Here is an indisputable fact … at the end of the day the marketplace determines business success. Especially when it comes to supply and demand of commodities.
Have not enough supply and great demand and prices will go up. Have just enough supply and great demand and prices will hold steady if not increase slowly.
But have way way too much supply and dwindling demand and prices and sales will plummet rapidly. And such is the case for the U.S. milk industry which for years have ignored supply and demand forces.
Because the truth is there are too many milking cows in the U.S. while the American public have increasingly decided the answer to “Got Milk” is nope.
The supply-demand imbalance reflects, in part, the management skill of U.S. dairy farmers. Way back in 1999 U.S. dairy cows produced an average of 17,763 pounds of milk a year.
But thanks to better genetics and improved feed rations dairy cows produced an average of 22,775 pounds of milk annually by 2018.
But here’s the rub. Milk production grew 76% from 1975 to 2000 while the national decline in cows was just 18%. That’s a recipe for dwindling dairy profits.
Meanwhile, cow’s milk is no longer favored by Americans who have increasingly sought out less-sugary or plant-based alternatives. In fact the milk alternative market likely will top $18 billion this year up about 3.5% from 2018.
Yes, that’s just a drop in the milk bucket, but clearly a warning sign to traditional milk which is expected to have sales globally of roughly $120 billion this year.
With all that going on the other hoof (shoe) has now dropped with 94-year-old institution Dean Foods filing for chapter 11 bankruptcy protection.
It’s been a brutal year for Dean’s. In the first half of 2019, sales fell 7% while profits were down 14%. As for Dean stock … it fell completely off the table losing almost 99% off this year’s high. Nope that’s not a misprint…99%
Dean’s is in such a pickle that currently can’t meet it’s pensions obligations.
Rabobank and Dean’s other lenders have floated the company $850 million to keep the milk flowing while it tries to sell the company, perhaps to the Dairy Farmers of America cooperative.
In short, Dean’s is drowning in milk. Just how bad is it? Dean’s has posted declining sales in seven of its last eight quarters and has lost money in eight of the last 10 quarters.
Meanwhile, dairy farmers with no market for their overabundant supply are dumping it on the ground. And when farmers are not dumping milk they are going out of business.
USDA reports that 6.5 percent of U.S. dairy farms shut down in 2017.
Putting it bluntly, the cow is out of the barn and unless the milk industry finds a whole lot of new demand rapidly you can expect even more dairy farmers, and milk suppliers to throw in the towel.
It didn’t need to be this way. But for way too long the dairy industry ignored basic economic theory.
About Dave Dickey
Dickey spent nearly 30 years at University of Illinois at Urbana-Champaign’s NPR member station WILL-AM 580 where he won a dozen Associated Press awards for his reporting. For 13 years, he directed Illinois Public Media’s agriculture programming. His weekly column for the Midwest Center covers agriculture and related issues including politics, government, environment and labor. His opinions are his own and do not reflect the Midwest Center for Investigative Reporting. Email him at dave.dickey@investigatemidwest.org.
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