According to data reported by the National Farmers Union (NFU), the average dairy farm has shown a positive net income only once in the last decade, in 2014. In 2018, the average value of production exceeded the total cost of producing each hundredweight of milk in only one state, California, and nationwide, dairy farmers lost an average of $3.21 per hundredweight of milk produced. For 2019, total dairy production is expected to increase modestly over 2018, by less than 0.3 percent, and the average all-milk price is expected to increase as well, from $16.26/cwt in 2018 to $18.40/cwt. While the projected 13 percent increase in price for this year is welcome news for U.S. dairy farmers, that level still falls below the average total cost of production for farmers in most of the country.
This situation is largely a result of a persistent mismatch between the supply of dairy products and the demand for them, and is not isolated to the U.S. domestic market. Within the European Union, low dairy prices prompted some Italian, German, and Belgian producers to dump their product in protest during the summer of 2019. The combination of low prices and a severe drought in 2018 has pushed many Australian dairy operations to the brink of collapse. The farmer-owned Fonterra dairy cooperative, serving both Australia and New Zealand farmers, has seen its share values decline by about 50 percent since the beginning of 2018.
Overall demand for dairy products has increased modestly in the United States in recent years, by less than 9 percent since 2000, or less than 0.5 percent per annum, according to USDA data. Among categories of dairy products, fluid milk and ice cream consumption has fallen over the same period, yoghurt and cheese consumption has increased, and most other categories (such as butter, cottage cheese, and canned and dry dairy products) are largely unchanged..
In many ways, the current supply/demand conditions in the global dairy market, at least in developed countries, seem to represent an example of the “treadmill theory of technology adoption” in agriculture, posited by Dr. Willard Cochran (University of Minnesota) in the 1950s. Farmers adopt new technologies to reduce their costs, but if most farmers do the same thing, it often leads to over-production of that commodity. Prices drop, so they end up generating less revenue.
In the 2018 farm bill, enacted late in the year, Congress tried to respond to the dairy crisis by making significant changes to the dairy safety net system. Under the new legislation, Dairy producers will be able to cover their production with both the Dairy Margin Coverage (DMC) program (the replacement for the Margin Protection Program) and Livestock Gross Margin insurance for dairy offered under the crop insurance program. Dairy producers will be eligible to claim a refund of some of the premiums they paid under the Margin Protection Program, a benefit estimated to cost $58 million for all producers. Dairy farmers who commit to maintaining the same DMC coverage level over the lifetime of the farm bill will receive a 25 percent discount on their premiums. Congress set the stage for bolstering these programs with provisions in the Bipartisan Budget Act of 2018 (passed in February of 2018), with policy changes that were projected to cost $1.1 billion over and above baseline spending levels for the period of 2018 through 2028.
Under the DMC program, 37,468 dairy operations were enrolled for 2019, accounting for 85 percent of all operations. Payouts under the program for 2019 have totaled $306 million to date. Enrollment is now open for 2020 participation in the program, and the enrollment period ends on December 13, 2019. There were also 1,237 livestock gross margin insurance policies sold for dairy cattle operations in 2019, covering $128 million worth of liability.
Even with these recent dairy policy changes, many dairy farmers are leaving the sector due to the financial hardships they are facing. According to data reported by the American Farm Bureau Federation gathered from federal court filings, 580 farms filed Chapter 12 bankruptcies ( a form of bankruptcy only available to family farmers) in the year ending in September 2019, with the largest number filed in Wisconsin at 45. The national figure represented a 24 percent increase over the 2018 level. About one-fifth of those operations were primarily raising dairy cows.
In general, only a small share of farmers exit their businesses through bankruptcy filings. Instead, most simply sell their land, animals, and equipment and stop producing. Some dairy farmers have sold their dairy herds and milking equipment and continue as crop producers only. USDA has estimated that about 2,500 dairy farms in Wisconsin alone have gone out of business since 2015.
Despite the departures, U.S. dairy output continues to increase. In many instances, larger, mostly more efficient producers are obtaining the resources of the exiting farmers. According to data collected under the Census of Agriculture, there were about 55,000 farms with milk cows in their inventory as of December 31, 2017, about 9,000 fewer than were recorded as of December 31, 2012. The number of dairy operations with 1,000 or more dairy cows increased over the same period, from 1,807 to 1,953, and those larger operations’ share of all milk cows rose from 44 percent to 50 percent.