7 Trends That Explain The Contours Of Wisconsin's Deepening Dairy Crisis

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April 10, 2019

A maelstrom of economic and demographic forces are hammering Wisconsin's dairy farmers. But what's causing such exceptional distress in one of the state's iconic industries? Here are six charts — and a map — that can help make sense of these complex trends.

Milk pricing is quite complicated and requires detailed explanation. In brief, regulations originating in the 1930s have generally helped steady ups and downs the dairy industry and allowed farmers to secure more stable prices for their milk.

The price of milk hit an all-time high in the United States in 2014 at $25.62 per hundredweight, or cwt. The average price received by Wisconsin farmers at that point was a little lower, at $24.50, but was still a record high figure.

But 2014's high prices obscured a consequential long-term trend: since the early 1980s, inflation has far outpaced milk prices. The average milk price in Wisconsin in 1979 was $11.75, which in 2019 dollars would be $40.91. In fact, the effective prices received by dairy farmers since 2000 have been more similar to those their predecessors got during the depths of the Great Depression.

 

Compounding this inflation-obscured reality, 2014's record highs were short-lived and plummeted around 30 percent in 2015 and have since stagnated.

The 2015 price plunge can largely be explained by weakening export demand, according to Mark Stephenson, who directs University of Wisconsin-Madison's Center for Dairy Profitability and chairs a state dairy task force, that seeks to "maintain a viable and profitable dairy industry."

For most of U.S. history, export markets have had little effect on milk prices, Stephenson explained, until about 2005. That's when prices in the U.S. began aligning with those in the world’s top dairy exporters, including the European Union and New Zealand.

"When our prices came into alignment with theirs, suddenly we were competitive on world markets, and we started to export a great deal more," Stephenson said.

Since then, American milk prices have risen and fallen with international demand for U.S. dairy exports, which also hit record highs in 2014 before dropping off 30 percent the following year.

 

What happened in 2015 to cause U.S. dairy exports to collapse?

For one, a stronger U.S. dollar dampened foreign demand for American products. Stephenson also pointed to rule changes in the EU, which eased a longstanding regulation known as the "milk quota" that had set a limit on its members' production.

"A bunch of countries responded by producing a lot more milk, and virtually all of that was exported," Stephenson said. "That crowded out exports from countries like us. They didn’t do that thinking, 'We’re going to poke the eye of American producers,' but that’s what happened."

Moreover, around that same time, New Zealand experienced ideal weather for milk production, Stephenson noted. In contrast to the U.S., New Zealand's dairy industry is largely pasture-based, and weather more directly impacts milk output. During periods of drought, milk production suffers, but when the weather cooperates, robust pasture-grazing leads to a spike in production, which can surge into dairy export markets.

Since 2017, those international factors have been compounded by the ongoing trade war between the U.S. and its major trading partners, which have retaliated to tariffs imposed by the Trump administration on raw materials like steel and aluminum with tariffs of their own. Many of these retaliatory measures have targeted agricultural exports, including dairy products.

One illustration of this with particular relevance to Wisconsin's cheese-centric dairy sector is the nation's record-breaking cheese surplus. Cheese stocks in the U.S. have swelled since 2014 to nearly 1.4 billion pounds in early 2019.

 

"That's going to depress prices," Stephenson said. "Nobody wants to make cheese to hold in cold storage."

Barring an unexpected increase in export demand, he added, milk prices would likely continue to decline until the surplus is cleared.

Meanwhile, the unrelentingly low milk prices are hitting cash-strapped Wisconsin dairy farmers, though somewhat unevenly.

Kevin Bernhardt, a professor of agribusiness at University of Wisconsin-Platteville and farm management specialist affiliated with the Center for Dairy Profitability, researches profitability in Wisconsin's dairy industry. He's found a wide range of profitability among dairy farms between 2014 and 2017.

And even though Bernhardt found that profitability improved with increasing herd size, he noted the top-performing farms of all sizes have maintained healthy profits.

 

Stephenson has also observed this phenomenon.

"We've still got about 20 percent who are cash flowing and haven't had to borrow anything," Stephenson said. He estimated another 30 percent have had to increase their borrowing but should weather the crisis alright.

"Then we have another 30 percent who maybe had to completely restructure their loan payments, and another 20 percent that are really precarious," he said. "They’re the ones that are going out of business."

Complicating matters for dairy farms with the most precarious finances: those that remain profitable have no incentive to slow production.

"There's no reason for them to change milk production at all," Stephenson said.

Meanwhile, the total number of milk cows in the state has dwindled for decades. But over the same time, advances in technology and genetics have led to all-time highs in milk production per cow.

 

The emergence and growth of very large dairy farms with hundreds or thousands of animals, known as concentrated animal feeding operations, or CAFOs, has also contributed to record-high overall milk production amid the decrease in total cows in the state.

These dynamics — continued record-high milk production coupled with stagnant milk prices — are distressing many debt-burdened farmers.

"I think there’s a lot of frustration spilling over on farms where they're having to borrow money just to keep producing milk," Stephenson said. "They’re asking, 'Why can't the milk prices be higher?' The truth of the matter is we're still producing more milk today than we did last year at this time."

Record production, weak export demand and low milk prices are colliding with another long-term trend that's been apparent for decades but is only starting to have a real effect on the agricultural economy: the aging of farmers.

Producers across the nation have been steadily aging since the 1970s as younger generations increasingly opt for non-farm careers. In 1978, the average age of a Wisconsin farmer was 48.6 years. In 2012, it was 56.5 years. More than 26% of Wisconsin's farmers that year were already beyond retirement age, with another 30% quickly approaching it.

 

Seven years later, many of Wisconsin's dairy farmers are deciding between keeping their operation afloat or risking their ability to plan for retirement, explained Mark Hagedorn, an agriculture agent for University of Wisconsin-Extension Eau Claire County.

"Even the more well-heeled producers out there that aren't having to service much or any debt … they still don't have enough dollars in the coffers left to replace old equipment," Hagedorn said. "Accounting 101 tells you when you don’t cover depreciation, you're losing equity, and equity is what these folks are using as a retirement account."

A large share of producers are approaching retirement with little prospect of their operation living on with the next generation.

"The lifestyle afforded by milking cows is a pretty tough road," Hagedorn said. "A lot of time there is not a willing generation to accept that lifestyle."

In the Eau Claire region, dairy farms trend toward the smaller end, Hagedorn noted. He estimated the average herd size in the area to be between 75 and 85 cows.

 

These factors — a lack of profit, an aging population and few willing to enter the industry — have helped contribute to Eau Claire County losing dairy herds at one of the fastest rates in the state between 2017 and 2019, Hagedorn said. The county lost more than a quarter of its dairy herds over the two-year period. Several neighboring counties in western Wisconsin, including Barron, Dunn and Trempealeau, as well as others in the Driftless region to the south, have also seen higher rates of herd loss.

The figures provide stark evidence for just how deep the current crisis is cutting into an iconic Wisconsin industry. Back in the heyday of dairy farming, the U.S. Department of Agriculture settled on the Eau Claire market as the epicenter of its milk pricing system; today, farmers in the Eau Claire area are exiting the business in droves.

"They're seeing there just is no light at the end of the tunnel at the moment," Hagedorn said.

7 Trends That Explain The Contours Of Wisconsin's Deepening Dairy Crisis was originally published on WisContext which produced the article in a partnership between Wisconsin Public Radio and Wisconsin Public Television.

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