Oct 12 2012
Milk in America: Part Two
This article is Part Two of my research on our country’s relationship to milk, specifically the culture surrounding milk, milk pricing, and milk consolidation. If you missed Part One, you can click here to read it. Scroll down to view my final thoughts and a comprehensive list of sources I used.
Milk is produced in all 50 States; in 2003, the top five producing states were California, Wisconsin, New York, Pennsylvania, and Idaho.
Dairy production has exploded in the Western states. Several factors contribute to this: less expensive land, lower production costs, a climate that permits large-scale, dry-lot operations with lower costs, access to hired labor, and easy access to population centers that are markets for dairy products.
Since 1980, milk output per cow has risen by nearly 50 percent while total cow numbers have declined. The number of dairy farms has declined by over 70 percent, while the number of milk cows per farm has more than tripled. According to 2006 figures, the largest 1% of dairy farms (meaning operations that contain over 2,000 cows) produce nearly one quarter of the milk we consume.
Today, four companies control 70% of the nation’s milk supply. These companies are Land of Lakes, Foremost Farms, Dairy Farmers of America (DFA), and Dean Foods.
This consolidation happened for numerous reasons. According to the USDA, adoption of technologies that resulted in increased profits have allowed dairy farmers to increase the size of their operations. Large dairy operations can receive volume discounts on purchased inputs like feed and milk shipping charges. These larger operations can spread the cost of equipment across a larger number of cows.
Ron Schmid is quick to pinpoint what enabled this consolidation to happen:
"[Industrial operations] have done this through monopolization by strategic underpricing of smaller scale competition and by developing a revolving door of corruption between corporate management and the very government agencies charge with enforcing regulations."
Milk Pricing and Subsidies
History and Calculating the Cost of Milk
Because milk is a ‘flow’ commodity – that is, it’s produced and marketed daily – it can’t be priced by the methods employed by other agricultural commodities.
National dairy policy programs have been in existence in different designs for about 70 years. Dairy programs now include price support and product storage, import protection, marketing regulations that set minimum prices and pool revenues for producers, export subsidies, and direct producer payments.
Many of the individual programs that make up U.S. dairy policy were originally designed as a response to the dairy industry in the 1930s, when over 50% of milk production was destined for fluid consumption and many dairy farms were part of diversified farming operations. Today, the largest percentage of milk is used for manufactured dairy products (such as cheese) rather than fluid milk (which now represents 36% of milk utilization). Most dairy farms are not farms at all, but instead, highly specialized industrial operations.
The main dairy programs to be aware of are the Federal Milk Marketing Orders (FMMO), the Milk Income Loss Contract (MILC), and the Dairy Product Price Support Program (DPPSP).
Created in 1937, the Federal Milk Marketing Order establishes minimum pricing rules for the sale of raw fluid-grade (Grade A) milk from the producer to the processor or manufacturer. Milk processors must pay monthly minimum prices to milk producers, either directly to the farmer or to a dairy cooperative. The FMMO price differs depending on the region the milk is processed in. In 2000, the FMMO system was reformed to reduce the number of orders (regions) from 31 to 11, to better reflect natural market boundaries.
FMMO is made up of two systems:
- Classified price: the minimum price that regulated handlers (processors) must pay for Grade A milk. These are minimums: farmers and coops can negotiate prices above if they are able.
- Revenue Pooling: these classified prices are not paid directly to farmers but instead, milk receipts are pooled and a weighted average price is paid to producers. These producer blend prices vary regionally.
The Milk Income Loss Revenue Program (MILC) was created in 2002. The program provides money to dairy farmers when milk prices drop. MILC kicks in when the price for milk falls below $16.94 per hundredweight (there are 12 gallons in a hundredweight of milk). Under current law, dairy farmers receive federal payments that cover 45% of the difference between a price threshold and the actual price of milk after taking into account the price of feed. This means that the Milk Income Loss Contract program won’t cover more milk than what a farm of about 150 cows produces.
To be more specific, MILC is triggered when the FMMO price falls below $16.94 per hundredweight, after adjustment for the cost of dairy feed rations. This payment doesn’t happen frequently. For example, in New England, a MILC payment was triggered in April 2012, the first payment since 2010.
Under the Dairy Product Price Support Program (established in 1949), the Ag Secretary supports the price of manufacturing milk through the Commodity Credit Corporation (CCC) by purchasing butter, nonfat dry milk,and cheese at between 75 and 90 percent of parity. These payments are designed to allow processing plants to pay producers the support price for milk (under the FMMO).
Dairy programs can have countervailing effects. For example, because the MILC program increases producer returns through production-linked payments, production is expanded, contributing to a future falling milk price, while the FMMO aims to create a price floor.
