State of the Dairy 2020: Southeast: At a crossroads

With its heavy dependence on the fluid milk market, no part of the country is a bigger cauldron of emotion than the Southeast.

Dave Natzke

Editor / Progressive Dairy

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Ask about producer mood, and responses range from lost patience and frustration to uncertainty with an ever-present dash of optimism.

“It’s been arguably the most challenging five-year stretch I can remember,” said Travis Senn, market research communications specialist with Southeast Milk Inc. (SMI). The co-op has members in six states, mostly in Florida and Georgia, and extending into Alabama, South Carolina, Mississippi and Louisiana.

Influenced by the weather, wide fluctuations in regional milk production create economic challenges for co-ops, especially balancing costs. During the flush periods, there are significant costs in surplus disposal; during short months, SMI purchases large volumes of supplemental milk from long distances.

“Trying to match our members’ milk production along with our customers’ milk demands is extremely difficult in the Southeast given our reliance on serving primarily declining fluid markets, large production volatility due to heat and humidity, and the need for dairy farmers to grow to simply remain competitive,” he explained.

The situation was especially troublesome in 2016-18, and SMI has not paid at least a FMMO blend price in quite some time, Senn said. A lack of over-order premiums has put a strain on producers.

The situation is not quite as dire entering 2020, he said, and higher milk prices are forecast.

A $2-per-hundredweight (cwt) increase in milk prices in 2019 over 2018, and the anticipation of another $1-$1.50-per-cwt increase in 2020, is helping provide some optimism, according to Calvin Covington, a retired dairy co-op executive and Southeast dairy consultant who analyzes dairy in three FMMOs – the Southeast, Florida and Appalachian. The outlook is further improved as co-ops work together to restore over-order premiums. Is it enough?

“Patience of playing the waiting game has all but ceased,” Senn said. “Producers don’t just want but need prices to recover for a prolonged period of time. The final few months of 2019 brought some much-needed price recovery, but for many, it was simply too little, too late.”

Borden and Dean bankruptcies

Declining fluid milk sales are creating “extra” fluid processing capacity, a factor Senn said he believes contributed to Dean Foods and Borden Dairy filing for bankruptcy.

Covington describes the extent of concern: There are 40 fully regulated fluid milk plants in the 10 Southeast states, 18 of which are owned by either Dean or Borden. About one-half of the fluid milk in the region is purchased by plants in bankruptcy, adding uncertainty to future markets.

“This uncertainty is causing angst with our members and with our cooperative in general,” Senn said. “We are hopeful these bankruptcies won’t drag out for an extended period, no matter what the final outcome might look like.”

“Adding to the processor challenge is increasing competition among grocers, with many using fluid milk as a loss leader to attract customers,” Covington said. “For the Southeast to stop its milk production decline, it will take an increase in locally processed milk sales. History shows that milk production only increases in areas where there is a growing and profitable market for local milk production.”

Compared to a year earlier, the 10 Southeast states had the largest decline (5.1%) in milk production of any region in the country in 2019, Covington said. It was the largest year-to-year drop since 2003. Only one state, Georgia, increased production in 2019 over 2018. In 2019, Class I producer milk was 5.5% below the previous year, falling below 10 billion pounds.

The Southeast’s heat and humidity affects feed quality and quantity, putting more reliance on sourcing shelled corn and proteins from outside the region, adding production costs. An occasional hurricane doesn’t help. Annual milk production data shows recovery from Hurricane Irma took almost two full years. And in severe cases, weather forces plant closures and halts milk movement – even though cows keep producing.

Finding and retaining qualified employees continues to be a huge challenge facing dairy farmers, Senn said. And like the rest of the country, consolidation is reality in all segments of the industry, including producers, processors and retailers.

For SMI’s Senn, many Southeast producers are at a crossroads. However, he doesn’t believe dairy is dead.

“The past five years have beaten many producers up so bad they have begun questioning their long-term livelihood altogether,” he said. “Many considering expansion not too long ago have put any such plans on hold. Some dairy farmers continue exploring diversifying their operations – whether that involves increasing beef herds, developing added-value milk processing and/or looking at other options for their land investments.”

