US dairy farms disappear due to rising costs and pricing problems

While the number of dairy farms has decreased, the average herd size (the number of cows per farm) has increased. Today, more than 60% of all milk production takes place on farms with more than 2,500 cows.

This massive consolidation in dairy farming is impacting rural communities and making it harder for consumers to know where their food comes from and how it is produced.

As a dairy specialist at the University of Tennessee, I get asked all the time: Why do dairies go out of business? Well, just like our friends’ Facebook relationship statuses, it’s complicated.

The problem with pricing

The biggest complication is how dairy farmers get paid for the products they produce.

In 1937, the Federal Milk Marketing Orders, or FMMO, were established under the Agricultural Marketing Agreement Act. The purpose of these orders was to establish a monthly, uniform minimum price for milk based on end use and to ensure that farmers were paid accurately and on time.

Farmers were paid based on how the milk they harvested was used, and it still works that way today.

Is it bottled milk? That’s Class 1 pricing. Yogurt? Class 2 pricing. Cheddar cheese? Class 3 pricing. Butter or powdered milk? Class 4. Traditionally, Class 1 gets the highest price.

There are 11 FMMOs that divide the country. The Florida, Southeast and Appalachian FMMOs focus primarily on Class 1, or bottled milk. The other FMMOs, such as the Upper Midwest and Pacific Northwest, have more manufactured products such as cheese and butter.

In recent decades, farmers have generally received the minimum price. Improvements in milk quality, milk production, transportation, refrigeration, and processing have all led to larger milk volumes, longer shelf life, and greater access to produce in the United States. The increased supply has reduced competition among processing plants and lowered overall prices.

These improvements in production were accompanied by higher production costs, such as feed, farm labor, veterinary care, fuel, and equipment.

In 2022, researchers at the University of Tennessee compared the price received for milk in different regions with the primary costs of production: feed and labor. The results show why farms are struggling.

From 2005 to 2020, the revenue from milk sales per 100 pounds of milk produced ranged from $11.54 to $29.80, with an average cost of $18.57. For the same period, the total cost to produce 100 pounds of milk ranged from $11.27 to $43.88, with an average cost of $25.80.

On average, this meant that a single cow producing 24,000 pounds of milk would bring in about $4,457. However, it cost $6,192 to produce that milk, which meant a loss for the dairy farmer.

More efficient farms can reduce their production costs by improving cow health, reproductive performance and feed-to-milk conversion ratios. Larger farms or groups of farmers, such as cooperatives like Dairy Farmers of America, can also benefit from forward contracting on grain and future milk prices. Investments in precision technologies such as robotic milking systems, rotary milking parlors and portable health and reproductive technologies can help reduce labor costs on farms.

Regardless of the size of your business, passion, dedication and careful business management are essential to survive in the dairy industry.

Some regions have seen greater losses than others, largely due to how farmers are paid, meaning the types of milk, and rising production costs in their area. There are some insurance and hedging programs that can help farmers offset high production costs or unexpected price drops. When farmers take advantage of these, data shows they can act as a safety net, but they don’t address the underlying problem of costs exceeding revenues.

Passing the torch to future farmers

Why do some dairy farmers continue to operate despite low milk prices and high production costs?

For many farmers, the answer is that it is a family business and part of their heritage. Ninety-seven percent of American dairy farms are family owned and operated.

Some have grown up to survive. For many others, the transition to the next generation is a major obstacle.

The average age of all farmers in the 2022 agricultural census was 58.1. Only 9% were considered “young farmers,” aged 34 or younger. These trends are also reflected in the dairy world. Yet only 53% of all producers said they were actively engaged in estate or succession planning, meaning they had identified at least one successor.

How to Help Family Dairies Thrive

In theory, buying more dairy would increase the market value of those products and affect the price producers get for their milk. Society has done just that. Dairy consumption is at an all-time high. But the way people consume dairy has changed.

Americans eat a lot, and I mean a lot, of cheese. We also consume a fair amount of ice cream, yogurt, and butter, but not as much milk as we used to.

Does this mean the US needs to change the way it prices milk? Maybe.

The FMMO is currently undergoing a reform that could help stem the tide of dairy farmers leaving. The reform focuses on better reflecting the ability of modern cows to produce greater amounts of fat and protein; updating the cost support that processors receive for cheese, butter, skimmed dry milk and dried whey; and updating the way that Grade 1 is valued, among other changes. In theory, these changes would bring milk prices in line with production costs across the country.

The U.S. Department of Agriculture also supports four Dairy Business Innovation Initiatives to help dairy farmers find ways to sustain their farms for future generations through grants, research support and technical assistance.

Another way to encourage local dairies is to buy directly from a farmer. Value-added or farm-based dairies that make and sell milk and products like cheese directly to customers are growing. However, these businesses come with financial risks for the farmer. Being responsible for milking, processing, and marketing your milk takes the already large task of milk production and adds two more jobs. And customers must be financially able to pay a higher price for the product and be willing to travel to get it.

Elizabeth Eckelkamp is an associate professor of animal sciences and a dairy industry specialist at the University of Tennessee.

This article is republished from The Conversation under a Creative Commons license. Read the original article. The views and opinions expressed in this commentary are solely those of the author.