The Return of Tough Times in the Dairy Industry!

By Julie Murphree, Arizona Farm Bureau

Last October, USDA’s National Agricultural Statistics Service came out with its 2011 Arizona Agricultural Statistics. Full of a wealth of statistical information on Arizona’s 2011 year in agriculture, it highlights our major agriculture commodities. Arizona Dairy retained its top spot on the leader board listed at $871 million in cash receipts alone; versus $658 million in 2010.

A year ago Arizona Agriculture interviewed Paul Rovey, owner of Arizona’s Rovey Dairy, chair of Dairy Management, Inc. and President of United Dairymen of Arizona (UDA). “The contrast from 2009 to today is night and day,” Rovey said back then. “2009 was painful, 2010 was our climb out year and 2011 should reflect gains.”

He was correct. The 2011 numbers show gains; however, 2012 numbers won’t be revealed until this coming fall. But even without new numbers Arizona Dairy farmers know too well that the overall industry is hurting again. So recently Arizona Agriculture reconnected with Rovey to understand the current situation.

UDA members represent approximately 90 percent of the milk produced in the state.

Arizona Agriculture: Briefly explain the current situation.

Rovey: It’s really a tough situation in the face of extremely high feed prices. While milk prices have been higher, the price we’re getting for our milk is barely covering our production costs. Earlier, we had about a nine-month period where prices for milk were not covering our costs to produce it especially in the southwest. While the Midwest has a tight setting too it’s not quite as bad as here.

And, if we try to predict the next twelve months, it becomes anyone’s guess.  Recent tracking of the market reflects corn prices coming down. If that continues things would look a little brighter. At the same time, milk supplies are definitely strong. There is no shortage of milk. Exports are reasonable at least for 2012. Yogurts are good and cheeses are strong.

For consumption, overall dairy consumption has been reasonably good but the challenge is we keep producing more and more product, creating more than adequate supply for the consuming market. We’re too good at what we do.

Arizona Agriculture: Why did some report that dairy prices would have a dramatic jump if something wasn’t done to address the Farm Bill? For explanation, Congress approved a one-year extension of the farm bill that had expired last September 30th, heading off a government-mandated milk price increase. The extension also preserves subsidies that even farmers call wasteful and makes plans approved by the U.S. House Agriculture Committee and full Senate last year “moot.” This brings stakeholders and lawmakers back to square one to negotiate in an even tougher cost-cutting climate.

Rovey: The original law [back to 1949] had milk pricing on parity. The support price was at parity. So consequently if you sold milk to support you would do that at the parity price which was at $42 a hundred weight.  But the mechanics of that affecting the milk price on the street when all prices for powdered milk, cheeses, butter are aggregated the result could not have allowed milk, for example, to shoot up since in the cumulative it would have taken months for the price to go up. But it was used as a scare tactic to cause Congress to act.

Arizona Agriculture: What exactly did the Farm Bill Extension temporarily fix?

Rovey: It’s really detrimental in the fact that the proposed farm bill [planned farm bill for the next 5 years] was a good fix and we wish it would have been put in place. The proposed farm bill would have eliminated the support program for dairy and would have put in place an insurance program that the dairy farmers could have utilized. The old support program really doesn’t support anything but put product in the warehouse and extends the pain and agony. The old program is not a true benefit to the commercial dairy industry as we know it today. If the proposed farm bill would have passed it would have put the dairy industry in a competitive world market environment and gotten rid of the old programs that no longer work in our more efficient dairy industry.

The extension did not change current farm bill law; it just kicked it down the road a ways. We’re going back to square one. It opens the door to reworking and changing it. As [congressional leaders] try to pin their personal bells or whistles onto the effort it’s not necessarily a positive thing. The proposed farm bill was more streamlined.  

We were hoping they would have the foresight to plug the revised dairy section into the extension. Ultimately, we’re starting over from the beginning.

Arizona Agriculture: Last year you told me you didn’t know if the volatility in the dairy industry would ever end. What is your core advice for the industry to endure and also thrive in such an environment?

Rovey: Really, dairies that I see across the country that are surviving and thriving are ones either strategically pairing up with hay/feed farmers or farming their own ground to raise their own feed. Partnerships that negotiate a win/win on price and work out volatility are working. Similarly, if you own the ground and farm your own feed you can survive high feed prices. This is a new paradigm I’m seeing where dairies are either building closer business relationships with their partners or farming to produce their own feed. The old model of plunking down my dairy on 80 acres and then dial up my order for feed because it’s cheap is no longer viable. You’re seeing more integrated models. I don’t see feed getting cheaper for a long time or for any length of time. I believe feed will be inherently more expensive from here on out.

Arizona Agriculture: Where are your biggest concerns and what do we need to do to create an environment of opportunity?

Rovey: We must continue to be more efficient. The volatility is not going to go away especially because of what drives our costs. No change in volatility in oil and other commodities so this impacts everyone’s costs.

Part of our volatility is that we have new and different tools. For example, one is “sexed semen.” Today, we can ensure an adequate supply of heifers. Consequently, we no longer come up short on cattle; production is always matching demand and often exceeding it.

Arizona Agriculture: A recent market report shared the continuing decline in milk consumption. What do we need to be doing to reverse such a trend, or at least expand consumer demand in the other mix of dairy products?

Rovey: We have seen a continual slip of fluid and to a greater extent just recently. DMI [Dairy Management, Inc.] has really been working to understand this through extensive research. And while there has been a decline in fluid milk, cheese, yogurt and our other dairy products are up. So you’re seeing a trade off. We now say people are going to chew their milk instead of drinking it.

But that doesn’t mean we’re ignoring the opportunities in the fluid category. We have a lot of opportunity in this segment. To begin, we’re looking at understanding barriers to help solve and change this paradigm. Since fluid milk has had such a tremendous amount of competition we’re competing for a share of the stomach. A few innovative companies in the dairy market are taking a crack at this. The idea is to position milk as health in a bottle. We’re looking at opportunities to fortify the product. Plus, we see a great market for eliminating the lactose in milk for the lactose intolerant. With much of the research conducted, we hope to move to a development phase where we’ve got new products moving online for consumers.

We’re having a series of meetings in the next few weeks to determine our direction based on the research.

Arizona Agriculture: Some in the industry have described this next generation of dairymen to be some of the most proficient yet. Do you agree and why?

Rovey: Partly because of the toughness it takes to stay in this industry. You have to be terribly proficient to stay viable in it, you can’t be second rate. In Arizona we have really good dairymen partly because it’s so darn hard to make milk in this state. This is portrayed across the country. Our young dairymen are going to be very proficient and very competitive. It’s the only way we can be to survive. They are very capable. There is a good future for dairy; we must mind our “p’s” and “q’s.”

Arizona Agriculture: Are you encouraged? I am if we can get the Farm Bill where we get rid of all the craziness and allow us to get out there and make milk.

Rovey: It gets a bit discouraging due to ever-increasing regulations. The continuing challenges with the EPA continue to be an unknown. The agency is currently moving to try and classify the nutrient water and nutrients on our dairy as toxic. They’re not.

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While Rovey is clearly aware of the challenges ahead because of his leadership position with UDA, the milk-marketing cooperative owned by 70 farmers with an average of 1,600 head per farm, he describes the industry’s ongoing efforts as focused on marketing for what the consumer wants and staying engaged. “As it relates to engagement, we’ve just hired someone at DMI for our social media efforts. Overall, we intend to really understand what’s occurring with our consumer markets in order to bring to market what the consumer wants.”