What Changing Structure, Government Policies, Trade, and Tech Mean for U.S. Dairy Farming

milking cow web

Dairy farming and dairy product creation and distribution have undergone massive changes in the last 25 years, including a wide-swinging public perception pendulum on the nutritional value and safety of milk and milk products. Every such change, whether technological or economic, has an impact on dairy industry investment in new equipment, livestock, land use, expanded or contracted acreage, research and development, hiring, training, etc.

The future of dairy farming is a national issue, with dairy farms found in all 50 states, led by California, Wisconsin, Idaho, New York, and Pennsylvania. And unlike most other farms, the vast majority of U.S. dairy farms remain family-owned and operated.

According to “Changing Structure, Financial Risks, and Government Policy for the U.S. Dairy Industry,” a March 2016 report by USDA’s Economic Research Service, the shift in U.S. dairy farming from small to larger, still family-owned, farms has reduced industry-average production costs and contributed to growing dairy product exports. At the same time, increased international exposure has created new price risks for U.S. farmers.

The report found median herd size in the United States grew from 80 or fewer cows in 1987 to 900 by 2012. As herd sizes increased, average milk production costs fell sharply, with the largest farms (2,000 or more cows) reporting costs 16 percent below farms with 1,000 to 1,999 head and 24 percent below farms with 500 to 999 cows. Changes in farm size also reduced national average milk production costs by nearly 19 percent between 1998 and 2012. All that helped make the United States a major world supplier, with dairy exports growing from $1 billion in 2003 to $7.2 billion in 2014.

“Dairy farming, in general, is changing rapidly, becoming more and more professional. Herd sizes are increasing, automation is a reality, and in the next decade, we expect to see a lot more data gathered that will enable us to take the dairy industry to a new place,” João Dürr, CEO of the Council on Dairy Cattle Breeding (CDCB), told U.S. Agriculture Outlook.

“And consumers, I think, are beginning to realize a lot of what has been said about milk and beef is not true – animal protein is an essential part of human nutrition and we are committed to provide that to our consumers. We are a service operation, focused on the interest of the farmers, but the principle that drives us is feeding a world population with healthy products from healthy animals. So we are part of the machinery, providing tools to help farmers maintain better operations,” he said

The future of dairy farming is a national issue, with dairy farms found in all 50 states, led by California, Wisconsin, Idaho, New York, and Pennsylvania. And unlike most other farms, the vast majority of U.S. dairy farms remain family-owned and operated.

The nonprofit CDCB is a collaboration involving several elements of the dairy industry, representing four major operations: Data Herd Information Services, Data Record Processing Centers, Breeder Association, and the National Association of Animal Breeders, which represents the semen sales industry.

“We also receive information on animal genotypes to help predict how they will perform or if they might develop some condition or even have a longer-than-average life expectancy. That can be determined as soon as the animal is born,” Dürr explained. “A good part of our database also is dedicated to pedigrees, because knowledge about relationships is valuable in studying inheritance of traits.

“Our role is to be a cooperative database, gathering information from all these segments into a central location to support the National Genetic Evaluation System, which ranks animals according to their potential. We also provide benchmarks for different organizations and farmers, so they can compare their own operations with others across the country and establish their own goals.”

With millions of genotypes on file, the CDCB database is the largest of its kind in the world. The database also contains information on each cow’s life and performance, a valuable asset when applying models to determine what a genotype represents.

“The genotype itself isn’t very useful unless it can be matched with specific information about the animal involved,” Dürr added. “From our perspective, the genomic method [sequencing, analysis, and mapping of an organism’s genome] has had the most significant effect on productivity at the farm level in the past decade.

“What we do has nothing to do with genetic engineering. We just read the animal’s DNA, then predict what the percent of protein in its milk [will be]. So we can tell a farmer one cow has more potential than another or which bull will provide better protein production capability to his daughters. We aren’t trying to create super cows or super bulls, but to improve productivity at the farm level by gathering information on herds and individual cows.”

Within USDA’s Office of the Chief Economist, the World Agricultural Outlook Board (WAOB) provides information and forecasts about the agriculture market each month in its World Agricultural Supply and Demand Estimates Report. The chief economist then uses that information on what the markets are doing and what WAOB predicts they will do going forward to look at existing or proposed government policies and how they may affect dairy and other markets.

There have been a number of changes in government support programs in agriculture in recent years, especially under the Agricultural Act of 2014 and the Dairy Margin Protection Program (DMPP), which replaced previous support programs, at least through the end of 2018.

cows waiting to be milked web

Cows wait to be milked. The Agricultural Act of 2014, otherwise known as the 2014 Farm Bill, made some changes to government support programs for dairy producers, including the implementation of the Dairy Margin Protection Program and the Dairy Product Donation Program and the eradication of the Dairy Export Incentive Program. Credit: USDA photo by Bob Nichols

Under the DMPP, producers have the option to buy insurance from the federal government to protect themselves if the price of milk falls below a certain part of costs, with premium payments based on how much milk is to be covered and related costs. DMPP replaced the Milk Income Loss Contract Program, which enabled the government to compensate dairy producers when domestic prices fell below a specified level.