The price support program and the MILC program provide an example of problems that can be caused by conflicting policies. The price support program establishes a safety net floor under milk prices—milk prices are allowed to fall enough to trigger a correction in oversupply (or underconsumption). However, when the market price has fallen toward the price support safety net and the supply needs to be adjusted, the results are partially muted by the MILC program, which, because it provides production-linked funds to farmers, serves to encourage production and negate the supply adjustment.
In 2004, the USDA published a study entitled “The Economic Effects of US Dairy Policy and Alternative Approaches to Milk Pricing". Their analysis found that effects of dairy programs on markets are modest and that forces such as technology, changing consumer demand, and changes in the marketing and processing sectors, are important to the future of the dairy industry.
The Milk Income Loss Contract (MILC) Program expired on Sept. 30, 2012, leaving dairy farmers to face an imminent reality of no financial support until the current Farm Bill is brought to Congress again. As the Farm Bill is currently written, the MILC will have an expiration date of June 30, 2013, before being guided into a “transition period” in which dairy farmers would have the option of participating in MILC, or switching to the Dairy Production Margin Protection Program.
Dairy Subsidies: Out with the Old, In with a New Idea
The Dairy Production Margin Protection Program (DPMPP) along with the Dairy Market Stabilization Program (DMSP) have been proposed to serve as successors to the DPPSP, MILC, and DEIP.
Many industry experts agree on the need for a new system. Farmer Bill Rowell, of the group Dairy Farmers Working Together, has been researching the issues since 2006. As he explains, “When milk is paying good, the signal to the farmer is you better put on more cows to make more milk to make up what you’ve lost. You quicken the pace to oversupply and a deteriorating price."
A voluntary margin protection program, the DPMPP provides direct cash payments to dairymen during periods of time when on-the-farm margins are severely compressed or negative. It will include two components:
- A government-funded “basic program” that makes payments to enrolled farmers when the national “milk-price-minus-feed-cost” margins calculated in the program drop below $4.00 per hundredweight.
- A partially-subsidized “supplemental program” that allows dairies to customize their margin protection. This program includes a premium paid by the dairymen, but provides direct payments when “milk-price-minus-feed-cost” margins calculated in the program drop below a customized trigger (such as $5.00 per hundredweight or $6.00 per hundredweight, etc.)
The Dairy Market Stabilization Program (DMSP) provides a direct incentive for dairies to temporarily cut back milk production when those on-the-farm margins reach severely compressed or negative levels. An important caveat is that the DMSP only applies to dairies that decide to sign up for the government funded and subsidized DPMPP.
The triggers for the DMSP are the following:
- When the actual national margin is below $6.00 for two consecutive months, producers will receive payment for the higher of 98% of their production base or 94% of the current month’s milk marketings.
- When the actual national margin is below $5.00 for two consecutive months, producers will receive payment for the higher of 97% of their production base or 93% of the current month’s milk marketings.
- When the actual national margin goes below $4.00 in a single month, producers will receive payment for the higher of 96% of their production base or 94% of the current month’s milk marketings.
The goal of these proposed programs is to protect farmers against losses and to eliminate big price swings. If farmers enter into these voluntary programs, they will agree to production limits based on the amount of milk they’ve historically sold. A national board will meet each quarter to decide to increase or decrease milk production. If a farmer wants to milk more than his allotment, he can, but must pay an access fee that will go into a pool for farmers who are milking within their quotas, to compensate them for any money they may lose in a slightly over-saturated market. As an example, a farm with 100 cattle over five years would pay $3,250 to cover 25% of its milk and $11,700 to cover 90%, which is the maximum level of coverage. The quotas are suspended if they drive up U.S. milk prices to the point where they aren’t competitive in the world market.
In 2004, The Government Accountability Office (GAO) released a report on the dairy industry to Congress. In the report they highlighted multiple programs to reform the dairy industry, including something similar to the proposed quota program. They cited several drawbacks to the quota system:
As quota shares reduce production, consumer prices could increase. While demand for fluid milk products is relatively price inelastic, higher prices could reduce long-term consumption by providing incentives to purchase substitute goods.
From Cow to Grocery Store
From the cow, milk typically travels to a dairy cooperative, to a fluid milk processor (production of fluid milk products), to a dairy product manufacturer (production of dairy products other than milk), and then to a retail store.
If you break down the retail price of a gallon of 2% milk between the years 2000-2004, farmers received 46% of the price, cooperatives 6%, wholesale processors 36%, and retailers over 12%.
Cooperatives are owned by producers (farmers), and one of their principal functions is providing members a market for their product. Some dairy cooperatives’ only function is to market milk to fluid processors and dairy manufacturers, and negotiate the best price for their members (these are known as “bargaining” cooperatives). Other cooperatives are also the processors and manufacturers of the dairy products.
