Food & Beverage

US dairy glut leads to problem of spilled milk in some markets, as NAFTA brings other worries

Key Points
  • Michigan and the Northeast regions are seeing some milk being dumped as production is exceeding the capacity to process the product.
  • The U.S. has relied on exports to soak up the extra production, but more competition globally and the strong dollar have created a tougher environment.
  • Mexico is the largest importer of U.S. milk, but uncertainties surrounding NAFTA are raising added concerns for American dairy producers.
  • Negotiators from the U.S., Canada and Mexico are set to gather Saturday in Ottawa for a third round of talks to modernize the 23-year-old trade deal.
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There's a domestic dairy glut that's so bad it's led some American farmers to spill milk.

National milk production is increasing faster than the processing capacity. Another challenge facing the industry is total per capita consumption of fluid milk has been steadily falling for some time because of competition from other beverages and because the share of the nation's total population who are children continues to decline.

"In Michigan and the Northeast, milk is being dumped," said Gene Paul, legislative coordinator of National Farmers Organization, an Iowa-based organization which markets livestock, grain and milk for its members. "Milk is just being thrown away, because they just don't have the processing capacity."

Also contributing to the dairy glut is that average production levels are rising as more-productive cows allow big dairies to experience output growth.

Regardless, it comes as tough trade talk from President Donald Trump and threats to ditch NAFTA, the North American Free Trade Agreement, is causing worries for American milk producers. Mexico is a huge buyer of U.S. dairy products.

"Exports are a big component now of milk sales in this country," said Peter Fredericks, a dairy specialist with the U.S. Department of Agriculture and administrator in the agency's Northeast milk marketing area.

The USDA recently raised its milk production forecast for 2017, indicating that "increases in milk per cow more than offset a slower rate of milk cow expansion."

"There are certain supply-and-demand imbalances going on," said USDA's Fredericks. "We're not seeing rivers of milk being dumped. We're not seeing farmers foreclosed on — that type of thing."

Overall, U.S. milk consumption on average is rising between 1 and 2 percent annually but production is going up around 3 percent.

"We're seeing the growth of these very large dairies that have good cows, they have good technology and they just keep producing more and more milk," said Paul. "Production just continues to increase, and there's no brakes on it. And cooperatives are almost encouraging production by paying volume premiums."

American dairy farmers every year are producing about 3 billion more pounds of milk than the year before, according to a report released this month by CoBank. It found the available processing capacity, particularly in the Northeastern and upper Midwestern states, "has strained the ability of dairy cooperatives to fill the role of market balancers."

In the Southwestern states, though, there's less of a dairy glut and less pain being felt by the dairy producers.

"It is a regional problem but a serious problem,' said Ben Laine, senior dairy economist at CoBank in Denver. "It has put pressure on pricing, especially in some areas like Michigan. It's depressed prices in other areas whenever you're forced to dump milk because you're not able to process it."

Last year, Michigan ranked No. 5 nationally in terms of milk production, with an estimated 97 percent of the state's dairy farms family owned, according to the United Dairy Industry of Michigan, a trade group.

Surplus milk produced by the state is exported to meet demand in other states since Michigan produces more than enough milk to supply its own needs.

"We're 'nip and tuck' on processing capacity," said Ken Nobis, a dairyman in central Michigan and president of Michigan Milk Producers Association. "Our state's production has grown very rapidly, and it's grown faster than global consumption has increased."

In some cases, skim milk is dumped because there is sometimes the capacity to take the butter fat out of it, which Nobis said is between 50 and 60 percent of the value of the milk product. That said, he's still heard of "cases where everything was dumped."

Yet it's not all sour for the dairy industry.

Per capita consumption of dairy products in the U.S. as a whole has been increasing, helped by strong growth for butter and certain yogurt categories.

Whole milk also has been doing better in terms of sales growth than the overall fluid milk category. Also, more cheese products are being sold today and not just for hamburgers or meals but for snacks too.

Trump warns Canada over dairy tax
Trump warns Canada over dairy tax

Some research is indicating that dairy fat isn't the health hazard that it was once considered. And in some cases it's indicating that it's good for you.

"For 30 or 40 years we've been under the gun of this fat consumption issue," said Nobis. "We're seeing increased consumption of the higher-fat items in dairy, like whole milk, butter and cheese."

Some large dairy cooperatives are turning their attention to cheese plants or making investments to shift to faster-growing segments such as organic milk. USDA data released this week showed milk was the top organic agricultural production commodity last year, growing 18 percent in sales.

"The dairy industry is a growth industry," said John Wilson, a senior vice president of the Dairy Farmers of America, a Kansas-based dairy marketing cooperative that is owned by nearly 14,000 dairy farmers. "We're very bullish on the opportunity that the U.S. dairy farmer has to feed the world."

Indeed, the U.S. has relied on exports for the last several years to soak up the amount of extra production. But it's becoming more challenging, and industry executives worry that trade friction could worsen the situation.

Exports currently represent about 13 to 14 percent of U.S. milk production, although it's down from around 19 percent back in 2013-2014, according to the USDA. The figures include not only fluid sales but milk powder and cheeses.

"The export market is substantial but not at the level it was 3 or 4 years ago," said USDA's Fredericks. The strength of the U.S. dollar has an impact on demand for American milk products, and domestic dairy producers also must contend with more competition from other regions of the world, he said.

Mexico imported about $1.2 billion of U.S. dairy products last year, but the uncertainties surrounding NAFTA bring risks. Negotiators from the U.S., Canada and Mexico are scheduled to meet Saturday in Ottawa for a third round of talks to modernize the 23-year-old trade agreement.

The Asian market, including China and South Korea, also are major export markets for the U.S. dairy farmer. China backed off buying U.S. dairy products from the levels it had back in 2014 because of its own huge inventories but now appears to be purchasing again.

"What makes it challenging to build these massive [dairy] plants that we need in the upper Midwest is that we have these issues with global trade going on," said Nobis. "We don't see production or consumption growing that rapidly in the United States. So for dairy and most of agriculture, our expanding sales are going to be across the sea."

Canada also imports U.S. dairy products, but some U.S. officials and dairy executives have charged the country with protectionist policies on dairy that are hurting American dairy farmers, particularly those in the border states.

"We're hopeful that the [Trump] administration will be able to negotiate an improved NAFTA as it relates to dairy with Canada," said Wilson. "NAFTA has worked very well for dairy in Mexico and for U.S. dairy solids being sold to Mexico. Canada dairy wasn't part of the original NAFTA agreement, and we would like to see Canada play by the same rules that the U.S. and Mexico play by."

American dairy producers are also facing more competition in the global market from dairy leading exporters such as New Zealand and Australia, as well as Europe. After the EU ended its milk quota system in 2015, production increased sharply, and now the 28 member countries together exceed U.S. dairy production.

WATCH: US in dairy war with Canada

US in dairy war with Canada
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