The Roots of Michigan’s Dairy Crisis and the Dangers That Lie Ahead
How International Trade, World Events, and Overconfidence Doomed Michigan Dairy
LANSING (Great Lakes News) - 154 Michigan dairy farms closed their doors last year according to the Michigan Department of Agriculture and Rural Development. That averages out to three farms every week. Farms that stay open find it harder to acquire loans and rely on outside income or agritourism to push through. This marks another chapter in Michigan dairy farmers’ years-long struggle to survive, and this spring’s extreme weather has the potential to damage Michigan dairy at unprecedented levels. A combination of predatory trade practices and world events have put dairy farmers in a compromising position. And as the first frost approaches, farmers have no choice but to hope for the best.
How Did We Get Here?
Starting in 2014, the dairy market experienced a dangerous combination of market forces that rapidly dropped dairy prices.
2014 marked an especially good year for milk prices, with prices remaining high enough for long enough for dairy farmers to justify increasing production. While in the process of upping their output, international events erased the markets the farmers relied on for purchasing their milk.
The European Union operated under a supply management program of dairy production for 35 years, and moved away from the model in 2015. Supply management places caps on production to keep prices at a manageable level. American dairy producers operated under the assumption that European supply would remain somewhat consistent and were unprepared for a large flooding of European dairy products into the world export market.
“When they moved away from supply management it allowed producers to expand milk production and they expanded very rapidly,” said Michigan Milk Producers Association (MMPA) Senior Policy Advisor Ken Nobis. “That first year they increased their production 5 percent, which is a lot of milk.”
Simultaneously, China bought large amounts of dairy products from the global marketplace. Their spending habits left them with a large surplus of dairy and they decided to stop purchasing an excess of dairy products in 2015. China now bought far less diary, and Europe lost another major buyer soon after.
“The same year was when Russia moved into the Ukraine,” Nobis said. “The west sanctioned Russia, and Russia stopped buying dairy products from the EU. That milk had to find another home in the export market, which drove prices even lower.”
Where American farmers struggled through the price drops, European farmers could rely on government programs that keep their farms profitable regardless of market value.
“The US producer has some government programs,” Nobis said. “But, in the European Union 20-30 percent of your revenue is going to come from the government in the form of green payments. It’s legal, but they don’t have to be as profitable because of the huge subsidies they receive.”
In the past, American farmers operated under the “Base and Surplus” system that reduced the amount for which you could sell milk that exceeded your stated production goals. This prevented farmers from overproducing, but proved unpopular in the deregulation minded Reagan era. This placed American farmers in a bind when Europe entered the market with such strong trade protections. As prices dropped, so did revenue. And as revenue dropped, farmers produced more milk and dropped the price even lower. Without any prescribed caps on production there was a mad dash to produce as much as possible. Ultimately, only the largest farms could survive the fluctuation.
“It was a perfect storm,” Nobis said.
Where Are We Now?
Dairy prices just went up for the first time in awhile, but they may not have the strength to bring dairy farmers out of this years-long price deflation.
“Fortunately we’ve seen some uptick in dairy prices in the recent months, and hopefully that will help,” said Michigan Farm Bureau Dairy and Livestock Specialist Ernie Birchmeier. “But it’s going to take some time to work us out of this challenging situation that we’re facing. When you go through five years of lack of profits in any business that’s going to take a toll.”
Birchmeier claims that the last five years of economic challenges in dairy have put a nearly irreparable strain on farmers. Dairy farms continue to close. And while many are picked up by larger and more economically flexible dairy operations, the total amount of cows is dropping as well. A slight raise in price may provide some relief to farmers, but systemic problems continue to cause them grief. So much grief in fact, that their mental health is at risk. A Morning Consultant research poll showed that “fear of losing the farm” negatively affected the mental health of farmers all across the United States.
“We all know how stressful farm life can be, and things are even tougher now because of the farm economy,” said American Farm Bureau Federation President Zippy Duvall. “More of us are affected, either directly or by having a friend or family member in distress. This poll proves what we already knew anecdotally: Rural America is hurting not just economically but also emotionally.”
Michigan dairy farmers are not exempt from these anxieties, with many doing everything they can to push through hardship because of a commitment to themselves or their family.
“I don’t know any farmer who gets up in the morning and says ‘I don’t want to push through.’ It’s their business, it’s their livelihood, it’s something they want to pass on to the next generation,” Birchmeier said. “But let’s be honest, if you go through five years of economic challenges it’s going to take its toll. It’s not just the dairy industry, it’s across all agriculture.”
Adding to the economic pressures of the export market is President Donald Trump’s trade war with China, which reduced dairy exports to China by 54 percent in the first half of 2019. This comes at an especially bad time. According to Crain’s Detroit Business, demand for diary in China is steadily rising again as the population gains an appreciation for western foods like pizza and “wine and cheese nights.” As Michigan dairy farmers remain desperate to sell their excess milk, they find themselves restricted even further.
More complications come from the United States’ trade relationship with Canada, who uses NAFTA provisions to sell byproducts from butter production at predatory rates.
“What we have seen globally is a higher consumption of dairy fat (butter) in the last 5 years,” Nobis said. “Dairy fat was under the gun for years because of an erroneous study from Great Britain that said dairy fat was particularly unhealthy. That has since been disproved, and when that happened people started consuming more dairy fat.”