However, the 2014 Farm Bill created the Dairy Product Donation Program (DPDP), which now addresses low margins for dairy operations by using Commodity Credit Corporation (CCC) funds to buy dairy products for donation to public and private nonprofit organizations that provide nutrition assistance to low-income populations. Such purchases are only made by USDA during periods of low margins and dairy operators do not need to enroll to benefit from the DPDP, which, if ever triggered, will be administered jointly by USDA’s Farm Service Agency and Food and Nutrition Service.

“The Dairy Export Incentive Program, which provided payments to dairy exporters to bring U.S. prices closer to world prices, making it more competitive, also was ended under the 2014 Act,” said Shayle Shagam, a WAOB dairy analyst. “By supporting prices through product purchases, the government was setting prices and removing product from the market without any real relationship to what was happening in the world market.”

“So now, U.S. export prices have to compete on their own against prices in the rest of the world, such as competitors from Australia, New Zealand, and the EU. If there is a strong U.S. dollar and large global supplies, U.S. dairy may not be as competitive as we might like, as has been the case in the past couple of years.”

As those changes went into effect and dairy farmers and product producers scrambled to adjust, they also were faced by market changes stemming from import bans from some nations – as Russia did with U.S. and Australian dairy – forcing them to compete for replacement markets. Those efforts included a greater focus on new technologies, from UAVs for herd and field management to automated milking machines to converting waste products into useable energy.

“Producers are always looking to improve their operations through better technologies, genetics, seeds, farm management techniques, and robotics,” Shagam added. “The results will depend on each individual producer, but as attempts are made to reduce cost structures, improve their product, and expand production, all those will come into play.”

Further complicating where the dairy industry makes new investments are societal changes and consumer perspectives on dairy products – and their non-dairy alternatives – both in the United States and abroad.

“Changes in dietary habits are affecting consumption of dairy products, which cuts both ways – a decline in fluid milk consumption in the U.S., but an increase in cheese-containing foods, such as pizza. And a new view of fats, such as butter, which is now seen as not as unhealthy as previously thought. Alternate beverage products, such as soy milk, also provide competition. Internationally, the main competition comes from other exporting nations,” Shagam said, adding all those variables are tracked and reported on by various USDA components.

“We have programs partnering with groups such as the U.S. Dairy Export Council to encourage U.S. sales overseas. We also maintain agriculture attachés in our embassies, who report on market conditions in other countries. The WAOB then uses that information to determine the potential for U.S. exports, what the world supply will look like, and what the U.S. will be facing globally in terms of supply and demand.”

Twice a year, through USDA’s Foreign Agricultural Service (FAS), WAOB publishes a forecast for global supply and demand, similar to its monthly domestic reports. Those reports then may be used by U.S. dairy producers and organizations to determine market potential, university researchers to see how things are changing, and policymakers to determine where the United States stands relative to other nations and the impact of both U.S. and foreign policies.

“We are becoming a larger player in the world dairy markets and so more internationally focused, although we still produce primarily for domestic consumption. Right now, we’re working through a situation of large global supplies, making it more difficult to compete, although possible improvements in the EU and Oceania may, in the long term, see some benefit to our ability to export product,” Shagam said.

“U.S. export prices have to compete on their own against prices in the rest of the world, such as competitors from Australia, New Zealand, and the EU.”

In terms of production, the EU leads the world, especially thanks to high dairy production in The Netherlands and Ireland, with the United States in second place. Late year USDA/FAS estimates for 2016 show about 152 million metric tons (mt) of cow’s milk production in the EU and 96.4 million mt in the United States; India is third with about 68 million mt.

On the export side, looking at individual products, not milk itself, the EU also dominates. In cheese exports, for example, the EU’s 820,000 mt is nearly triple that of No. 2 America’s 280,000 mt and far surpasses Australia’s 166,000 mt. New Zealand, however, leads the world in butter exports at 565,000 mt, more than double the EU’s 235,000 mt and dwarfing America’s estimated 34,000 mt in 2016. Non-fat dry milk total exports for the year show 560,000 mt from the EU, 569,000 mt from the United States, and 450,000 mt for New Zealand.

According to USDA/FAS numbers, almost every category of U.S. dairy product exports showed significant increases between 2009 and 2016, led in percentage jumps by cheese (roughly triple) and ice cream (up 234 percent).

