The past year might be best described using a term I found from Jens Orback, executive director of The Global Challenges Foundation: 2022 was a year of “colliding consequences.”
From domestic politics and economic policies to the Russian-Ukranian war and a pandemic that lingers, individual and institutional decisions were seemingly on a collision course for much of the year. The consequences will continue to be felt in 2023.
2022 by the numbers
After a year of declining cow numbers in 2021, the U.S. dairy herd began to rebuild in 2022. The USDA’s monthly Milk Production report estimated U.S. cow numbers had reached about 9.42 million head in November (the latest estimate available at Progressive Dairy’s year-end deadline), the most since August 2021.
Texas led all states in year-over-year herd growth in November 2022, up 30,000 head from a year earlier, followed by South Dakota, Iowa, Idaho and Georgia. Cow numbers in those five states were up a combined 85,000 head compared to a year ago. Compared to a year earlier, cow number declines were heaviest in New Mexico and Florida, down 13,000 and 11,000 head, respectively.
The strong milk prices and tighter supplies of cows and heifers pushed U.S. average prices for dairy replacements to their highest level in more than six years. U.S. replacement dairy cow prices averaged $1,730 per head in October 2022, up $20 (1%) from July 2022 and $390 (29%) more than October 2021. Although it’s the highest quarterly average since July 2016, October 2022’s average price was still 18% per head less than the last peak of $2,120 per head in October 2014.
With the building herd and modest gains in milk output per cow, the U.S. began producing more milk than the same month a year earlier in July, with growth extending through the end of the year. Even with that growth, however, 2022 milk production was up only about 0.3% from 2021 and up just 1.7% from 2020.
Strong prices but tighter margins
On the surface, dairy incomes were strong in 2022, as milk prices moved to historical highs. U.S. average all-milk prices topped $27 per hundredweight (cwt) in April and May and will average more than $25.50 per cwt for the year.
Below the surface, skyrocketing feed prices and higher costs for nearly everything else took a bigger bite out of those higher milk prices. One margin measure, the Dairy Margin Coverage (DMC) program, showed baseline feed costs for all feed components (alfalfa hay, corn and soybean meal) also moved to record highs in one month or another in 2022. National average total feed costs hit $16.22 per cwt of milk marketed in August and averaged about $14.81 per cwt of milk marketed for the year (January-November), up more than $3 per cwt from the year before.
DMC program indemnity payments were issued in only two months, August and September, with 2022 payments estimated at about $84.6 million. (December 2022 DMC margin and potential payments won’t be announced until Jan. 31, 2023.) That’s in stark contrast to indemnity payments in 2021, which totaled nearly $1.2 billion.
Interest, operating costs higher
Meeting on Dec. 13-14, the Federal Reserve Board raised interest rates by 0.5%, boosting the federal funds rate to 4.5%. The increase was the seventh of the year. Based on quarterly lender surveys from Chicago, Dallas, Kansas City and Minneapolis Federal Reserve districts, interest rates on all agricultural loans rose throughout the year, in some cases reaching decade highs.
Outside of feed – and not factored into DMC margins – other costs were also higher. The November index of prices paid for commodities and services, interest, taxes and farm wages was 11% more than November 2021, machinery costs were up 13%, the fuel cost index was up 22%, and fertilizer prices were 20% higher than November 2021.
The USDA’s October quarterly Farm Labor report showed 2022 U.S. gross farm wages were up 7% compared to a year earlier. That might have been the good news. When it came to labor, many producers couldn’t find it.
The weather stayed dry in the West
Beyond economics, the drought continued to impact dairy and agriculture, especially in the Western half of the U.S. And while year-end rain and snow provided optimism for 2023, most of 2022 was dry in the West.
U.S. Drought Monitor maps showed about 56% of all alfalfa hay acreage was classified under drought conditions to start 2022. That grew to 66% by March before improving to 41% in June. Conditions deteriorated into mid-September (54%) and late November/early December (69%). The drought trendline was similar for all hay acreage, sending Western hay and alfalfa hay prices to record highs.
Drought maps also reflected dry conditions for the nation’s dairy cows. Nearly 50% of all dairy cows were located in areas considered under drought to start and end 2022, with a slight improvement in June through mid-September.
FMMOs: Disorderly conduct
Based on historical trends, milk marketing through the Federal Milk Marketing Order (FMMO) system was again somewhat disorderly in 2022. This year, however, it was the high value of butterfat, yielding strong Class IV milk prices, that had the greatest impact on pooling and depooling.
Class IV milk prices averaged about $24.48 per cwt in 2022, about $2.50 more than the Class III milk price average of about $21.96 per cwt. Widest spreads hit $4.71 and $4.81 in August and September.
