On Dairy, He's a Bull

Mark Stephenson came to campus in July as the college’s new Director of Dairy Policy Analysis and Director of the Center for Dairy Profitability. In these positions, he will take a leadership role in education and research related to dairy policy and dairy market analysis. He comes here from Cornell University, where he spent 17 years as a dairy economist. Before that he spent three years on the faculty at UW-River Falls.

In the early 1990s a lot of people thought Wisconsin’s days as a dairy leader were behind it. You were here then. Did you agree?
Actually, I thought Wisconsin’s dairy industry had a bright future, but it wasn’t clear to most people back then. That was when California had double-digit growth year after year and surpassed Wisconsin as the number-one milk-producing state. It was not obvious at the time that we were going to have the kind of turnaround that we have seen in the last few years in this state.

Why are you bullish about America’s Dairyland?
For the same reason that W.D. Hoard was more than a century ago: He looked at the agronomic resources of this area—the climate, the soils, the potential to grow—and recognized that you could grow terrific grass here. You could grow corn. You could grow what you needed to support animal agriculture, and in his mind the best animal agriculture was dairy. It would yield the most and it would give back to the land the animal waste. We still have those resources here today.

How does that help us compete?
Farms here average an acre-and-a-half or two acres per cow. A California farm may have 10 or 12 acres altogether. They buy all of their feed. We buy part of our feed, but we grow an awful lot of it. That means that in times of price volatility we have more stable input costs. With the price swings and downturns in 2009, farms out west got clobbered much worse then farms in the upper Midwest.

How has Wisconsin dairying turned itself around?
For one thing, our processors aren’t so commodity orientated. Twenty years ago. we were making a lot of cheese, a fair amount of butter and some nonfat dry milk, but these weren’t highly differentiated products. Today our processors have really brought up the game. They’re making a lot of specialty cheese and other products that stand out from the rest of the pack.

What about our farmers?
They looked at what was happening in the West and realized that they could do that too—think about economies of scale and employ a variety of business models, including smaller, pasture-based systems. They began to remold the dairy industry in this state. Our milk production is showing it today.

Milk prices paid to farmers fell by nearly half last year. Why didn’t the price of a bottle of milk follow suit?
There is a strong relationship between retail prices and what farmers receive, but you wouldn’t expect them to move in lockstep. Milk may be the major ingredient in dairy products, but it is not the only cost. Other costs—labor in the plants, transporting the milk, the energy used in the plant and the store, everything needed to get it to the checkout counter—haven’t changed. The other thing is that consumers do not like prices bouncing around a lot. We all like a sale, but we don’t like it to be $2 a gallon one week and $4 a gallon the next, so retailers try to buffer those changes. Sometimes their margins shrink, maybe even to negative numbers, and sometimes they grow.

We now have farms milking 5,000 or 6,000 cows. Is this is a positive thing for Wisconsin?
I don’t think it is a bad thing. I think that the state would do itself wrong to automatically decide not to allow these farms to look for opportunities to lower their costs. I think folks who have a negative connotation about those types of farms should visit one and take a tour. Your image of a “factory farm” might evaporate. You might see that cows are treated very comfortably and humanely. It is not the case that because these farms are big, they are bad. And it is not the case that because they are big, they aren’t family farms.

Will there still be a place for 80- or 100-cow herds in Wisconsin?
There will. Some might need to change their business model, for example, going from a tie-stall barn and selling milk to a co-op to becoming a grazer, perhaps even seasonal grazing. This lower-input approach could be particularly useful for a farm that needs a capital refresh that the operator isn’t prepared to make—where the silos and buildings and equipment are too worn-out to function. Those who want to milk fewer cows can also consider adding value to their milk—sell it not as milk, but as a finished consumer product. This requires a lot of new skills and homework, but some farms are doing it and doing it well.

But that’s not a panacea?
Those approaches work for individual farms, but they can’t account for the volume of milk that we produce in Wisconsin. You couldn’t have 10,000 small value-added dairy processors. We don’t have the consumer market here for that much dairy product, so those folks would have to be become much more intelligent marketers and get well outside of their geographic boundaries.

So who’s going to consume all the additional milk and cheese and yogurt?
If we want to support that growth, we have to look for new markets. We are finding new ways to use milk and entice consumers into using different kinds of dairy products, but a lot of that growth is going to be through export. Other countries have been doing it for a long time and we need to get better at it. We need to understand our customers better. If we delivered a product that a retailer didn’t want in this country, we would take care of that quickly. We’ve been a bit more relaxed in dealing with export customers. It is harder to service customers overseas, but we need to get them the products and the packaging they want. We are only beginning to become deeply involved in that.

Can the university help with that?
We can help processors to better understand global markets. The United States has tended to use world markets to sell what we have in surplus—like nonfat dry milk. But the rest of the world isn’t used to nonfat dry milk—they are used to skim milk powder. Most of the world wants butter that is 82 percent fat. We produce ours at 80 percent. If we want to sell a commodity around the world, we have to make what the world wants.

What counsel can you offer to farmers who have seen their profits evaporate and their net worth plunge in the last couple of years?
I don’t anticipate prices having the kind of rebound that will restore all of the lost equity we had over the last year and a half in any short time period. I think it’s going to be a crawl back for a lot of people. That’s the reality of this. But prices have been stronger here than in the rest of the country, and the costs of producing milk have been relatively lower. So people can look for a better margin of profitability here. They will be restored more quickly than in most places.

So there’s a good reason that we’re America’s Dairyland.
Some of the best operations around the country have moved from the West and Southwest to the Midwest because they see this. It’s an advantage to be able to grow your own forage base as opposed to buying it. It’s an advantage to be in a cooler climate with these high-producing cows. We’ve had also had a lot of growth internally from dairy producers who have realized that a different type of farming system could be even more profitable. They’ve done it because they recognize that this is a great place to produce milk.