On this edition of The Milk Check, T3 and Anna join our dairy market sage and patriarch, Ted Jr., on a trip down memory lane to talk about how the dairy industry has developed over more than 50 years.
They discuss changes in trucking, processing and entrepreneurship, among many other topics.
The trio also debates how the Federal Order System has impacted the industry, whether it still holds water in today’s market and the perception that dairy producers are often the most impacted by market downturns.
T3: I thought this podcast would be a great opportunity to just talk a little bit about history. Talk a little bit about what were markets like back in the ’60s and how have they evolved into what we’re dealing with today? And maybe what are some of the things that are still the same and what are some of the things that are different? And I just thought it would be a great perspective to talk about how milk and cheese and whey and cream, how it all moved back then, and how it all moves around and gets balanced today. We really haven’t talked about things from a historical perspective, and I thought it would just be a great conversation.
T2: Well, let’s start in the ’50s. Tank trucks came in in the mid-’50s. They were relatively small, they were about 30,000, 35,000. By the time you got to 1960 or so, you’re up to a load somewhere between 45,000. In those days, the Class 1 utilization was paramount. Depending on where you were located, you had basically 60%-plus Class 1 utilization and milk move from upper Wisconsin, Eau Claire and Bloomer and Turtle Lake, during the short period of the year, we…back to almost everywhere, to Florida to Louisiana, New Orleans, Dallas, you name it, St. Louis was a big market. Indianapolis in the ’60s had 20 to 30 loads a day moving out of basically the Fond du Lac area down to Indianapolis, which is why Foremost is prominent in Indiana these days is because a lot of that milk was Foremost Milk, they actually had an office in Indiana, which wasn’t closed until a few years ago.
The market was much different. Class 1 utilization was the big item and we had a much more cyclical milk production profile, if you will, where in the fall of the year when it got hot, and it seems to me, if my memory serves, it got much hotter in the ’60s and ’70s than it does today. And production really languished, particularly down in the Southeast. And so huge volumes of milk moved and most of that milk was moved directly out of plants. It wasn’t moved directly from the farm, never moved directly from the farm until, oh, probably sometime in the ’90s. Farms got big enough and the technology of dairy farming reached that point. That was the way the industry was structured in those days. And it’s a much different structure today.
T3: To be back in the ’50s and 60s, you also had a lot of Grade B milk, we don’t ever talk about Grade B milk anymore. How did that affect the industry?
T2: Actually, we didn’t have that much Grade B milk, and most of what we had stayed home. Yeah, we moved a little, it wasn’t really that much. There were quality standards when you moved. Acid was the primary quality standard, acid and temperature. And you expected the milk to show up at a bacteria count of something less, basically, than 750,000 or half a million. Again, depending on where you were, and temperature less than 45 degrees. So that was the standard. And it wouldn’t make any difference whether it was B or A in those days. Quality was not a matter of somebody saying that it was B or A, it was a matter of what showed up at the plant. And if it wasn’t suitable when it showed up at the plant, it was rejected. It wasn’t a question of arguing about it, it was rejected. That fell back upon the seller, in our case, usually as the seller’s agent, us, to dispose of it accordingly, and we did.
As time went on, the volatility in certain areas caused a lot of construction. In late ’70s, they built Holly Milk over in Carlisle, Pennsylvania, which was basically a joint venture between Interstate Milk Producers and Maryland and Virginia. It changed hands over the years and ultimately became Land O’Lakes That plant would take off and start running and then blow up the dryer and we would sometimes be up until midnight arranging trucks to get milk out of there, get it back to the Midwest, or to Ohio, or wherever we could get rid of it until they got their dryer up and running again. And the same thing happened down in Texas and New Mexico. When the equipment would break down, we’d have a multitude of haulers we could call on and most of these haulers were plant to plant type haulers and some of them had routes.
