Can the US become competitive?
The problems with US dairy industry’s pricing and marketing policies are glaring
The policy fosters a low-risk, low-reward environment where focus stays on processing volume at low-cost rather than optimising unit value. The value of raw milk is set well after milk has been delivered and processed and price signals are short and prone to volatility. Risk management tools have been created but are poorly understood and used by a small number of large producers.
The politically-powerful production sector and boards of co-operatives in the US industry appear comfortable with the status quo, and devoid of the willingness to bring reality to the signals reaching farmers and processors and improve the incentives for innovation.
Several years of overproduction of raw milk and weak global ingredients markets delivered low farmgate milk prices. Rather than face reality with a blunt signal to encourage change, the industry sought protection and support – ensuring more milk remained in production that the US market could absorb, pushing the surpluses to low-paying export markets.
Achieving a cost-competitive supply of basic ingredients and cheese is not a problem – becoming functionally competitive seem a mountainous task.
It is unlikely that this situation will change. With marginal US politics expected to intensify further over the next decade, the farm lobby will continue to be highly influential and prevent a move to a system that contains any uncertainties.
Is there stomach to alter the environment? A market-aligned approach would remove the pooling mechanism and regulated conversion cost allowances. Plants would compete for milk, contracts could be used to create incentives or disincentives to manage supply. Prices would be set by a processor’s use including exports, not the weight of domestic surveyed averages. Phasing might require a compromise to cushion segments of the production sector exposed to commodities produced by the customer they supply.
What impact on milk output and product mix if there was a migration to a demand-pull rather than a production-push? Higher value opportunities would be taken up by innovative producers and the gulf between high and low value milk will increase.
Change would be slow evolution, but it would speed up the attrition in the production sector, already expected to see the departure of 50% of farmers by 2030.
What does this impact?
The US is a dairy juggernaut and the only major producer that appears capable of structural growth in output – a common feature of our LongView scenarios. Whether the focus can shift sufficiently to deliver higher unit value from export markets by meeting customer requirements, without changing the straightjacket of domestic price and supply regulations will remain the defining challenge for the sector in the next decade.