Of course, things don’t always work in a farmer’s favor, as in the case of Dairy Farmers of America, a cooperative notorious for tactics that have left farmers with no choice but to join. The New York Times reports that “the D.F.A. would sign exclusive supply agreements with milk bottlers or buy the bottling plants outright, often in areas where it had few if any members. The dairy farmers who supplied the plant could then either join the cooperative or find somewhere else to sell milk. In a time of rapid consolidation, there often weren’t any other plants within a reasonable distance."
Dairy farmers receive a price for raw milk. Dairy farmers selling raw milk to manufactured or fluid milk processors regulated by an FMMO receive an average, or “blend,” price that is the weighted average of the prices of Class I through IV milk. Dairy farmers located in one milk marketing order sometimes ship their milk to another order to obtain a higher price
After receiving the raw milk, each organization involved in the processing and marketing of fluid milk adds value to the product and retains a portion of the difference between the farm and retail prices. This difference is known as the price spread.
The quantity of raw milk that dairy farmers supply to the processor is determined by a slew of factors including the operating costs of producing that milk, such as feed (this is typically the highest cost), fuel, equipment, land, and labor, as well as the price that farmers expect to receive for milk (the FMMO price).
Requiring manufacturers and processors to pay minimum prices for milk was intended to balance the market power between producers and processors. Yet, as technology has accelerated (with advances in milk handling, storage, and marketing), processing plant size has risen in inverse proportion to the decline of both processing plants and smaller farms.The number of fluid milk processing plants has declined continuously, while the average volume processed per plant has increased.
The increased size of dairy farms and processing plants, and the declining share of smaller dairies, has raised concerns about competition in dairy markets and the viability of small farms. The rise in supermarket mergers in the 1990s created incentives for fluid processors to further consolidate to meet the demands of large retail accounts (like a Walmart or Kroger). Pressure from these high-volume retailers, large restaurant chains, and food processors have incentivized dairy processors and manufacturers to grow even larger to serve customers.
The Price You Pay
Unlike wholesale milk prices, retail prices (what you and I pay) are determined by market forces of supply-and-demand. There is often a large variance in the retail price of milk from one store to another and among different regions of the country. This is because of differing “markups” to the wholesale cost of milk applied by supermarkets, mass merchandisers, convenience stores and other retailers.
The GAO reports that three key factors influencing fluid milk prices at the retail level are retailing costs, consumer demand, and market structure. As detailed above, a handful of fluid milk processing firms have changed the market structure of the dairy industry at the wholesale level. This increased concentration of fluid milk processing firms can increase the price at which fluid milk is sold to retailers because market concentration can provide these processors greater bargaining power. Increased market power can also benefit processors in their negotiations for raw milk supplies from cooperatives and independent farmers. In essence, as concentration grows at one marketing level, it is likely to be replicated at other marketing levels. As the GAO report explains:
High market concentration at the retail level can lead to greater concentration at the fluid milk processor level, and higher concentration in fluid milk processing can, in turn, lead to higher concentration at the cooperative level. One fluid milk processor that we spoke with stated that retail concentration has resulted in retailers preferring only one supplier, requiring a processor to have multiple plants in order to supply a retailer who serves many markets.
Year-Round Pastured Milk and Our Country’s Relationship to Dairy
How much milk do we really need in our diet?
According to Mark Bittman, the Department of Agriculture’s recommendation for dairy is three cups daily-1½ pounds by weight- for every man, woman and child over age nine.
Bittman has documented his own struggles with milk and how much healthier he felt when he drank less of it (and of course, knew the source of his milk). Since first writing about milk, Bittman has shared that he’s received a multitude of emails from people outlining their experiences with dairy, and health problems as varied as heartburn, migraines, irritable bowel syndrome, colitis, eczema, acne, hives, and asthma.
Selling, along with consuming, milk and other dairy products, whether it’s good for you as an individual or not, is now an all-American task, Bittman says.
In an ideal situation, consumers could access milk from fully pastured cows year-round. But, in nearly every geography of the United States (with the exception of parts of California), there are times of year where it’s not advisable or even beneficial for a cow to be on pasture all day. We’ve been raised to think of milk as a year-round product, instead of a seasonal staple like watermelon or zucchini.
Even raw milk dairies like California’s Claravale Dairy don’t keep their cows on pasture year round. Instead, they pasture their cows during the natural growing season and then supplement the cows’ diet with hay, grass seed, and produce during the rest of the year. They illustrate it this way: after a cow grazes on pasture, the pasture matures and dries out. The cow continues eating “pasture” but this time in the form of dry grass: hay. When the pasture begins to mature again, it forms seed heads, with the nutrition concentrated in seeds. So just like the pasture works in a cycle, the cows “graze” on the pasture in a similar cycle.