But for the most part, if you’re looking at the Northeast, for example, there was a fella by the name, and he still has tracks, Herman Ule [SP], he would sit there when…he must have had 100 trucks sitting in his yard in East Earl, Pennsylvania. He and his cousin hauled a little bit of farm milk, but mostly when something would go wrong or when you’d want to move milk from A to B and you’d run out of trucks — because Herman was very expensive — when you’d run out of trucks, then you’d call Herman and you need 20 trucks, he’d have 20 trucks and drivers that could show up within a matter of hours. Today, it’s harder to do that because most of the hauling is committed to farm milk and haulers have responsibilities for certain farms. And you normally have that farm going from, for example, Kalamazoo to Indianapolis, and he’s got trucks and drivers allocated to that move. And suddenly, you call that guy, that hauler, and tell him you want to go to Atlanta, that’s a different kettle of fish, and very disruptive. So the hauling environment today is much different.
In the ’80s, for example, if you needed a truck and a certain area looked like it was gonna have some hauling that would keep somebody busy, there wasn’t a young man in the dairy industry who didn’t anchor to buy one of those big, shiny, stainless steel drugs in a Peterbilt or Mac and go to work if he could pay the bills. And usually, they did pay the bills until maintenance issues showed up two or three years later. That was, sort of, the environment you were operating in back in the ’80s. And it was much different than it is today. So today, our Class 1 utilization is down to, what, 20% depending on where you are, more in some areas, less in others. And the amount of Class 1 utilization that we have isn’t enough to carry the amount of Class 4 when you’ve got a $2 or $3 difference between the Class 4 and the Class 3. So that change now has to be addressed. And how we’re gonna do that is probably the next big change that’s on the table for everybody.
T3: Back in the ’50s and ’60s and ’70s, was it still always Class 4 that balanced everything? I mean, today one of the rules of thumb is always if you have a cheese plant, you always run it full, especially if it’s a cheddar plant. Was that true back then as well?
T2: No, you could move it to butter powder plants, and they were certainly a little bit more flexible than cheese plants. But the main balancer of the Northeast was in New Wilmington, Pennsylvania. And we used to move milk to Northeast Ohio to four or five different cheese plants in Northeast Ohio. Orrville Milk Products had a butter powder plant there but there were also an assortment of cheese plant that served balancing uses. And a lot of those cheese plants were structured in such a way that they could pay overtime or double time on Saturday and Sunday and buy the milk cheap enough where they could run. The cheese plants were much more flexible. Today, talking about the big plants 8 million, 10 million, 12-million-pound plants, they all have enclosed vats, double-Os, or whatever. And they have set schedules and they have locked themselves into that schedule. And they’re much less flexible as far as balancing is concerned today than they were in the old days, so to speak. So that’s changed. Today, the balancing is butter powder.
But also there’s another angle to it that you need to consider. The balancing requirements today are much less because you don’t have the Class 1 sales. And Class 1 plants were the ones that needed to be balanced. So we went from 60%-plus utilization in some areas, most areas actually, to 20% in a lot of areas. And so the balancing obligations are reduced accordingly. It’s a different ballgame. And I’m inclined to believe that the balancing obligations will continue to diminish unless we make changes that bring the industry back to more Class 1 sales and school business and so on. I guess my own opinion is, I don’t see that happening unless there are major changes in the federal order that provide for more entrepreneurship in the Class 1 area.
T3: I never really thought about it that way that one of the biggest differences between milk in the ’70s and the way milk moved today is that not only has modern technology on the farm caused lower variation in milk per cow volumes throughout the country. We also have lower variation in demand changes because Class 1 was where the demand swings would be biggest when kids are in school and out of school. And it was 60% of the order at times back then and only 20% today. So you’ve had, on both sides of the spectrum, diminishing variation in supply and demand. That makes one of the major requirements of why we needed a federal order in the beginning. It’s just not as necessary today, is it?
T2: Well, I guess it depends on how you look at it. We both know that there are different ways that people look at it. And from my own perspective, I think you basically have two regulatory systems. One is the classified pricing system and the price you pay to participate in that is the regulatory system. And I think the problem that we have basically is with the regulatory system, not the classified pricing system.
T3: What do you mean when you say regulatory system, what are you referring to?
