began during the COVID-19 market uncertainty and continued for nearly 12 months. Much of this growth was related to purchases of boxes of cheese-rich foods and out-of-pocket payments from the government.
“Many producers arrived in 2021 feeling relatively comfortable and able to withstand the now more difficult economic conditions linked to higher costs, inflation and lower milk prices,” a- he declared.
With the outlook now clouded, “we’re starting to see the herd correct, and I think we’ll see a bit more of a downward correction, at least over the next few months,” Laine said.