With that price disparity, Class IV handlers kept their higher-valued milk out of FMMO pools. Based on utilization estimates, Class IV milk will represent about 10% of all milk pooled in through FMMOs in 2022, the smallest percentage since 2013. In contrast, Class III milk utilization averaged about 53% of all milk pooled in 2022, the highest percentage since at least 2010.
Corresponding with the wide Class III-IV milk price spread, an expansive gap in monthly advanced Class III and Class IV skim milk pricing factors also affected FMMO class and uniform milk prices. Those factors, used in calculating Class I base prices, created another uproar over the Class I mover “average-of plus 74 cents” pricing formula, implemented in 2019.
That formula change resulted in monthly Class I base prices that were lower than they would have been under the previous “higher- of” formula in nine months in 2022, peaking at -$2 per cwt in October. The economic impact on uniform milk prices within individual FMMOs depends on Class I milk utilization in each FMMO.
The drumbeat for change grew louder, with both the National Milk Producers Federation (NMPF) and American Farm Bureau Federation (AFBF) saying they’ll seek a return to the higher-of Class I mover price formula when (and if) a FMMO hearing gets underway.
Besides the Class I mover formula, there was a lot of discussion regarding changes to the FMMO system during 2022. After meetings for more than a year, the NMPF board endorsed a proposal that discontinues including barrel cheese in the protein component price formula; updates milk component factors for protein, other solids and nonfat solids in the Class III and Class IV skim milk price formulas; develops a process to ensure make allowances are reviewed more frequently through legislation directing the USDA to conduct mandatory plant-cost studies every two years; and updates dairy product manufacturing allowances contained in the USDA milk price formulas.
Priority issues identified by AFBF were similar, but also included tightening pooling provisions, simplifying milk checks and using modified bloc voting on rules impacting FMMOs.
Dairy policies under FMMOs and the 2023 Farm Bill will be dominant topics in the year ahead. Whether modifying or reforming FMMOs, heat from producers does not necessarily generate speed. Once dairy organizations petition for a hearing, the process will take upward of 12-18 months, with public notices, invitations for input, formal hearings, analysis of input and initial recommendations, comment periods, issuance of a proposed rule and referendums within each FMMO.
It seems like ages ago, but some dairy producers did see financial assistance in early 2022 related to the Class I mover and unanticipated financial losses created during the COVID-19 pandemic. While USDA set aside $350 million for Pandemic Market Volatility Assistance Program (PMVAP) payments, who received them and how they were disbursed is unknown because all payments were issued through participating cooperatives and other milk handlers and cited as proprietary information.
Domestic consumption strong
Whether at home or returning to restaurants and schools, U.S. consumers continued to add more dairy products to meals and snacks. Latest annual USDA data from 2021 follows long-term trends: U.S. consumers ate more dairy in the form of cheese, butter and yogurt, while the long-term decline in the consumption of fluid milk persisted.
U.S. per-capita consumption of dairy products (on a milk-equivalent, milkfat basis) jumped nearly 12.5 pounds from 2020 to 667 pounds in 2021. It was the largest year-over-year increase since 2015-16. Per-capita dairy product consumption has risen 23 pounds in the past five years, from 644 pounds in 2016 and was up 99 pounds since 1990.
Consumption or American-type cheeses rose to about 16.06 pounds per capita in 2021, thanks to small increases in both cheddar and other cheeses. Per-capita consumption of butter (6.5 pounds) rose 0.2 pound in 2021, a fifth consecutive annual increase.
U.S. per-capita consumption of fluid milk was estimated at 134 pounds in 2021, down another 7 pounds from 2020. Longer term, per-capita fluid consumption was down 62 pounds (roughly 7.5 gallons) since 2000. As a percentage of total U.S. dairy product consumption, fluid beverage milk slipped from nearly 46% in 1975 to about 20% in 2021.
Exports and trade
Through October 2022 (the latest available at Progressive Dairy’s deadline), U.S. dairy product exports had been on a growth curve, with monthly exports higher than the same month a year earlier for seven consecutive months. That growth could be attributed to both higher dairy product prices and the U.S. position as a reliable supplier to the global market.
Through the first 10 months of the year, the value of 2022 U.S. dairy exports stood at $8.08 billion, already an annual record. Exports on a milk solids equivalent (MSE) basis exceeded 18% between February-October 2022 and were on track to surpass 2021’s record of 17.3%.
Not everything was smooth sailing. The dairy trade relationship between the U.S. and Canadian governments ended 2022 the same way it began. In late December, U.S. Trade Representative (USTR) Katherine Tai requested new dispute settlement consultations with Canada over compliance of dairy obligations under the U.S.-Mexico-Canada Agreement (USMCA). At the heart of the dispute: Canada’s tariff-rate quota (TRQ) allocations.