T2: Well, in order to participate in the classified pricing system, you need to make shipments to distributed plants or pool plants. And there’s a cost associated with doing that.
T3: You’re talking about qualification and things like that?
T2: Right. So there’s a cost associated with that out. In Wisconsin, for example, the benefits of pooling are much less than, say, the benefits of pooling down in the Southeast. The Southeast, of course, pooling is paramount, you have to pool. You wouldn’t be in business for a week if you didn’t pool your milk in the Southeast. But in Wisconsin, certain times you have little or no benefit, and maybe, at most, certain times of the year, under extreme circumstances you got 30 cents. The costs of participating in the regulatory system in Wisconsin are not very great, but the benefit isn’t very great either. Whereas in the Southeast, the cost of participation is huge and the benefit is also huge. So it comes back to how you look at it and what the cost and benefit is. For a cooperative who is not bound by minimum prices under the order, the cost is basically transferred to the membership and spread over the whole membership. Whereas for a proprietary handler, they’re obligated to pay the minimum price under the order. And then, of course, if they’re buying it from a co-op, they pay the co-op who basically benefits from that sale, and they have their own producers, they pay their own producers that minimum price.
So it’s the regulatory aspect to it, which I think they need to look at. And those minimum price provisions, which I think would give Class 1 sales a little bit more boost in entrepreneurship opportunity, I think would be helpful for a lot of people, particularly for the dairy farmer. Seems a little counterintuitive, but at the same time, it’s basically competition for the milk that improves the options for the dairy farmer at the farm level to, as an example, you would see that prices in Wisconsin are almost as high as the prices of Florida certain times of the year because of the fact that all those little plants up there, which basically produce specialty cheese and variations of specialty products, are competing for quality milk supplies. If I was doing it, that’s what I’d look at.
Unfortunately, I think most people today are looking at how to gild the lily and particularly hang more of the burden on Class 1, which from my perspective is exactly the wrong approach. They should be basically looking at how to increase Class 1 sales rather than require more burden on them and less people being attracted to sell milk. Not to get into it much deeper but Costco, for example, here in St. Louis, the Class 1 area is a good size three-car garage in the back of the store, which you have to search for. And it’s refrigerated and you go in there and you share the space with eggs, butter, and organic this and that, and other types of perishable products, oat milk, and whatnot. And yes, you’ve got three or four skids of milk in there, which people are picking at. So that’s a far cry from where we were 50 years ago. And if you bring Class 1 milk or bottled fluid milk, beverage milk, whatever you want to call it, back to the fore, I think that would go a long way towards eliminating the problem. And I think you can do that if you provide opportunities for entrepreneurs to get into that area.
T3: What about cream, how has cream changed in the last 50 years?
T2: Well, basically, I think we’re heading back to where we were. The traditional movement from cream was from the Michigan, Ohio area, Northern Indiana, Michigan and Ohio, what we call the Mideast today, to the East. And the markets basically were Kraft in Lowville, Abbott’s in Philadelphia, and a host of cream cheese plants who serve the cream cheese clientele all along the East Coast. There was always an active market for cream, particularly in the shorter periods of the year, and it was more on a spot basis. We got to the point in the ’90s where we started doing contracts, balancing contracts, and so on. And some of those worked out and some of ’em didn’t. But basically, there was active cream demand and the cream multiples would skyrocket in the second half of the year and then go into the toilet during the longer periods around Christmas and the flush and so on.
I think we’re heading back to a more active cream market because we’re gonna wind up with a significant volume of Mideast milk and cheese. And so I think cream will be more active and more lucrative for the sellers going forward from where we’ve been for the last 10 years or so. That’s my opinion. And, of course, you have additional supplies of cream available now in the Northeast because of the increase in components and so on. So that’ll offset that a little bit. But I do think we’ll see an active cream market once we get to July.
T3: What are some other big differences that you’ve seen as our industry has evolved over the last 50 years? Besides how milk would move and how cream would move, and how much less Class 1 utilization there is as a percentage of the total, is there anything else that always stands out to you when you think back on 50 years of working in the dairy industry?
