State of the Dairy 2020: Northwest: Apprehension, but a commitment to innovate

“Apprehensive” is the best term to describe the mood of dairy producers in Idaho, according to Rick Naerebout, chief executive officer of the Idaho Dairymen’s Association.

Dave Natzke

Editor / Progressive Dairy

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That apprehension is being fueled, in part, by increasing milk production. While U.S. production growth was subdued in 2019, up just 0.3% from 2018, Idaho trailed only Texas in terms of increased cow numbers compared to a year earlier. The state’s milk production growth, which has averaged about 2% every year since 2013, is likely to come in about 3% higher in 2019 than the year before, based on preliminary data from the USDA.

“We are operating in a unique period of time here in Idaho,” Naerebout said. “Production at the farm level has exceeded growths in processing capacity for a number of years, and the issue is coming to a head. We dumped a significant amount of milk in January, and nearly every organization that buys milk in the state is implementing ‘base’ programs to establish production limits for their shippers. Various strategies are being implemented, but we expect that, once enforced, we will see culling rates increase as producers manage to get below their base to avoid penalties.”

Like most parts of the country, dairy farm consolidation in Idaho is ongoing. While the number of farms exiting dairy was about “average” in 2019, the state’s 425 dairies are now owned by about 300 owners and partners. All 300 are family owner-operators, he emphasized.

Does the supply-demand imbalance and shrinking dairy farm numbers mean the Idaho dairy industry is on its deathbed? “Absolutely not,” said Naerebout, noting that the dairy profile in the state depends far less on the fluid milk market.

“Yes, fluid sales continue to decrease, but demand in cheese, butter, powders and other dairy ingredients are increasing at rates greater than loss in fluid sales to create growing demand for dairy as an overall category,” Naerebout said. “We make ingredients in Idaho, so all expectations are that dairy demand will continue to grow for Idaho’s dairy industry in the coming years.”

A recent $30 million expansion of Idaho Milk Products’ plant at Jerome, Idaho, increased processing capacity by nearly 30%, from 3.4 million pounds to 4.4 million pounds of milk per day. Idaho Milk Products now processes more than 1.1 billion pounds of milk every year, with a focus on milk protein concentrate and isolate, milk permeate and cream. All its milk supply is sourced within a 45-mile radius of the plant.

Idaho enters 2020 with ample supplies of feed and forages. “The winter was a bit warm, so corrals have been sloppy but clearly not enough to impact milk production,” he said. Labor concerns, however, are at crisis levels. Most dairies are running about 10% short of labor needs, and starting wages are in the $16 to $20 per hour range.

Idaho producers seeking to position themselves for the future are trying to figure how to operate in the new reality of having base production limits.

“Those that are making money seem to be putting it into facilities,” Naerebout said. “We have a couple of larger dairies converting from open lots to cross-ventilated freestall barns. They can’t grow production and need to put it somewhere to avoid tax.”

Naerebout said the Dean Foods bankruptcy shouldn’t have a big impact on Idaho producers. There are two Dean plants in the region: one in Salt Lake City, Utah, and another in Boise, Idaho. Both are listed in a Dairy Farmers of America “asset purchase agreement” filed with the bankruptcy court.

“It is easy to focus on Dean’s or Borden’s bankruptcies, but I would contrast those two companies with the success of fairlife and its recent purchase by Coca Cola,” he said. “The main observation is product innovation. Fairlife exemplifies innovation while Dean and Borden seemed to struggle to innovate over the years, and it cost them dearly.”

Darigold investing in fluid innovation

In addition to fairlife, another company making innovations in the fluid market is Darigold. Headquartered in Seattle, Washington, Darigold is the marketing and processing subsidiary of Northwest Dairy Association (NDA), which is owned by about 430 dairy farm families in Washington, Oregon, Idaho and Montana. Darigold handles approximately 10 billion pounds of milk annually, producing a full line of dairy-based products at 11 plants throughout the Northwest.

Its newest product, Darigold FIT, is an ultrafiltered, high-protein, reduced-sugar fluid product launched in the Pacific Northwest market last year. Sales and distribution have doubled in the past six months.

To support further growth, the company will invest $67 million in its Boise, Idaho, facility this year. In addition to expanding capacity, the facility will also produce FIT in aseptic packaging, creating a shelf-stable product that can be shipped and stored without refrigeration.

The co-op’s investment in Darigold FIT is part of an overall commitment of hundreds of millions of dollars under a five-year plan of transformation and modernization, according to Jim Werkhoven, who milks about 1,700 cows near Monroe, Washington. After serving 21 years, he retired from the Darigold board a couple of years ago.

With that investment, a portion of which comes out of producer retains, dairy producers like Werkhoven are approaching the future with cautious optimism, with an understanding patience is required. He said last year’s good cropping season resulted in strong milk production, which is likely to continue to stretch processing capacity for a number of years.

Darigold has had a long-standing production management program that requires producers to pay the cost to move their milk to the next available market when its plants are full. The cost to move over-base milk this year is estimated to be between $5 and $10 per hundredweight (cwt). The program allows the transfer and sale of production base between producers. The market value of base has been as high as $25 a pound in early 2020.

“These factors, coupled with a tough labor market, have led to a lot of disruption in the dairy community here,” said Werkhoven, who serves as an editorial adviser for Progressive Dairy. “Consolidation of the industry continues at an accelerated rate. A number of dairy farmers nearing retirement age have taken advantage of the high value of production base and have sold their herds.”