Milk Co-ops Can Play a Role in Managing Supply

Eric Lyons, Lyons Jerseys Toledo, Iowa

Eric Lyons, Lyons Jerseys Toledo, Iowa

Recently, my Dad and I attended the Prairie Farms Co-op district meeting. Despite having recently shut down our milking operation last October, we had a quality award coming and wanted to see our many friends that were in attendance. The meeting was well attended and upbeat. Prairie Farm’s producers seemed pretty positive despite the widespread bloodbath in the dairy production business we have experienced for over the last four years.

Could this unexpected optimism have had something to do with some key decisions that the co-op’s management group made over the last few years?

Yes. Initially, they closed the co-op membership and later instituted a progressive supply-management system within Prairie Farms. There are many reasons that this program has been successful. Several of them have to do with the skill and vision of their leadership team to successfully expand their manufacturing and sales efforts. At the same time, they have limited the costly over supply of milk by their dairyman member-producers.

Supply management seems to generate a lot of negative reactions in dairy circles. However, the extended downturn in mailbox milk prices suggests that current large and small dairy producers take a step back and ask themselves these questions:

  • Who really benefits from our current system of over supply?

The processing side benefits from cheap milk. Co-ops that only supply others with raw milk are caught without bargaining power. Even co-ops that are processing member-owner milk have not been able to generate enough profit to give back to producers adequate dividends to support their stressed farm operations. Assumedly, consumers also win with cheap food prices, though processors and retailers don’t always pass along their savings.

  • What has caused this continual over-supply problem?

We are builders. Dairymen embrace the challenge of operating bigger and better. All our suppliers profit when they sell products that support expansion. Investing in “big agriculture” has been popular with some off-farm investors for tax write-offs and diversity when stocks or other investments under perform.

Dairyman from other countries and states can grow operations in the U.S. when their home country’s regulations won’t allow for expansion, and they generally have ample capital from their inflated land values to spend. However, this continued expansion of new dairies has resulted in more failures of existing operations, costing our agriculture sector enormous amounts of capital, people, and lost rural development opportunities. Wouldn’t a system that allows farmers to decide when to exit the business and receive compensation for their market share benefit both parties?

 

 

  • Will the system that we have now allow me to stay in business?

Not most of you, actually. Judging by other agriculture sectors that have trended toward larger operations with smaller margins, your choices are: leave the industry, become an employee, process product on the farm or form a large corporate structure with outside investment capital. Think about whether staying in the business for your kids’ sake is really doing them a favor. Preserve the equity that you have for other options. Ninety percent of the hogs marketed are under contract. Eggs produced are under “cost plus” contracts. Three or four packers control 80 to 90 percent of the meat processed. Getting the picture?

  • What are the “real costs” of the current system?

Both the obvious and hidden costs of current on-farm losses are devastating to agriculture in general. “Feeding the world” is a noble battle cry for agriculturists, however, most producers don’t want to donate their produce, even though some days it may seem like we are. Current government subsidies are real costs to taxpayers. Failed businesses cost taxpayers. Bankruptcies cost taxpayers. Those dollars could be used to feed the world’s hungry.

  • What can realistically be done to improve milk prices for dairymen?

In a word, supply. Though not as well promoted, the facts are that Americans are consuming dairy products at near record rates. Those pushing for fluid milk promotion dollars often overlook that more dairy is consumed without a glass than with one. Cheese, butter, sour cream, and yogurt are the new dairy reality. Domestic consumption, while always a challenge, is removing its share of product from the marketplace. Simply put, if you live in the real world, there is only one other way to avoid having to trust your livelihood to traders, export marketers, retail food monopolies, or politicians’ foreign policy whims; that is to LIMIT EXCESS SUPPLY!

 

 

Since dairymen cannot agree on how to help themselves, it falls to the government, or in our case ... forward-thinking co-op leaders, to limit supply. While we can make it work in a co-op like Prairie Farms, not all co-ops have the market position to accomplish this. Therefore, forming a critical mass is really only possible with the organizing power of a third party, like our government. Additionally, given the reality of the government’s control over dairy exports, it should fall to them to commit to a volume of milk for that purpose, instead of encouraging over production and pretending that they will allow free trading overseas.

Typically, large producers are not in favor of supply management. Let me approach them in a different way. If you want to expand your operation, wouldn’t you rather have guaranteed minimum margins to service your debt, versus relying on brokers, subsidies, the lottery of export marketing, the ever-diminishing idea that bigger is more efficient, and the prospect that your current investment won’t survive unless you continually expand? Wouldn’t you rather just purchase market share, which holds its value as a resalable equity in the operation, guarantees a fair price, keeps a market for your milk, and doesn’t continually fluctuate year to year?

In Canada, our nearest example, it appears that purchasing market share is in line with what purchasing the farmland next door would cost. It’s a good way to invest in a solid, negotiable asset. Seems most investors would call that a wise investment these days. It might even be a better investment than another cow shed.

Our producers are running from their own shadow. We have never valued our own market share; instead letting others convince us that free enterprise or competition in the marketplace will ensure “survival of the fittest” among the best operators.

Words such as “socialism” and “government in our business” try to discourage progress toward controlling over production. Sorry, but those terms have been used to steal the producer co-ops’ innate market power. Sorry, but only fewer and larger operations will be needed. Sorry, but the “fittest” will become a smaller and smaller number of good operators. Sorry, but this current process is a financial bloodbath for those forced out, which is both wasteful and unnecessary. Maybe our politicians will someday recognize dairy as a great value-added export that could help our country’s balance of trade and become a tool for food aid. For now, we must face reality.

Maybe there is still time to make the dairy industry unique in agriculture once again. We can set an example for other commodities. Talk to your fellow co-op members and leaders. Take a vacation to Canada and visit some of their beautiful, well-maintained dairy farms. Control over production … it works!

Eric Lyons has farmed with Jerseys for 30 years with his father and brother in east central Iowa.  Last fall the family sold their purebred Jerseys and continued with cropping operations.  Eric now owns a small herd of Red Angus.

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