T2: I think the trucking, which we’ve already addressed a little bit, but I think the trucking change is probably the biggest. We still move milk, for example, to the Southeast, we schedule it long in advance so the truckers can organize themselves to handle it. And what moves is directly from the farm to the customer. That, I think, is more efficient than we used to be by a lot. But we don’t have as much Class 1 sales even in the Southeast. So the volume of milk moving is, I think, reduced. There’s still milk moving out of the Southwest over to Florida, and we move some out of the Mideast to Florida. But I don’t think the volumes are anywhere near to what they were 30 or 40 years ago, I think they’re very much reduced.
Also, I might point out that there used to be a lot of manufacturing in Kentucky, and Tennessee, and Northern Alabama, for example, Northern Mississippi. Those were big evaporated milk areas. And a lot of the milk from those plants, the Grade A milk would gravitate to the bottling plants going south. So there’s a lot of stair-stepping that went on, and then they tighten the pooling provisions up in Order 5 and 7 and those plants then had problems getting enough supply to be cost-effective. So gradually, all those plants closed up. And it’s not fair to talk about strictly pooling because evaporated milk is no longer as big an item as it was. And Carnation, Defiance, and Borden’s all had evaporated milk plants in those areas. But there were cheese plants there too. Kraft had a bunch of them, Avalon Dairy had, I think at one point, about nine of them.
There were some others, I think some of the meat companies like Armour and Cudahy used to have plants in that area too. So that manufacturing trade in those areas has been very much diminished. It occurs to me today that they probably would regret that, they still like the idea of moving milk into the high-priced Class 1, but it would seem to me that they ought to take a look at it and make sure that that high-priced Class 1 is gonna be there for a lot longer. In which case, making cheese in Tennessee may be something that might be attractive again.
T3: Anna, do you have any questions?
Anna: Well, I’ve got some thoughts running through my head. I haven’t been doing this since the ’50s. So over the past 10 years, the 2 biggest shifts that I’ve seen are premiums and hauling charges. With premiums, we’ve talked a lot about milk moving to certain plants because it’s the higher price. But a lot of times, as a co-op, you’re not worried about what plants it’s going to, especially if you’re participating in a federal order because you’re gonna end up with a blend anyways, unless you’re de-pooling or something else. It’s just about the premium. And where we used to get higher premiums from plants, they just keep getting lower and lower even on contracts.
And from someone who’s looking at it from the producers’ perspective, it is really hard to watch plants who aren’t necessarily, in theory, gonna sell their products for anything less come in and offer you $2, $4, $8 under on milk. So that’s been a big shift. I don’t know if we want to talk about that in any further depth. But I also wanted to bring this up back when we were talking about hauling. I had a producer relate to me, prices were a little bit lower. They were saying if you get a $13 milk check, and the hauling is now $1.50, $2, and you’ve worked really hard to make that milk and then someone basically drives in, picks it up, drops it off somewhere, to give them that percentage of your milk check, that’s a really tough pill to swallow.
T2: It is a tough pill to swallow, but it’s better than dumping.
Anna: It’s better than not having it hauled.
T2: I know we’re faced with that situation when the pandemic hit, March or April, when suddenly we realized we were gonna have to lock down and the foodservice sales tanked and so on. As a company, we had never dumped a load of milk for anything other than the occasional antibiotic load or something like that in 60 years, and suddenly we’re faced with having to dump some. So we can well understand that from a dairyman standpoint, it’s anathema and extremely gut-wrenching to have to dump something. But on the other hand, the market for a lot of reasons because of all the volatility involved gets so twisted that you really don’t have a lot of choices, and not as many choices as you had 20, 30 years ago. Twenty, 30 years ago, every little town had a plant. They weren’t big plants, they were little plants. So it really wasn’t very difficult for us to place a load of milk. The only issue was placing it at the best price.