“So we are a major player, but others, especially New Zealand and Australia, produce a lot of milk with a small domestic consumption. Consumption in the EU is high, but they are very export oriented,” Shagam said. “In the past 10 to 20 years, the U.S. world market share has grown, especially with milk prices no longer set by government policy, but by the market, which allows us to be more flexible. And as other nations grow in income, their demand for dairy products increases. So the change in U.S. policy and the growth in overseas markets have both contributed to the growth in U.S. sales.”

Showing just how complex modern agriculture has become, even far more accurate and timely reports on global supply and demand, changing consumer trends, uncontrollable factors such as weather, and purely political domestic and foreign policy changes may be moot if the industry, from the farm to the factory, does not recognize, understand, and properly implement new technologies.

“If we only talk about genetic improvements in the past 15 years, using information supplied by USDA, you can see how much the industry has depended on and gained from WAOB’s efforts to provide a clear, palpable competitive advantage to U.S. dairy internationally,” Dürr said. “Today we have more automated tools and computers used by farmers, facilitating the flow of information, and, as dairy farms grow in size and become even more automated, all aspects of those operations have been evolving.

“What we do is very desirable from a consumer point of view. There is no concern about genetic engineering; instead, our reports allow decisions to be balanced, not just based on production, but also the health of the animals. And no one is more concerned about the well-being of cattle than farmers. The genomic method is a technology that provides opportunities to select future generations of animals that are healthier, less prone to disease, and produce more and better quality food.”

“As other nations grow in income, their demand for dairy products increases. So the change in U.S. policy and the growth in overseas markets have both contributed to the growth in U.S. sales.”

Other changes in dairy farming would astound previous generations of farmers – perhaps especially the growing provision of waterbeds to improve the quality of dairy cow sleep and, subsequently, milk production and quality. Farmers whose lives were controlled by the need to get their cows into barn stalls at specific times each day and hook them up to milking machines – also once considered a technological marvel – would, at the very least, be impressed by robotic milking machines.

Lely automatic milking system web

An Astronaut automatic milking system (AMS) by Lely. Such systems went into use in Europe in 1992; the first AMS in the United States was installed in 2009. Credit: Photo by ANOEK2012

Automatic milking systems (AMS) – robotic milkers – were developed in Europe, where they went into use in 1992. The United States was introduced to AMS in 2000, but it was another nine years before the first robotic milker was installed on a Michigan dairy farm. Since then, automated milkers have been installed on a rapidly growing number of U.S. dairy farms – nearly all with fewer than 350 cows – and there are more than 35,000 AMS units worldwide.

An AMS comprises a milking machine, a teat position sensor (usually a laser), a robotic arm for automatic teat-cup application and removal, and a gate system to control cows entering and leaving. As a cow enters the controlled area, enticed by highly desirable feed, a sensor reads her RFID tag; if she had been milked too recently, the automatic gate system sends her out of the unit. For those that are milked, an automated system of teat cleaning, milking cup application, milking, and teat spraying commences. When milking is completed, the cow is guided out – all with no human intervention.An AMS can handle up to 70 cows per unit each day.

Another major change in farm operations involves a new use for manure, long used to fertilize fields. Most common on large farms, anaerobic digester systems allow farmers to capture the methane gas contained in manure and convert it into electricity. More recently, farmers have been adding out-of-date food, otherwise bound for a landfill, from local groceries. Combined, even the manure from a herd of only 100 cows can generate enough electricity to power more than 100 homes.

“U.S. dairy farming faces two major and ongoing changes. One is a structural change toward fewer but larger dairy farms, while the second is a change in dairy product consumption away from fluid milk products and toward manufactured products for domestic and international markets,” the USDA/ERS report concluded.“The two changes interact with one another: structural change toward larger farms reduced industry average production costs and made U.S. dairy products more competitive in international markets, while change in product composition favors larger operations located away from population centers.”

Dramatic changes in U.S. dairy farm structure, production levels, domestic consumption, international market presence, domestic and international government policies, currency rate fluctuations, and, to a growing degree, major advances in technology indicate even greater future complexity.

A senior executive at John Deere described U.S. agriculture as being second only to the military in its use of technology. Increasingly, that also now includes what the Department of Defense calls C4I – command, control, communications, computers, and intelligence. That is nowhere more certain than on a 21st century dairy farm.

Caption for top photo: Farm manager Courtney Biggs prepares cows to be milked at Chapel’s Country Creamery, a dairy that produces artisan cheeses in Easton, Maryland. Although the United States is becoming a bigger player in world dairy markets, it still produces primarily for domestic consumption. Credit: USDA photo by Bob Nichols

This article was originally published in the 2017 edition of U.S. Agriculture Outlook.

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