$11 milk. What does that mean to a dairy farmer? How did we get here? What options do dairy farmers have? As someone who isn’t a dairy farmer but is closer to the industry than a lot of my friends and family across the country, these are questions I’ve been asked a lot in the last few weeks. And here’s my attempt to answer them.
Let me begin by saying the situation is tragic. The whole pandemic is tragic. Seeing milk dumped because a dairy cow doesn’t have an on/off switch for milk production is tragic. Seeing people need milk for their families and not being able to get it is tragic.
Let’s start with the basics. Milk is sold off the farm by the hundred pounds, what we call a hundredweight, which is abbreviated cwt. So $11 milk is $11 for one hundred pounds of milk.
How much does it cost to produce milk? Obviously this varies widely by the farm and their efficiency, overhead, labor, etc., but a rough average from the USDA is $17/cwt.
So if a farmer spends $17 to produce their milk and then only receives $11 for it, that’s obviously not a winning formula.
This is the crux of why the dairy industry has been in crisis for the last five years. For 2015-2019, the average price farmers received for milk was under the $17 mark. Farmers had been overproducing and flooding the market and it was a survival of the fittest (or who was most willing to support the farm with off-farm jobs) to see who would survive, resulting in the loss of thousands of dairy farms over that period. But as we neared the end of 2019 and towards 2020, things were looking good with projections for milk prices around $18 for the next year or so.
Then, as we all know, COVID-19 hit. Almost overnight the demand for bulk cheese used in restaurants was decimated. At the same time, people were staying home more so the consumer demand for milk by the gallon went through the roof and we had store shelves empty of gallon jugs. Plants are unable to switch production lines quickly and without massive investment, and cows are unable to be “turned off” when milk isn’t needed so the excess of milk resulted in dumping. The juggernaut cooperative Dairy Farmers of America estimated that 7% of milk nationwide was dumped the first week of April, with dumping continuing until we can recalibrate either through market demand or reducing supply by thinning herds or changing cow management to reduce production.
This is where the $11 milk comes in. You can see here in this graph from Macrotrends that the year started strong, then took a tumble in February, and then really dropped off the deep end as COVID-19 took hold of the country. To make matters worse, when one farmer dumps milk, because it’s not their individual fault that there’s nowhere for the milk to go, the cost of paying that farmer for their milk is spread out across all the other farmers in the region, meaning that the price they actually get could be lower than the already catastrophic market price.
So what’s a farmer to do? They’re at the mercy of the market and if the price drops there isn’t anything they can do, and the larger farms that have the capital to ride out the storm will, continuing the trend of consolidation of the market, right?
Well, that’s how the story gets told, but it’s not entirely true anymore. In fact, there are a lot of options available to dairy farmers to help them survive.
You’ve probably heard of crop insurance. It’s the thing that allows crop farmers to stay in business against the odds year after year through subsidized premiums, right? Well, guess what? There’s subsidized dairy insurance, three kinds to be exact. I’m going to outline the basics of each one in layman’s terms here.
The first is called Livestock Gross Margin-Dairy(LGM-D). This program uses the projected market prices in the futures market for milk, corn, and soy to calculate the projected difference between milk price and feed cost in a given month that is at least a month away from the purchase date. The farmer buys a policy guaranteeing that margin for a set amount of milk for that month, and if the actual margin is smaller than the projected amount, they get a payout. This program is available for up to 24 million lbs of milk per farm per year. It’s the most costly program of the three, but still relatively inexpensive, has its place, and has been around since 2008.
The second is called the Dairy Margin Coverage program(DMC). This is a rehash of an old program called the Milk Margin Protection Program, which was poorly designed and didn’t give farmers the security they were looking for. The 2018 Farm Bill released the new and improved program. For about $0.11 per hundredweight, farmers can guarantee that they will get a certain amount above the average feed cost. For example, in 2016 the average feed cost per hundredweight in Wisconsin was 7.92. If a farmer bought DMC at the highest level of $9.50, they would essentially be guaranteed $17 milk even if the market went lower, and that includes the miniscule premium. This coverage is a great deal, but is mostly useful to smaller farms as it can only be purchased for up to 5 million lbs of milk per year, about the production of 200 cows; yet any dairy farm can cover up to 95% of their milk at a $4 feed-price difference for a single $100 fee per year–it may be only castastrophic coverage, but it’s essentially free.