Now, if everybody has the same problem on a Friday afternoon at 4:00, you got hauling costs, which narrow down your options, you’ve got many, many, many fewer plants, so you don’t have as many options to choose from. And everybody has pretty much the same choices. So that’s why volatility now is sometimes more painful than it was a long time ago. You don’t have the options. If you needed to discount a load of milk into a local cheese plant back in the ’50s, the wife and the proprietor would get down there and make a vat of cheese out of it, they’d be very happy with it because their margin basically improved on that particular load. So that’s a change now you don’t have, but people get used to it. We talked about this, this morning. The big plants, the enclosed vats, the automated plants, they set a schedule, they want to stay with it, they want it to run. Instead of having 20 or 30 people, they got 3 or 4 running computers and so on to look at how the temperatures and the pumps are running and so on. So it’s a much different environment at a plant today than it was 50 years ago by a lot.
T3: What about skim condensed? That’s another market that has really changed over the years.
T2: Well, we used to have understandings to supply skim condensed to customers, for example, in St. Louis and other places. Ice cream mix, you bought either skim condensed or you bought a mix, and it was a part of the market. Ice cream is still a valuable part of the market but it’s not as big a percentage now as it used to be. Skim condensed or a really good quality powder, a lot of these plants just use powder. Powder wasn’t very soluble and they didn’t have the equipment to handle it 50 years ago. Today, quality powder can produce a much better ice cream. And then they have better pasteurization. It used to be that you pasteurized for half an hour at 140 degrees. And today they pasteurize for 16 seconds at about 180 or something like that. Plus, you got UHT and different methods of doing it. So it’s a little different now than it used to be from that standpoint.
T3: Anna, you have a question?
Anna: I was thinking, right now the biggest dynamic that I see between plants and producers, as a co-op, is we take whatever we can get. We look for the highest price, the best return, lowest haul, but everything trickles back to the producer. And even 10 years ago that really wasn’t as much the case. And I know that we’ve talked about this in the past about that being market signals, right? But plants used to pay more hauling, they used to pay more quality, premiums were better. Has everything always trickled back to the producer in terms of costs?
T2: Yes, The answer to that, Anna, is yes.
Anna: Has it always been to this level, though?
T2: Well, we haven’t had any pandemics other than this one in my experience. And we also didn’t have risk management back 50 years ago. We had situations which were desperate, 1974 comes to mind when markets were strong and going up and the premise was they were never going down, in a lot of people’s mind at least. That premise turned out to be wrong. The market broke and there were bankruptcies, particularly in the cheese industry where you had people storing cheese for just 90 days. Swiss cheese, for example, by law, all of a sudden your value, your inventory dropped 50%. Well, it’s pretty hard to buy milk cheap enough to offset that. And there were plants, New Wilmington was Swiss. And after that experience, they switched to Italian styles. But also, there were Swiss plants up and Southern Wisconsin too who had that problem, and it took several years for all those bills to be paid. Our company was involved in collecting that money over a period of time and fortunately, we got it all collected because the industry recognized that this was a particularly difficult situation.
Finally, when risk management and the CME and so on began to become more prominent in the ’90s, people were more in a position to carry inventory and handle things in a more organized fashion. And I think that had a major effect on how people approached things. You still had inventory considerations like age and value, and so on, that you had to worry about. But in the old days, you had to worry about just the value of the inventory going into the toilet. And that could break if you got too far out of hand. So you picture, you’re sitting there, and all of a sudden milk comes at you and it’s $2 a hundredweight cheaper than it was before. And boy, the temptation is to buy it, but then the cheese market goes down 40 cents. So that milk, all of a sudden, instead of being an attractive purchase turned out to be a big loser. And that was the way a lot of it was when you encountered the volatility. So you had to be pretty much on top of which way the markets were gonna go.
T3: Anna, I’m gonna take your question a different direction. It always feels like that it flows downhill to the dairy farmer. But I would say that there’s a lot of cheese companies who would argue differently in this aspect. Look, the reason the price of cheese will go up is not always because there isn’t enough milk. Sometimes the price of cheese goes up because there isn’t enough cheese capacity in the marketplace, there’s not enough plants making cheese. And that’s exactly what happened during the pandemic, the demand for cheddar cheese went through the roof. And we were constrained by cheese capacity, not by milk supply. What happened was the price of cheese went way up, and therefore, the price of milk went way up.