Demand for dairy fat rose in Canada, driving the Canadian government to raise quotas for milk production in their closed system and give economic breaks to Canadian dairy farmers to make selling butter byproducts like skim milk powder economically viable. The Canadian government created the distinction “Class 7 Dairy” to describe these products.
“Canada did not have the amount of fat needed to meet demand, and rather than import that fat they increased their quotas and produced it themselves,” Nobis said. “A byproduct of butter is skim milk powder, and Class 7 was created for that product. So when they paid their producers less for a portion of their milk they could sell that product globally at a cheaper price. They also increased prices for other products, so the producers didn’t lose money when producing them. This allowed them to meet the demand of butter in Canada, and dump that skim milk powder on the global marketplace.”
Nobis claimed that a dairy co-op in Arizona was unable to compete with Canadian exports of skim milk powder in Mexico, as the Canadian producers could ship their products across the entire United States of America and still sell them for cheaper than a producer a short distance from the border. This leaves farmers in Michigan and elsewhere unable to offload a byproduct that has the potential to make butter production far more lucrative.
Perhaps the largest looming danger in Michigan dairy, and all Michigan agriculture, is the ramifications of this Spring’s weather. Flooding and cold made for an especially bad yield, which has the potential to become worse in the event of an early frost. Despite assistance from the U.S. Department of Agriculture and efforts by the Governor to provide stimulus to make up for crop damages, Michigan lost plenty of crops during prime growing season. While this is a well established danger to all of agriculture statewide, it offers a unique problem for Michigan dairy farmers.
Most small dairy farmers grow their own feed every year. This makes it easier to cut costs on most years and gives the farmer something to sell in the event that they exceed their herd’s requirements. Less feed can cause damaging ripple effects in the dairy market.
“This will impact the amount of and quality of feed that is available for our dairy industry this year and throughout next year,” Birchmeier said. “They will not produce the same quality of feed they would have had they had gone in during the normal time frame. Milk production will have a potential to be down. These dairy cows are like finely tuned athletes, and if they’re not getting the proper nutrition they’re not going to be able to perform as well.”
Without the proper amount of feed required to get the best results, farmers will be forced to purchase additional ingredients to give their cows the nutrients they need.
“Farmers will need to offset that low quality feed with purchasing additional types of feed ingredients,” Birchmeier said. “It’s going to cost the farmer more to buy those ingredients, to bring the nutrient level of that ration up to meet the needs of the cow.”
If a farmer plants a crop that dies during the growing season then they have effectively spent the money for the crop without any reward. Insurance will cover lost crops to a certain extent, but the farmer is left with a sunk cost and nothing to show for it. Buying additional crops requires additional funds without additional benefits.
“You’re actually buying the grain crop twice,” Nobis said.
What Can We Do?
There is no easy solution to the problems faced by Michigan’s dairy industry after so many years of depression. Some argue that pressuring congress to pass the United States-Mexico-Canada Agreement (USMCA) should be a priority as it would further open up the Canadian and Mexican markets for American dairy products. Most importantly, it would reduce Canada’s leverage over class 7 dairy.
“Trade is critically important to our dairy industry, it’s important to all of agriculture,” Birchmeier said. “We need to get USMCA fixed and finalized. Many people don’t understand that NAFTA is a quarter of a century old and there are products that are produced now that weren't produced 25 years ago. One of those is class 7 dairy in Canada, and the agreement would open up the market for U.S. dairy in that segment. Congress needs to get the job done. It’s sitting there waiting for them to pass it.”
Michigan State Senator Keven Daley left the dairy business 15 years ago, citing Canada’s predatory dairy trade policies as his reason.
“Part of the reason I got out was because when NAFTA went into place Canada was allowed to operate under a quota system which put us in a non-competitive spot,” Daley said. “They could sell product over here and we couldn’t over there.”
Daley, who transitioned into beef cattle, believes that America moving away from the “Base and Surplus” system and allowing for overproduction caused the dairy industry’s numerous problems but does not offer a specific policy solution.
“As Americans, we like the free enterprise system,” Daley said. “When it came to the dairy industry, not being able to have some kind of control on the amount of milk that’s produced hurts us in the long run.”
Nobis argues that international efforts to curb free trade, like European subsidies and international tariffs, would need to be removed before dairy could make meaningful strides.
“We’re free traders,” Nobis said. “But there’s really a limit to what we can do in that area. The EU ships far more dairy products into this country than we ship into the EU because of trade barriers.”
Ultimately, the full extent of the dangers the Michigan dairy industry faces still elude experts.
“At his point the total impact is difficult to predict because we are not at the end of our growing season,” Nobis said. “It depends on when the first frost comes. If we have an early frost it’s going to be a disaster. If the frost is late like last year, you’ll most likely have enough feed and maybe a little extra. It will have an impact regardless.”
Birchmeier suggests Michigan residence help any way they can, even in something as simple as making decisions at the supermarket.
“Buy more milk. Buy more ice cream. Eat more cheese. Get another pizza,” Birchmeier said. “Dairy is an incredibly healthy product that is wholesome, nutritious, and affordable. Price is determined by demand, so if that demand goes up the price will go up and our farmers could use that right now.”
Simply switching your almond milk for the real thing could put Michigan dairy farmers on the road to recovery, but they still have along way to go.