World Dairy Leaders' Forum: Dairy Farmers of America
At the World Dairy Leaders' Forum during the IDF World Dairy Summit in Cape Town in November 2012, Jay Waldvogel, Senior Vice President, Strategy and International Development, at Dairy Farmers of America talked about "Feeding the World - The potential Impact of Increasing Complexity and Volatility on Global Dairy Supply”.
The US dairy market is producing 90 million tons milk/year, and has a 1,5% growth. The domestic consumption is not growing that fast, only by 0,5%.
Currently the US has 17% of the world trade, and they export 13,6% and import 3,0% of their production.
Like in most markets there is a consolidation of the farms in the US. 20 years ago there were 130 000 farms, now there are 50 000. With the current rate, in two years time there will probably be 10% less.
The US milk sheds in the last decade have been moving east to west, except for in the north east. The cows are moving away from the people, from the US consumers, but they are located ideally for export. The Southwest is perfect for Mexico and Latin America, while California and the Western coast is ideally positioned for the growing demand from Asia.
But the cows are not only moving; they are also changing business model.
During the last decade the farms in Eastern USA have not grown much and stay at around 100 cows/herd. In the Western USA, the average herd has grown from a bit over 500 cows to almost 1000 cows/herd - a dramatically different business model.
In the US this year, 50% of the milk produced will come from farms with more than 1000 cows. The following 35% of the milk comes from farms with more than 2000 cows. The 500 largest farms in the US, might well produce more milk that the whole of New Zealand.
Jay Waldvogel presented the two different dairy farm models in the US: the Eastern farms, self-contained, much considered a sustainable unit from a social and environmental point of view. And in many cases able to bear some of the challenges and complexity following that, because they are servicing a relatively higher value local domestic market.
The Western model is very different: large, efficient and high quality milk farms, but often with little ground beneath them. They are specialized in the process of making milk. And are these farms economically sustainable? Is this the basis of supplying milk in the future? These are the farms that supplied the growth in the US; they supplied the competition in the global market. These are the farms meant to feed the world, going forward. And the specific challenge that they face is volatility.
Graph on the milk price in the US from the last 30 years:
It went from a very predictable period to one with a healthy level of volatility, to the current position with an extreme volatility. Short cycles, dramatic peaks and dramatic drops.
If there was only milk price volatility to deal with, there are tools available to manage that, but this is not the only issue facing these farms, especially the Western model, where they tend to buy all their inputs.
This is a graph showing feed prices, and it doesn't include the price of fuel cost or fertilizer cost, just the feed element.
Historically, the relative cost of feed has been fairly predictable and low. This supported the Western model, in which you need not make your own feed, it's available on demand. You can focus on just milking cows. But since the market has taken off and the world market has grown, a whole series of things have increased not only the price, but also the volatility of the feed price.
There is a dramatic movement in the margin difference between milk and feed cost.
The orange line across is the average of the last ten years. Waldvogel explained that, in theory, above the line stimulates growth, below it stimulates contraction. There have been huge negative impacts, in addition to the volatility impacts. Increased complexity, tighter margins and extreme volatility are challenging the Western model. Current farmers are unlikely to expand. They have become financially and emotionally weary. The financial institutions think that the Western model used to be very bankable, very secure, but is not anymore. The real challenge for the US is to use that model to expand.
New milk may require new farmers with new business models. Waldvogel explained again that his presentation is US centric, but that he believed it affects other parts of the world equally, or will. He said we have to look at models of change; that it is happening already.
Farmer groups and cooperatives with a strong capital base are looking at how to get further up the value chain, and are starting to mitigate some of these issues. And brands and marketers themselves are moving back down to secure supply for exactly the same reason. Are the dairy farmers following the same path as for example poultry farmers, and end up being just contract managers?
Or we have to look at structurally higher milk prices, generating higher margins to sustain and grow supply from existing dairy producers. So that they have enough cushion, so that they can manage through this volatility, to manage this complexity. One of these two things will likely have to occur, said Waldvogel, if we are going to assume that we will continue to drive growth in the market, based on supply.
In the last few years, milk prices have become higher, and they have converged. But Waldvogel says that we have to milk to a higher price.
“We can't forget that the renaissance of dairy, the explosion of dairy in the emerging markets is based on low cost milk. It was driven by efficient fresh grass production in New Zealand. It was supported by subsidized milk from the US, supported by heavily subsidized milk from the EU. When that mother in Asia, or in the Middle East for the first time had some disposable income, and wanted to buy nutrition for her child, she bought an affordable glass of milk. But will she still do that if milk is much more expensive? Is there a threat to milk as everyday nutrition?”
Jay Waldvogel pointed out that it is important that the value chain maintains the ability to be that key everyday nutrition for those emerging consumers, or dairy risks becoming just a high-end protein. He said that the most valuable thing for the dairy industry in his view is the connection to everyday nutrition at the very beginning of life. It's the emotional connection you create between milk and those consumers early on. It's the greatness of the goodness of milk, the power of milk as everyday nutrition.
He ended his presentation by questioning whether we have a sustainable global dairy supply, if we have the right connection between the farm side and the demand side.
“Are we making it too complex in the middle? Are we making the industry so difficult that we run the risk of losing that attachment we're based upon?”