And so the people who invested in dairy farms were the ones who benefited from the fact that the real issue was there wasn’t enough cheese capacity. And so, in theory, from a free-market perspective, what really should have happened was the demand for cheese capacity should’ve gone up. But that’s not the way it worked because of the Federal Order System. When the price of cheese went up, the price of milk went up because the price of milk is tied to the price of cheese. And so one of the things that the Federal Order System has done, and I personally consider this to be a negative, is it has locked in the margin that a cheesemaker or a butter-maker or a nonfat dry milk producer makes, and that’s the make allowance.
And so if there happens to be over-capacity or under-capacity in the marketplace for any of those products that have a make allowance in the federal order, it’s locked in. Now you can say well, they benefit from that because the risk is taken off the table. In theory, I guess I would agree with that. But what that also does is it gives…the marketplace itself often will get incorrect signals. And so if what we really need is an increase in cheese capacity, but if every time the price of cheese goes up it causes the price of milk to go up, what we will get instead is an increase in milk production.
Another way to look at it is those make allowances have caused the easiest investment to be an investment in a commodity cheese, cheddar being the best example. And so whether or not the marketplace truly wants cheddar cheese, a lot of times, that’s what you’re gonna get because that’s the risk-free investment. Whereas if there was less of those rules in the marketplace, the entrepreneur out there who wanted to make cheese would be out there trying to figure out what’s the best cheese to make, what is the cheese that the market would really want to buy, and then, of course, you could get more creative ideas of cheeses or something along those lines that they would try to sell at the supermarket and to the consumer or to the restaurants or whatnot.
And so what’s happened is it feels to the dairy producer like it all flows down and the dairy producer has to take all the burden of that. But if you were to get outside the Federal Order System simplified or take some of the make allowances out, you would actually free up the processors to be able to be more innovative because they would have to really pay attention to the risk that they have on the table.
Anna: I think to further complicate it though too, like let’s say over the past year, you have a really high Class 3 price, you end up with a blend that gives you a negative PPD from that. The producers have a share that they’re putting back into the pool, or the co-op does because they build that higher price, they happen to be selling to that higher price. And it makes sense, you know, as the PPD does, you share that with all the producers, even the ones going to 2 and 4 who aren’t billing the plants at a higher price. But on top of that, in a lot of cases, the cheese plants that have that higher price that they would get billed know they’re getting that higher price and so they’re offering you larger negative premiums. So it gets taken out of you in both places. In theory, you’re billing this higher price to a plant and, in theory, you’re getting that at least chunk of that you’re keeping but you also lose on the premium side too. If it was just a matter of what your classified price is, that would be one thing, but the premiums add to the feeling of it all trickling down.
T3: And I agree with that, it’s in the costs, especially in an inflationary environment. And we haven’t had significant inflation at this point for almost 40 years. But we’re starting to feel it, you know, increases in hauling prices right now is a major stressor throughout the economy, not just in dairy. Those are indications of how costs are going up. And when you have a system that constrains those costs, it’s not like those costs aren’t there, but they got to pop out somewhere. I think what’s really happening is the dairy farmer is feeling like they’re dealing with the burden of all of these increased costs when the reality is the system is directing it that way.
It’s interesting, you know, you asked the question, what would happen if we didn’t have a Federal Order System? You’d have a lot of different things happen. And I think one of the things my dad has said over the years is, “If you didn’t have a Federal Order System, you’d have a lot less efficient capacity. There’d be a lot more empty plants out there so that co-ops could switch back and forth between cheese and powder and butter and whatnot based on where they could get the best value, which would add a lot more cost to the system. And with a lot more costs to the system and less efficiency, everything would be more expensive.” And I think that’s very true.
