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Dairy: An Industry in Quiet Turmoil

Food Production

Dairy: An Industry in Quiet Turmoil

The Dirt

COVID-19 has changed the way our food system works, especially for dairy products. Milk, butter, cheese, yogurt…for generations, these products have been staples of the American table. But the bigger truth hidden within the COVID-19 pandemic is often overlooked: that the U.S. dairy sector has had problems long before COVID. The pandemic has only made things worse. A lot worse...

Dairy farmers know the story all too well. Long before COVID-19 raised its ugly head across the globe, the industry was already in the throes of major structural changes and fundamental economic shifts. Recently, Dean Foods and Borden Dairy filed for bankruptcy within months of each other.

Industry consolidation

In 1999, the U.S. had over 87,000 dairy farms spread across the country. In 2019, that number more than halved to 34,000. Over the same period, the volume of milk produced per cow has increased 32%. Surprisingly, the number of cows remains the same, hovering around 9 million.

Although smaller dairy farms with up to 30 cows still make up a larger portion of total farms in the U.S., in 2006, they produced only 1% of total dairy production. New technologies implemented by larger dairies dramatically increase production, but are just too expensive for the smaller dairies to adopt. This has prevented small dairy farms from increasing their volume, and thus, their margin. They needed to find a solution fast, and that solution was to consolidate.

So, why consolidate? Because it can mean much lowers costs. For operations of 2,000 or more cows, the small farm realizes a 12% savings in feed costs, 20% in operating costs, and 45% in overhead costs when consolidating with a larger dairy, according to the U.S. Department of Agriculture.

But a larger number of cows does not always mean a higher profit. Increases in per-cow productivity is much more important to getting a better end result, and larger farms still have the advantage here. Increases in per-cow productivity are made possible by advances in animal nutrition, health and well-being, and technological improvements. These are more financially feasible for larger operations.

Global demand shifts

The challenges facing the dairy sector didn’t end with consolidation. Today, consumers drink or eat about 160 pounds of dairy per year – a decrease from the 195 pounds in 2010. Alternative “milks”, like almond, oat, and even banana, started taking over the shelves and diets of many consumers, significantly cutting dairy demand.

Meanwhile, competition to export milk intensified: New Zealand recently ranked first with $5.5 billion of milk exports, compared to the U.S.’s $1.6B, placing us in fifth place. Also, in many rural areas, the lack of labor plus the inability to adapt rapidly to costly new technologies paints a bleak picture for many dairy farmers. For producers, prices didn’t generate the profits they needed to survive, let alone thrive.

Members of the dairy industry have wrestled with these problems for years and yet we, the consumer, didn’t notice. We still saw grocery shelves stacked with butter and cheese, and food-services ready to serve whatever dairy product we needed, so how could we know what was going on behind the scenes?

Then came COVID-19…

It wasn’t until COVID-19 cut off a huge portion of the restaurant, school, and food-service markets that we really started to notice the changes. Dairy producers were left with a significant oversupply – by some industry estimates, as much as a 10% surplus. But how?

Imagine going to a restaurant for dinner. Maybe you start with some fresh bread and it comes with butter. Your salad is topped with feta cheese. The salmon you ordered was cooked in a pan of butter and has parmesan sprinkled on top. The side order of a baked potato comes with butter and sour cream, and you order a nice slice of cheesecake topped with whipped cream for dessert. Every course in that meal included dairy in at least one way.

This is where the problem lies. These food-service markets purchase as much as half of the cheese and butter produced by the industry and school milk makes up 7% of all liquid milk sales. Without them, we see a huge decrease in demand.

The media reports a 70% overall drop in cheese sales, which – you can see in the chart – equates to a lot of milk left to waste. Leading producers of cheese, like Wisconsin, California, and New York, are facing a potentially worse supply-demand imbalance. Not coincidentally, Wisconsin and New York are where reports of milk being dumped on the ground seem most common. In April, as much as 7% of milk production wound up being poured out, rather than being shipped to processors.

