Dairy Channel: Taking a closer look at the future structure of the dairy industry

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Believe it or not, the future structure of the U. S. dairy industry depends upon what consumers are willing to buy.

The overall size of our industry will be determined by the demand for milk. Demand will be influenced by tastes, habits, and customs, as well as the price of milk and milk products.

During the last 30 years, the per capita consumption of fluid milk products has slowly declined. At the same time cheese demand has increased dramatically, resulting in the combined effect of a slight increase in per capita consumption.

However, if you look at just the last 20 years, per capita consumption is pretty much constant.

Since 1980, increasing U.S. population and steady per capita consumption have resulted in a steadily increasing demand for milk.

Demand expectations. According to USDA Economic Research Service information, demand for milk has increased from about 115 billion pounds in 1970 to about 167 billion pounds in 2002.

The question is, “What can we expect milk demand to be over the next 10 to 20 years?”

Researchers at Cornell University studied this in Future Structure of the Dairy Industry: Historical Trends, Projections and Issues. According to them, there are at least two scenarios that could happen.

A “continuation” scenario assumes that the historical 30-year trend in total milk use will continue, resulting in continued modest growth in per capita milk-equivalent consumption.

This would be driven by continued slight decreases in fluid milk consumption and increased consumption of cheese, low-fat milk, no-fat milk and industrial uses.

The second possibility is dubbed a “constant consumption” scenario, which assumes that per capita consumption will remain constant.

In this case, declines in whole milk consumption will be just offset by increases in cheese, low-fat milk, no-fat milk and industrial uses so that changes in total milk demand will be totally determined by changes in population.

Two scenarios. Under these two scenarios, the demand for milk in 2010 and 2020 will differ significantly. Both scenarios will result in increased demand for milk compared to our present market.

The “continuation” scenario would result in demand of 183 billion pounds of milk equivalent in 2010 and 202 billion in 2020.

The “constant consumption” scenario based on 1999 and 2000 per capita consumption would result in demand of 181 billion pounds in 2010 and 196 billion in 2020.

Assumptions. Researchers assumed farm use of milk (primarily for calf feeding) will decrease slightly from 0.5 percent in 2000 to 0.4 percent by 2010 and 0.3 percent by 2020.

They also assumed that exports and imports, while they have a significant effect on milk prices in some years, will not have a significant long term affect on demand for milk.

Thus, net milk imports are expected to meet a relatively constant over-time figure of 0.8 percent of total demand for milk.

There are many factors that could change rates of consumption of dairy products, including advertising and promotion, health claims (negative and positive) about certain products, new product development, “cheese fatigue,” and changes in ethnic populations.

After all these and additional factors are considered, the researchers conclude that constant per capita consumption is a better bet for estimating future demand for milk than the slight increases experienced in recent years. See table 1.

Number, size. A number of factors will influence the number and size of milk-producing farms in the future.

These factors include demand for milk, milk production per cow, economies of size, and other factors such as proximity of farms to markets, transportation costs, federal and state legislation.

If production per cow continues to increase at its historical rate, production per cow in the United States would be 21,722 pounds by 2010 and 25,352 pounds by 2020.

Given the fact that today’s top herds are producing almost 50 percent more per cow than average production per cow, there is reason to believe production per cow will continue to improve as existing technologies are more uniformly adopted across the industry, even if no new advances are made.

Looking at the amount of milk the United States needs to produce and expected production per cow, we can expect a continuation of the downward trend in cow numbers. See table 2.

Complications. One complicating factor in predicting cow numbers in the future is the fact that production per cow varies considerably by herd size.

Continuation of past trends indicates that milk per cow will increase from 14,406 in 2000 to over 18,000 for small farms, while on large farms production per cow could increase from 20,821 to almost 26,000.

Regulations. The Cornell researchers have examined historical data and trends and have factored in expected future influences on dairy farm structure, such as concentrated animal feeding operation (CAFO) regulations.

The researchers predict that, although large CAFOs are the first farms to be placed under permitting restrictions, any farm that is found to be causing significant pollution can be required to meet CAFO requirements.

Although the costs of facilities and equipment required to meet CAFO requirements can be substantial, experts believe that all farms will eventually be required to meet CAFO regulations.

The implementation of these regulations on smaller farms will force many of them out of business because the technologies are designed for the efficiencies of larger operations and may be too costly for small herds.

Many people believe the FSA Environmental Quality Incentive Program funds to help farms meet CAFO regulations will provide a slight competitive advantage to large farms, but that the overall effect on farm structure will be slight.

Cost of production. The USDA has put together data on the cost of production by region. These show that the Northeast and Upper Midwest have a $2 to $4 per hundredweight cost disadvantage, compared to the Southwest and the Pacific region.

Many people believe this disadvantage is overstated because unpaid family labor is included as a cost of production on family operations.

However, another factor to consider is that land in the Northeast and eastern Corn Belt has much higher development value than in the Southwest and Mountain West.

Distribution of farms. Recent trends in the number of farms and projected demand for milk were used to estimate future distribution of dairy farms by herd size for the United States.

These estimates indicate that the number of dairy farms in the United States will decline by about 59,000 farms or 55 percent from the year 2000 to 2010 and 89,000 farms or 85 percent by 2020.

This compares with a decline of 229,000 farms or 69 percent from 1980 to 2000 and a decline of 1.4 million or 82 percent between 1960 and 1980.

Current trends in the shift to larger herds will most likely continue as well. By 2020 nearly 85 percent of all milk will be produced by farms with over 500 cows.

In a future article I will discuss strategies dairy producers can employ to offset the trends and keep their small- and medium-sized farms competitive with larger operations.

(The author is an agricultural extension agent in Columbiana County. Questions or comments can be sent in care of Farm and Dairy, P.O. Box 38, Salem, OH 44460.)

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