Other exports
Two other short notes regarding exports in 2022. Lower supplies of U.S. dairy heifers – in large part to a higher percentage of female dairy cattle bred to beef sires and more heifers kept home to rebuild the domestic dairy herd – pressured exports of U.S. dairy replacements to their lowest annual level since 2016, and nearly matching a 15-year low. Other factors in the downturn included unfavorable exchange rates, high vessel charges and geopolitical worries related to the Russia-Ukraine conflict. While inquiries for U.S. dairy replacement heifers continued to come in from Pakistan, Egypt, Qatar and Vietnam, prices were at levels international customers were not willing to pay.
Another export market tracked by Progressive Dairy and Progressive Forage covers dry hay. With strong demand for alfalfa hay from China, exports in that category moved to new record highs in late summer. With weaker demand from Japan and other major markets, exports of other hay softened, however.
Environmental regulations
From international conferences to local zoning ordinances, agriculture is increasingly facing more environmental pressure from regulators and activist groups. Here’s a look at some of them that came under the microscope in 2022.
- WOTUS: On the final business day of 2022, the EPA and U.S. Army Corps released a final rule establishing a definition of “waters of the U.S.” (WOTUS). The rule establishes the definition of which waterways (intermittent streams, ditches and wetlands) may be subject to restrictions under the Clean Water Act, essentially restoring protections that were in place prior to 2015. The announcement comes before release of a U.S. Supreme Court ruling on a lawsuit (Sackett v. EPA) expected in early 2023.
- Air emissions: Initiated in the EPA’s 2005 Air Compliance Agreement, the EPA finally released its draft of “air emission models for dairy” in 2022. The models estimate ammonia, hydrogen sulfide and particulate matter emissions from barns and lagoons on dairy farms. Once all models have been reviewed and revised, the EPA will release them for a formal public comment period. After the models are finalized – possibly in mid-2023 – the EPA plans could use them for animal feeding operations to self-determine if their emissions trigger environmental permitting requirements.
- Climate and the SEC: While regulations are frequently focused on risks related to water and air quality, the U.S. Security and Exchange Commission (SEC) may be getting involved in regulating the economic risks. A proposed rule would require certain climate-specific “disclosures” in SEC business registration statements, financial statements and annual reports to identify climate-related financial metrics and risks. The rule mandates public companies to disclose direct and indirect greenhouse gas (GHG) emissions for their entire supply chain, but there’s debate over whether the proposed rule will reach all the way back to the dairy farm. While farmers and ranchers would not be required to report directly to the SEC under the rule, they provide almost every raw product that goes into the food supply chain.
- PFAS "Superfund" proposal: The EPA is proposing to designate two of the most widely used per- and polyfluoroalkyl substances (PFAS) as hazardous substances under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), also known as Superfund. Under certain circumstances, PFAS pose a potential threat to agricultural properties, operations and, in some cases, family livelihoods. Several U.S. farms have had groundwater and/or soils impacted by PFAS contamination in one of two ways: from the use of fire-fighting foams used at military bases and from municipal or industrial biosolids that were land applied to farm fields.
Politics and elections
From congressional hearings to court cases, much of the year’s political focus was still on fallout from the 2020 presidential election. There were midterm elections, which didn’t fully match predictions. Democrats maintained the slimmest margin in the Senate, while Republicans moved into the majority in the House. That means the leadership of House committees with oversight on dairy and other agricultural issues will be chaired by Republicans, potentially impacting the process, if not the content, of the 2023 Farm Bill.
A last-minute effort to include farm labor and agriculture immigration reform in an omnibus appropriations bill was unsuccessful.
Other developments in 2022
- An issue related to the environment continued to evolve in 2022: Carbon markets. While milk has been the traditional revenue stream for generations of dairy farmers, global demand to improve sustainability measures means carbon markets may grow as an income source.
- The USDA announced updates to school nutrition standards that could extend through the 2023-24 school year. Among the provisions, the rule allows schools to continue to serve low-fat (1%) flavored milk with meals without needing to secure a waiver.
- The USDA began disbursing payments under the Dairy Donation Program (DDP). The $400 million program was created to facilitate dairy product donations and reduce food waste, allowing eligible dairy organizations to partner with nonprofit feeding organizations that distribute food to individuals and families in need. Those partnerships may apply for and receive reimbursements to cover some expenses related to eligible dairy product donations.
- The USDA released a long-awaited “origin of livestock” final rule, establishing uniform standards for transitioning dairy cattle to organic production. The rule closed what many in the industry considered a “loophole,” creating unfair organic marketing practices.