But on the other hand, those costs would be uphill rather than downhill, a dairy farmer wouldn’t feel like they’re receiving the burden of all of that. But I think so much of it, to me, is perception. A market is a market and when costs go up, everybody’s gonna find ways to pass those costs along because the alternative is they become unprofitable, and they die. And so the costs are always gonna move somewhere. And if they’re moving downhill, to me, that’s just because it’s a perception issue rather than they’re carrying an increased burden relative to others.
T2: Let me weigh in a little bit on that. I agree with you that perception is reality, but you have a market and you have a margin, and a processor, be it a co-op or a proprietary, is working to maximize his margin. And so he’ll raise his price to his customers, and he’ll pay his producers accordingly. The margin is always under pressure, it’s sometimes a pressure to get the margin greater is different or greater than it is when it’s not. And so that’s the way markets are determined. If milk on the farm is competitive, then the producers will stay home and not spend a lot of time looking for alternative markets. But if the price on the farm is not competitive, the producer will consider switching to a different market.
Today it’s changed a lot because the producers don’t have all those different markets to switch to. So as a result, in a lot of cases, the producers turn out to be squeaky wheels because they don’t have alternatives as to where they can go, plus they’re tied up with contracts and so on, which often doesn’t leave them free to make changes when the time is right. So I would, again, get back to the premise that the argument that what increases the return to the producer in this environment is competition for the milk. Again, Wisconsin, where you have the most competition from the milk from an assortment of different customers for the milk from a dairyman standpoint, has higher pay prices than almost anybody but Florida, and sometimes they even exceed Florida, because in order to persist in Wisconsin, you need that milk supply, you need economies of scale, you can’t afford to lose producers. And so as a result, you go out and you pay premiums and you put together a milk supply which is based on dairies which are close in, which are good quality. And maybe you can supplement that with milk that’s a little distressed from outside of the area at certain times of the year and so on.
So again, the premise that I would like to support is the competition for the milk is what creates revenue for dairy farmers. And where you don’t have that competition for the milk, dairy farmers suffer. A good example, without mentioning any names, is in the Southeast the last three or four years. The check-off in the Southeast was measured in dollars per hundredweight, many dollars per hundredweight in certain times of the year, where balancing costs were extreme and the costs of maintaining the milk supply in that area with hauling costs what they are and so on were severe. So it’s not entirely true that you can take advantage of the Capper-Volstead Act and collective bargain, which is what co-ops are designed to do if there’s no one to collective bargain with. And again, Wisconsin’s a good example where you’ve got an assortment of different plants, an assortment of producers to choose from, and that’s where the price is the highest.
You look at it from that standpoint, it puts a little different spin on it than just saying that we’re gonna change the formula and make the Class 3 price higher and lower by adjusting the make allowance or whatever. The expression “lipstick on a pig” is probably a good expression to cover that approach.
T3: Let me add though another dimension to the Wisconsin argument. The cheese manufacturers in Wisconsin have to pay more for their milk than the cheese manufacturers, let’s say, in Southwest, in Texas and in New Mexico. And so because they have to pay more for that milk, they have to get more creative and more innovative in selling that cheese. And so I would say there is a relationship as well between the amount of specialty cheese coming out of Wisconsin, not just commodity cheddar, or mozzarella, but all of the other kinds of cheeses from brie to gouda to edam to feta and all of the above. Because as those premiums…they’re paying $1, $2 often more than other areas of the country for their milk. And so they got to figure out how to sell that cheese at a higher price than everybody else as well, and so they’ve gotten more innovative.
And so while I agree with you that competition for the milk is a big factor as to why that’s happened, the other question is why is there more competition for the milk? And I would say one element of that is because there are more cheesemakers, more innovative cheesemakers, more highly specialized, really good people who know how to make cheese in that area of the country than in other areas. And that innovation is driving more profitability for everybody in the system in the Upper Midwest, and especially in Wisconsin. And so yes, it is because of more competition. But you also have to ask the question, why is there more competition? And there’s a skill set, in particular in Wisconsin, or at least, you know, a larger volume of people that have that skill set, that’s driving that higher level of competition as well.