Claravale also notes a key difference between pasturing beef cattle instead of dairy cows. They state that beef cattle do fine on pasture alone as they only need to gain a few hundred pounds of weight in their life, while dairy cattle have to produce thousands of gallons of milk each year in addition to gaining weight.
Just as we preserve fruits and vegetables through pickling and jamming and freezing, traditional cultures preserve dairy through cheese and fermented milk products like yogurt and kefir, enabling them to enjoy the nutritional positives milk can bring in the off-season.
If the idea is to think about milk in a more seasonal way, and to increase the number of small pastured dairies, one’s thoughts immediately go to amount of pasture needed to support the cows. Industrial proponents argue that pastured dairy requires an unsustainable amount of land; Nicolette Niman Hahn responds that “we would have to reduce the total number of animals produced [from our current industrial system] — at least somewhat. But I like to point out that when you’re raising animals in confinement, you end up using a lot of land — the animals just aren’t on it. You still have to raise the crops to feed those animals and then you have to re-apply the waste to land."
The idea of viewing milk in a more seasonal way is even gaining traction on food message boards like Chowhound. One discussion I found highlighted the fact that pastured milk is “always going to be seasonal” If we think about the seasons and weather, it should be apparent that a farm can strive to be “perfectly pastured” but be able to be flexible in that assessment.
If you reached the end of this article (congratulations!) my hope is that the content answered more questions than it created. Before I sat down to learn more about dairy, I vaguely knew how complicated the system was – which was exactly why I carved out so much time to learning about it. But I was unprepared for how multi-layered all of the regulations are, how entrenched we are in our current system, and the scarcity of easily accessible information on dairy pricing and marketing. Even articles that discuss dairy tend to gloss over FMMO, MILC, and the new dairy proposals in the Farm Bill. With the amount of physical labor dairy farmers have to put in each day, I wonder how many of them even have the time to dig through the paperwork. It’s perfectly fitting that one 200 page document I combed through proclaimed itself as the “easy-to-read summary” of a very complicated system.
My personal relationship with milk remains similar to what it was in New York; I’ll drink it on top of cereal or use it in a recipe if it comes from a dairy I trust. Oregon’s local dairy options are not as wide ranging as New York’s. I haven’t researched why this is the case, but one hypothesis is the state’s proximity to California. Another hypothesis is that pasturing dairy cows is probably difficult to manage in the rainy season (November through May). The Portland Farmers Market is home to one local dairy farm, Mulino’s Lady Lane Farm. Lady-Lane Farm milks forty five Jersey cows, feeding them a diet of pasture, alfalfa, and brewers’ grain. The farm is not certified organic, though they don’t use hormones and only use antibiotics when the cow is ill. Lady Lane milk is pasteurized at a low level (145 degrees) and is non-homogenized. During the times we don’t buy Lady Lane, we buy milk from California’s Straus Creamery (no relation to Nathan Straus), a larger certified organic dairy, comprised of several smaller dairy farms.
Finding access to pastured, locally manufactured dairy products is particularly challenging. When I’m looking for heavy cream or butter, I find that I have to rely on Organic Valley because there’s no smaller producer available to me.
When I decided to learn about our milk system, I was prepared to dedicate a chunk of time to the task; I wasn’t prepared to spend over 100 hours of researching and writing (which doesn’t even count the time spent reading “The Untold Story of Milk"). As my research deepened, I encountered a mix of vague information, confusingly worded legislation, or no information at all. While I wasn’t surprised to find myself digging through GAO and USDA studies and reports, I was overwhelmed by their density.
Information on dairy for the general public isn’t accessible – and it should be. I know more about dairy pricing and pasteurization than before, but with the introduction of new subsidy regulations, about which there is currently very little information to find, I know I’ll be starting from scratch when the new Farm Bill is passed.
Although I’ve been eating seasonally and locally, I hadn’t been viewing milk as seasonal. In our country, cows aren’t raised and milked seasonally. As I continue to support local dairy, I would like to talk to dairy farmers about their lives in this complicated system – and their ideas on what can change.
It’s clear that we need to strive towards a system that enables more small dairy farmers to raise cows on pasture profitably, with processors to process their milk and with retailers that will sell it. Doing so will require not just regulatory overhaul, but also the reversal of decades of cultural attitudes – in fact, a return to the world that Henry Coit and the clean milk movement envisioned over a century ago. By seeking out and buying milk from small dairies and co-ops, experimenting with drinking milk seasonally, and fighting for access to raw milk, we can each take small actions that help make that better world a reality.