A happier New Year for dairy?

A happier New Year for dairy? – trends in the dairy industry

Dave Fusaro

More consolidation, less subsidization but stable pricing appear to be dairy’s destiny in 1998

Consolidation. The beginning of the end of government subsidies. The emergence of milk as a marketed beverage. 1997 was marked by a host of changes with effects that will reach far into the future.

The year past saw the creation of three new No. 1 companies: the largest dairy processor in the U.S., the largest dairy company in Canada and the largest dairy cooperative in the world.

Who knows what 1998 will hold? The safe money is on more consolidation and less government intervention, but also on more stable raw material prices – although maybe room for a finished product price increase.

“There’s no doubt we’ve been through another bizarre year for the dairy industry. But the overall U.S. economy seems to be in remarkable and sustainable good shape,” says Mark Stephenson, senior extension associate at Cornell University’s Program for Dairy Markets and Policy, Ithaca, N.Y.

“Consumers want and are able to afford a varied and healthy diet, so I believe demand for dairy products of all types will grow,” he continues. “If things happen the way we expect, 1998 should be a pretty decent year for processors and producers; perhaps a higher-priced year, but without the peaks and troughs; a year when processors possibly could raise prices.”

1998 begins with questions

“If things happen the way we expect…” Stephenson says. He and a number of dairy economists and others in the industry warn that a lot could go haywire throughout the fragile dairy economy if the de-regulation of the dairy industry happens too abruptly – as nearly happened in November when a federal judge in Minnesota threw out Class I milk price differentials overnight.

Annual Commercial Disappearance of Dairy Products

(On milk equivalent, total solids basis; millions of pounds)

1991 1993 1995 1996

Fluid milk 46,412 45,840 45,722 45,982

Butter 7,934 9,147 10,394 10,371

Cheese 59,360 64,377 68,256 70,445

Frozen desserts 11,811 11,614 11,499 11,390

NFDM 4,474 4,378 6,238 6,799

Other 14,165 12,446 12,804 11,579

Total milk 144,156 147,802 154,913 156,567

products

Source: USDA and National Milk Producers Federation figures

Price differentials were developed in the 1960s when the heart of dairy production was in Wisconsin and Minnesota. The “Eau Claire rule” increased the price of Class I (beverage grade) milk according to the distance from Eau Claire, Wis., that it was sold.

Then, early last November, U.S. District Judge David Doty in Minnesota said USDA could no longer enforce the pricing system.

When chaos began setting in and faced with numerous appeals, Judge Doty in December stayed his own ruling until Feb. 15 – in effect giving USDA two months to come up with a replacement for Class I differentials. As of presstime, no plan had been proposed.

Despite being one of the organizations requesting a stay, the International Dairy Foods Assn. says, “The judge was correct in recognizing the unfair and archaic milk pricing system in this country. The secretary (of Agriculture) should hold emergency meetings to deal with this issue.”

So now USDA has one short-term headache and two longer term ones. Regardless of Judge Doty’s decision, the 1996 Federal Agriculture Improvement and Reform Act calls for the Dept. of Agriculture to gradually remove dairy price supports and to reform the milk marketing order system.

The Federal Milk Marketing Orders, a Depression-era system to assure a local milk supply in all areas of the United States and to pay producers a “pooled” price regardless of milk classification, must be reduced from the current 32 orders (geographic regions) to between 10 and 14 by April 1999.

“Reform of Federal Milk Marketing Orders is essential to allow the dairy industry to continue to move toward more market-based pricing and to build stronger markets for its products,” says Connie Tipton, IDFA sr. v.p. “It will also allow for more innovation in product development and product use.

“In addition,” she continues, “government definition of pricing based on product utilization could limit new product ideas. In the end, we believe producers, processors and consumers will all prosper through less regulation and more attention to the marketplace.”

How stable a supply?

Regardless of the federal government, how stable is the milk supply? Experts we talked to were divided on this issue.

The potential for shortages scares Robert Allen, CEO/pres. of Tuscan/Lehigh Dairies, Union, N.J. “In the Northeast, even with the compact, the average age of dairy farmers keeps going up, while the number of cows per farm and per-cow production is not increasing as it is in other regions. They’re

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