Dairy’s Decline Compounded by Tariffs

As an average consumer, you won’t look at the dairy case and see anything other than that gallon of milk for $2.19 and think, “that’s a pretty good deal.” However, on the other end of that bargain for you is an American dairy industry that’s seeing a massive drop in the return on its investment. The culprit? Well, there isn’t just one. It’s complicated.

On June 1, the Trump administration imposed tariffs on goods coming from Mexico and China. In return, those countries—which represent our top two trade markets—imposed their own tariffs on U.S. products, including dairy. In a recent letter to President Trump, the National Milk Producers Federation, which works closely with Kansas City-based Dairy Farmers of America, pleaded with Trump to ease the tariffs on Mexican imports in hopes that they would in turn ease their own tariffs. The tariff impact, according to Chris Galen with the NMPF, has already been staggering.

“We have an economic estimate that the imposition of the tariffs will result in price decline for farmers that will reduce the income for dairy farmers by $1.8 billion in the last two quarters of 2018,” said Galen. That $1.8 billion would result in a decline of roughly 19 cents per gallon for the farmers for all milk. Remember, though, only some of that hits your store shelves as liquid milk—the majority of production is manufactured into things like cheese, yogurt, milk powders and ice cream. If you do the math, that would cost the Kansas dairy market more than $75 million, based on 2016 production.

This outlook is much more foreboding than just a few months ago, when the pricing outlook was looking better. That spring outlook was a ray of hope for dairy farmers who were already seeing their revenues tumble. “If decline doesn’t turn around,” states Galen, “you can attribute that to the impact of the tariffs.”

This would be bad in a normal market for dairy farmers. It’s even worse considering the decline has yet to be stemmed. “The reality is that dairy farmers nationwide were already facing weak economic conditions,” said DFA Senior Vice President, John Wilson, “and these tariffs are creating even more stress for dairy farm families.”

When you look at the general industry of milk as a whole, dairy and non-dairy, the difference is stark. According to market intelligence agency Mintel, the U.S. dairy market has declined by 15 percent since 2012.  Meanwhile, non-dairy products, like almond milk or coconut milk, have skyrocketed with more than 60 percent growth in the same time frame. The conditions have become so bad in some areas that depression among farmers has become a major concern. In one part of Kentucky, the dairy farms have dwindled from hundreds to just three in an entire county.

The impact can also be felt locally. According to the Kansas Livestock Association, nearly 300 licensed dairy farms dot the landscape of the Sunflower State, with more than 150,000 dairy cows between them. While it’s not a decline, Kansas also did not add any licensed dairy farms from 2016 to 2017. Missouri lost 60 farms in that same time frame.

When it comes to milk production, Kansas ranks 16th in the United States while Missouri is a little further down that list at 26. A little more than 20 years ago, Missouri ranked 14th in milk production. Since 2016, the Show-Me State has seen nearly a nearly 12 percent decrease in production, while Kansas has seen a 3.1 percent uptick. That is the start of another issue.

Information from the USDA.

Kansas’ increase goes along with a national production trend that actually hurts the farmers.  According to a national milk business production, the promise of cheaper feed later this year, combined with increased production and fewer purchasing markets, will make the supply issue even worse for dairy farmers. 

Some farmers have tried to take the route of a popular Kansas City-area dairy, Shatto Milk Co.  That family has had a dairy farm for more than 80 years, but in 2003 decided to process the milk themselves. According to co-founder Matt Shatto, that move has largely insulated them from many national issues. “We had no choice,” Shatto said.  “We started (processing our own milk) in 2003 because dairy was on a continual decline.  It was difficult to pay bills on a normalized year, let alone longer-term.”

Because of that problem, the Shattos either had to go out of business or change their business model. They changed. It worked. They vertically integrated their business and decided to focus on their region instead of the nation.  “We are so thankful to our customers, we have been very fortunate,” says Shatto. “We don’t want to become what has created the problem for so many little dairy farmers across the country. We don’t want to become something we’ve never been.”

The Shattos are also taking advantage of the fastest-growing segment of the dairy industry—flavored milk. Offering non-traditional flavors like cotton candy, cookies-and-cream and egg nog, the Shattos are claiming part of a $1.78 billion market. The hard part, according to Matt, is you don’t know it’s going to work.  “We’re seeing a lot of friends that have followed suit, done similar things.  Some have been successful and some haven’t,” laments Shatto.

Compounding the problem of the tariffs is an industry that isn’t cheap to begin with. “With the dairy industry as a whole,” Shatto says, “farmers are getting paid less and less when it’s costing more and more to do their daily work, whether it be feed or long-term capital expenditures.”

A study conducted with Ohio dairy farmers in 2016 showed that the average net returns per cow were $1,266—nearly $800 less than the average cost of the animal itself. The net returns factored in hired labor, but not the farmers paying themselves. Think income taxes, retirement savings and principal payments for the very expensive equipment.   

So what’s the solution? Wilson and others went straight to the top. “Along with other dairy industry leaders, we have asked the president to re-evaluate the tariffs as well as expressed concern about the potentially negative, long-term impact of these tariffs on American dairy farm families and the future health of the industry at large.”

Besides that, groups like NMPF have started discussions with the secretary of agriculture, Sonny Perdue.  “He indicated there would be a tariff-mitigation program, but what form it takes and when it is rolled out is to be determined,” says Galen, “so we have begun to reflect on some things that the agency could do to help dairy farmers.”

Galen added the USDA has an insurance program that farmers can buy into to hedge their risk should prices get low or costs increase.