Dairy farm struggles in the Southeast are creating more fragile partners in allied industries as well, said Albert DeVries, professor of dairy management systems at the University of Florida. Florida is now down to about 75 commercial dairy farms.

Dairy isn’t dead

“The anti-dairy entities love to spin the story for their agenda,” Senn said. “This could not be further from the truth. While it is true fluid milk continues to be in a decline, total dairy product consumption continues to rise.”

“The Dean Foods and Borden Dairy bankruptcies certainly raised some eyebrows, but I believe this to be a shift in who controls the processing plants rather than the ‘death of dairy.’ We are seeing companies develop high-protein, low-sugar and lactose-free products. I expect to see more innovation drive the fluid dairy category forward. Other bright spots include increasing exports, rising cheese consumption, sports drinks utilizing protein and whey products, whole milk’s comeback and flavored milks – notably chocolate,” Senn said.

Covington noted that the Southeast, especially Florida, has had its challenges with anti-dairy forces alleging animal welfare issues on dairy farms.

“Those challenges will probably not go away, but dairy farmers are in a better position to meet them today,” he said. “One of the more positive activities to educate the public and school kids on dairy and the importance of dairy are the mobile dairy classrooms.”

Initiated in Georgia, the mobile classrooms are reaching other states, including North Carolina, Virginia and beyond, reaching thousands of consumers. They help put a positive face on dairy and allow dairy farmers to answer consumer questions, one on one.

DeVries, whose responsibilities include teaching an introduction to dairy science course to non-dairy undergraduate students, said they are very interested in animal welfare and environmental footprint of dairy. “As a dairy industry, we need to get this right. We need to be greener to have a good story.”

Georgia: Looking for reform

Farrah Newberry, executive director of the Georgia Milk Producers, describes the mood entering 2020 as “prudent.” She’s encouraged by producers’ willingness to learn about new technologies and risk management tools while remaining frugal and paying down debt. Many producers are watching the success of the state’s first robotic dairy as a positive solution for labor issues. Construction for a second robotic dairy is underway.

Like others in the Southeast, Newberry does not believe the region’s dairy industry is on its deathbed. Starting the new year, dairy farm exits have slowed.

“Georgia producers believe that if promoted differently and branded better, milk can hold steady and come back,” she said. A recent fluid milk promotional campaign conducted by the Georgia Agricultural Commodity Commission for Milk and Kroger, called Milk Makes Amazing, resulted in increased sales.

With the need to balance milk movement both in and out of the state, transportation is a big cost concern, said Newberry. Southeast producers are currently paying $4 per mile to move a tankerload of milk.

Part of the answer to keep the Southeast viable in the dairy industry is FMMO reform to grow local markets, she said.

“A system shouldn’t be structured to put a good operator out of business,” Newberry said. “If that’s the case, then something systemic is wrong and this needs to be addressed.”

North Carolina: Tempered hopefulness

Further up the eastern coastline, in North Carolina, the number of Grade A dairy farms fell about 7% from 2019 to 2020. However, North Carolina State University Extension associate Brittany Whitmire describes the mood as “tempered hopefulness.” With the expectation of improved prices, combined with heifer inventories coming into the production pipeline, she anticipates the state’s cow numbers will be up slightly in 2020.

“Thankfully, the blend price is looking up compared to last year at this time, and we finished 2019 with strong domestic demand. With nonfat dry milk stocks low and our seemingly insatiable appetite for cheese, we are looking at futures prices with more promise than dread this year – and that’s a welcomed change.”

Like the rest of the Southeast, North Carolina must adapt to shifting demands and a declining fluid milk market, she said.

“Farmers’ greatest challenge is not in producing more or better products as much as it is in ensuring they have a strong market demand for the products they’re really good at producing,” Whitmire said.

“Milk that leaves the region and passes by – literally, not just figuratively – comparable milk coming into the region based more on policy than direct market signals creates inefficiencies,” she said. “Milk supply that fluctuates drastically throughout the year with an inverse pattern to market demand compounds the problem. All of these factors impact dairy farmers and processors in our area, and the biggest hurdle for surmounting the challenge is wrapping our collective minds around what consumers are demanding – today and in the future – and how we’re going to adapt the supply chain to produce it.”