T2: That’s all true. But the two go together, the creativity and marketing and management and all the things that go towards producing a higher return, which gravitates to the dairy farmer exist in Wisconsin that don’t exist, for example, in locations in the desert where you have these 10-million-pound-a-day commodity cheese plants. You’re not gonna build a plant like that from scratch in Wisconsin. You may add on to an existing plant to add to your marginal costs or your marginal profits on top of your existing business, but you’re sure as hell not gonna build a plant in Wisconsin which is similar to the plant which just got built in Michigan because you couldn’t afford to pay the dairymen to fill the plant up. You know, I hear you, but it’s competition for the milk in a multitude of markets that maximizes the return to the dairyman. And staying alive in Wisconsin, from a processor standpoint, is a difficult job too because they got to be creative and they got to be able to deliver a competitive pay price to their dairy supply. So one hand washes the other, and that’s the way it’s set up and that’s what works.
T3: And that’s what markets are.
T3: I think a lot of times, for the dairy farmer, the feeling that all of these costs are being passed down to them and that they carry the burden, a lot of it has to do with perception, but it’s perception based on the reality of the fact that the way the system is set up, risk, both positive and negative benefit from that risk, has been taken off the table for a lot of processors with the make allowances. And I think that if you were to get rid of make allowances, you would introduce that risk back into the system. But that wouldn’t necessarily solve the problem from a dairy farmer’s perspective like they think it would because it has both had a positive benefit and a negative benefit to the price of milk. It is a positive benefit because when cheese capacity is driving the price of cheese up, it is the dairy farmer who benefits, but it is negative in that when there are increased costs in the system, those costs tend to be passed down to the dairy farmer. In the end, I think it’s a matter of pick your poison, which is a better path for the dairy farmer, do you want to carry more risk or less risk? And where do you take it from there?
T2: You know, over the years, make allowances have been a bit of a football and my view has always been the larger the make allowance, the more the dairy farmer benefits. Today, that probably doesn’t make any difference because today, most of the so-called premiums are negative, maybe not so much in Wisconsin, but around the rest of the country, you pretty much have a negative check-off as opposed to what the classified prices are. And that makes the classified pricing essentially an arbitrary figure. I don’t oppose, if you want to get rid of make allowances, that’s fine with me. I think probably the dairymen would benefit from that because it would encourage, to some extent, processors to reach out further for milk supply. The hauling costs have gone up, and I’m sure they’re already doing that, but it would take a little bit of the pain off the table if the negative implications of a make allowance which was too short was removed.
T3: And I agree with that. And a good way to give a practical example is if you’ve got a negative premium of 50 cents and you increase the make allowance by 5 cents a pound of cheese, 50 cents a hundredweight on a Class 3 price, your Class 3 price would drop by approximately 50 cents. But that premium would go from a negative 50 to zero almost simultaneously. So the actual price the dairy farmer would receive would actually probably be the same either way.
Anna: There’s still not as much competition for the milk, would they go ahead and take that make allowance to keep it and still do the negative 50 premium?
T3: I think if you look at it in terms of two or three months after the change, it’ll feel like somebody is keeping it. But ultimately, market forces are what’s gonna shift price.
Anna: I’d buy that, yeah.
T2: I think that today’s classified prices are strictly benchmarks. I don’t think they mean much anymore because you check off…most of the milk is paid for by cooperatives, which are not bound by the minimum price under the order. It essentially takes the proprietary side of the business out of the picture and forces them to buy through the co-op. It’s basically a benchmark, and I don’t think it’s really serving any useful purpose. But if the minimum price under of the order was removed, then let’s call it the practicality of having a large make allowance would enable people to reach out further for the milk, which would increase the competition somewhat. So I think that’s an argument that most people don’t understand because it’s a little counterintuitive.
T3: I agree.
Anna: Sounds like we’re ready to wrap this one up here. But it looks like it’ll be a long one. One thing we can say for certain whether we’re talking about pricing, transportation, seasonal production variations, or plant balancing needs is that there has been plenty of change in the industry. And I’m sure there will be plenty more for us to discuss in the future. Thanks for joining us, especially to everyone who stuck with us all the way to the end on this one.