Dairy farmers across the country are getting letters from their buyers that, because of the pandemic, their relationship is going to change in a way that's not good for producers.

According to a dairy market analysis by John Newton, chief economist for the American Farm Bureau, demand for dairy products actually increased for a short stint at the beginning of stay-at-home orders across the country.

But that increase came only after it was clear that "economic growth was likely to slow in the U.S. and abroad —destroying demand for dairy products typically destined for food service or export markets", wrote Newton.

Newton explained in his April 14 report that the dramatic decrease in demand for for dairy products, stemming from COVID-19 and the spring flush, resulted in some of the largest dairy cooperatives and processors in the country to ask producers to dispose of milk.

"Some of these cooperatives and processors, but not all, are now requesting dairy producers cut back supplies by nearly 20%," wrote Newton.

Marin Bozic is an assistant professor in the department of applied economics at the University of Minnesota. He's also a member of the National Program on Dairy Markets and Policy, with a team of dairy economists that was nationally recognized for their outreach work on the 2014 Farm Bill.

A popular public speaker on dairy topics, Bozic took it as his responsibility to find as many of these requests Newton is referring to and share them. Most of the requests came via letter to producers, which Bozic has then posted to his social media accounts.

The letters from the Midwest that have been posted by Bozic are from Ellsworth Cooperative Creamery (Wisconsin), Klondike Cheese Company (Wisconsin) and Land O' Lakes (Minnesota). He's also shared letters from processors in Idaho, Texas, Washington, Kansas and Florida.

• The letter from Ellsworth Cooperative Creamery reads: "The board is urging all patrons to reduce the amount of milk being shipped by 7%." The letter then provides suggestions to cull cows, dry cows early or reduce feed rations to do this.
• A letter to producers from Klondike Cheese Company in Monroe, Wis. reads: "There is a very real possibility that you will need to dump milk. A 20% decrease in our milk supply may come close to balancing with our orders. We are requesting that you do whatever you can to cut back your milk output by 20%." It also gives suggestions for doing this.
• From Land O' Lakes, a letter reads: "Effective with March 23 production, we will be strictly enforcing our Base program and will be assessing members for production over their individual Base allocation. Members will be assessed a flat $10 per hundredweight for any volume produced above members' individual Base allocation." Later in the letter it reads: "We need to be prepared to dump milk on members' farms and at our plants should the situation worsen. This would be unlike short-term milk supply disruptions like tornadoes or blizzards, and our ability to pay members for displaced milk will likely be impacted in the event of prolonged milk supply and demand disruption."

Bozic said each letter shares a common feature of providing marginal incentives to producers, adjusted for each of their particular situations.
"That means the price for those unwanted pounds — pounds above a certain level — will be different than the price for pounds the processors have a home or need for," Bozic said.

Traditionally when there's too much milk, the price of milk just goes down for all milk, said Bozic, which is still happening now.

But Bozic said because variable costs for producers are still lower than the prices they are getting for milk, low milk prices aren't enough incentive for producers to start adjusting production. While selling milk at low rates, larger producers will still make more money if they operate at full capacity.

"In general, lower than break-even milk prices result in you starting to lose money, but you're still better off making more milk," said Bozic.

So the payment systems described in letters from processors give extra incentive for the percentage producers would be giving up.

"By saying if you don't cut back, we are going to pay you a tremendously low price for that lost percent," Bozic said.

Some letters describe a "marketing fee" for that percentage, which Bozic said would drive the price to producers way down. Other letters are more blunt about it, telling producers how much milk they will accept.

"And that what you do with the rest is entirely on your own," he said.

Options left for producers' milk at that point is limited and will often result in farmers dumping it.

Out of the blue

Bozic said some of the systems given in the letters have existed for years but haven't really been put to use, whereas others are just now instituting them.

"And they are doing that in a very rapid and emergency-mode way," Bozic said. "So it's coming out of the blue, and it's not a protocol that has been there for a long time."

Fortunately the payment systems laid out in the past two weeks are not anticipated to last for more than two or three months, if the economy reopens as planned, Bozic said.

Private pricing regulations

Some processors are still offering to accept producers' milk but at a discounted rate, and others are completely closing the doors to a percentage of milk from producers.

Bozic said the approaches may differ depending on whether the company is private or public. Private processors (not cooperatives) cannot pay producers below what the federal-ordered minimum price is for any milk they accept.

"Even if they wanted to have this two-tier pricing system, where the last 10% is priced differently, they couldn't," Bozic said. "Because it would be violating the rules of federal orders."

That's driving private processors to create a system where they say "we cannot accept your milk," he said.

Dairy is unlike the many other sectors hurt from the economic fallout from the pandemic, but it's an industry that needed a win and couldn't handle another loss after 2019.

"Viruses are just a fact of life. It's ugly and a gut punch," Bozic said. "Every time I read one of those letters, I almost feel like crying, knowing how much human misery it will impose."