The third program is called Dairy Revenue Protection(DRP). This is also a newer program, and is closest to traditional crop insurance. There are a lot of variables in this program but the basics are that a farmer can use the futures market to lock in a minimum price they will receive for their milk. They can contract as much or as little of their production that they want at a time, and hedge their bets by watching the market and adding coverage for more of their production as they see fit. They can contract prices for up to 15 months out. If the market goes lower than the price they insured, they get paid the difference. If the market goes higher, no big deal, they’re only out the premium. Price on this varies based on market volatility and how far out one is contracting, but averages around $0.20 per hundredweight (prices in the last couple weeks have been higher due to volatility).
So how do these options sound to you? To me, they sound pretty reasonable. Sure, they may not pay out every year, but that’s how insurance works. Here’s the kicker. LGM-D and DRP aren’t widely used. In fact, LGM-D and DRP usage for the crop year ending July 1, 2020, encompassed less than 15% of the milk produced in this country during that time. Use for next year is increasing with the recent volatility, but still only represents 25% of our milk production. With DRP a farmer could have locked in a price floor at or close to profitable for the whole year a few months ago, but most didn’t. DMC was widely used in its first year of existence but with the projected good prices for this year, fewer farmers signed up and only 12% of annual production is enrolled in the high-level coverage. As for the free catastrophic coverage? Only 31% of production was enrolled for this year, and with $11 milk it may actually pay out depending on crop prices. In contrast, on the corn side of things over 85% of the nation’s corn production is covered by their yield and revenue protection programs. What’s more, DMC can be combined with one of the other two programs to provide extra security.
So what gives? Some producers do lock in actual futures market prices via contracts with brokers or cooperatives, but those offer less flexibility and still have a cost, and I haven’t heard of them being widely used. I’ve heard that farmers don’t want to pay the premium, or they don’t trust the program because they were burned in the past and these programs are new. I suppose the latter is a good reason, and I know full well how tight margins are in farming, but that seems like all the more reason to invest in protecting your bottom line. I’ve also heard, and from a trauma-informed perspective do understand, that after the last five years of low prices farmers just couldn’t believe that it would get bad again quickly and that this had to be the year when things went right, so they gambled with optimism. I feel this one deeply, yet lesson number one in farming is, of course, never bet against Mother Nature.
Dairy farmers are an incredibly hard-working and a ruggedly individualistic bunch, so I understand their hesitation to get involved in government programs. There are some that don’t participate in any programs whatsoever, and I can respect that. Yet now that the market is tanking I see farm and dairy lobby groups clamoring for a larger share of stimulus funds or for the government to purchase more cheese to keep the industry flowing since we already have 1.4 billion lbs of cheese in storage.
I won’t object to dairy products being given to the poor, especially at a time when so many are in need; I do think most industries experiencing losses are deserving of stimulus funds, including dairy. Nor do I object to encouraging people to eat more cheese (because it’s delicious), but the sheer volume of the problem is hard to make up for at the grocery store. (And while dairy was the earliest commodity to experience this crisis acutely, they are not the only ones, I weep for the bacon not being put on cheeseburgers at restaurants across the country that is resulting in the euthanasia of thousands of hogs.) I will also say that due to the much smaller size of their lobby the dairy farmers have been subject to a lot more chain-yanking and hard times than the behemoth that is the corn/soy lobby. But I can’t escape the feeling of dread that so many dairy farms, which have for so long been a symbol of rural Wisconsin life, may go out of business due to this crisis. Could or should they have done more to prepare themselves to weather this storm?