Dairy processors, such as Nestle USA and the Dairy Farmers of America Inc, have rushed to adapt to the surge in demand, or ‘panic-buying’ as we’ve seen it called, for fluid milk that has emerged from the pandemic. In the first two weeks of the pandemic, fluid milk sales jumped by 55% and still remains about 35% higher than usual.

“As panic buying reached its peak, we shifted production to focus on products most in demand – whole and 2% milk for retail business – to maximize our output efficiency,” said Anne Divjak, Vice President of Government Relations and External Communications for Dean Foods. “Demand has since normalized, and we are back to normal production runs but still seeing significant declines in school milk and food-service business.”

So…why the empty dairy shelves?

If there is such a large decrease in demand and milk is being dumped, why are we still seeing empty dairy cases at the grocery store?

There’s another problem, and that lies at the retail level. There is simply not enough storage space needed to accommodate large amounts of a product to keep the shelves full, especially one that quickly goes sour like fluid milk.

This is why so many of us were perplexed by the sight of empty dairy cases we saw at our grocery store and the subsequent reports of dairy producers dumping milk on the ground. Little did we know it was because grocery stores couldn’t rely on the next link in the supply chain to have the resources needed to adapt to such a profound shift in demand “pull.”

On top of that, distributors are also overwhelmed with the endless delivering. “We’re waiting for the next truck to come in,” became a common phrase among grocers and retail workers. The pandemic has caused a shift to the entire supply chain that can’t be fixed overnight.

As you can see, there isn’t a shortage of dairy products. Our delivery and retailing systems simply need some time to adjust to the massive changes in the system.

What’s the dairy industry to do?

In the short-term, the industry must work hard to accommodate the changed demand picture. It must focus on supplying the products customers want most. It must step up efforts to augment the traditional retail sales channels with more direct sales, like direct-to-consumer opportunities, and donations to food banks and community food programs.

Our food system is nothing if not adaptive, and many dairy operators are already hard at work seeking new ways to deal with problems made so visible by COVID-19. In upstate New York, the Dairy Farmers of America bought $15,000 worth of milk to donate. This allowed dairy farmers in Tioga County to give away their milk to nearby residents to avoid dumping. Over 800 families were able to pick up free milk right from their local dairy farm.

Similarly, in Syracuse, NY, the Dairy Farmers of America hosted a “milk drive-thru,” where they gave away over 8,000 gallons of local milk to low-income families, rather than disposing of their products.

The new direct-to-consumer initiative is ground-breaking for many reasons. First, it begins building new and important channels between the producer and consumer, while also allowing the food distribution and retail sector time to adjust to the new system.

Adapting to these direct-to-consumer channels also preserves and enhances the local farmer as an essential component of the food system. Food doesn’t grow on grocery shelves… it comes from men and women who actually produce the food for us. Increased local sales and more interaction between farmers and consumers could emerge as one of the few benefits from the COVID-19 experience, and the new farmer-consumer relationship may last well beyond.

Although these efforts won’t fix the supply-demand problem completely, every initiative is crucial to its survival.

What can we do as dairy consumers?

We can do our part by looking beyond the traditional sources of supply. We can be patient as the industry adapts to a brave new world of feeding people. And, we can avoid panic-buying, which only exacerbates the supply-demand misalignment. Lastly, let’s look for opportunities to support local producers at farmer’s markets and by buying directly from responsible and reliable local producers.

And, in conjunction with getting your 5-7 servings of fruits and veggies per day, perhaps occasionally treat your family to something special by ordering in. “We have to focus on increasing demand for dairy, however we can,” explains Scott Higgins, President and CEO of the American Dairy Association, Mideast. “So, maybe order a couple of pizzas for home delivery, too. Only with double cheese.” 😉

The Bottom Line

We may be entering a new era of how dairy products are sold to consumers. We will get through this time as long as we remain patient, calm, and avoid panic-buying. We should also always remember the value of dairy products in providing a balanced, wholesome diet for families, as well as form a new appreciation for those who provide them.

D2D-illustration Bottom Line