By Keith Woodford*
In a recent article, I wrote that there are four big questions for New Zealand to consider when assessing its future positioning as a dairy producing country. On the supply side, those big questions relate to competition from the EU and the USA.
In the immediate future, our key competition on global markets will come from the EU. I have already written about that. But in the longer term, the potential power of the United States as a major exporter cannot be ignored. And so it is on the United States that I will focus here.
The US has about four times as many dairy farmers as New Zealand, and produces about four times as much milksolids. So that suggests that the average American farm is of about the same size as in New Zealand.
However, averages can sometimes mask what is really happening, and that is very much the situation in the United States.
In essence, the United States has about 40,000 small family farms, many with less than 100 cows, and about 3000 farms with more than 500 cows. These 3000 bigger farms still only lift the American average dairy size to about 215 cows. But the important picture is that half of America’s milk comes from farms with more than 1000 cows, and this proportion is increasing each year. So averages are indeed misleading.
Big farms, big cows
There is also a need to take into account that many of the biggest farm businesses comprise multiple farms. I know of one American farmer who has 60,000 cows. I know of another three farmers who between them have close to 100,000 cows and have their own processing plant.
Also, it is important to recognise that American cows produce more than double the milk that New Zealand cows produce. This is in part because they are big cows – some 30% to 40% heavier than average NZ cows – and in part because they are fed balanced rations. Some of these cows are milked three times a day, and some of them are given injections of bovine somatotropin (bST) to produce even more milk. This practice is not allowed in New Zealand.
It is very clear that the mega farms with more than 1000 cows are much more cost-efficient than the small farms. It is also very clear that there is an ongoing trend for small farms to go out of business and for more big farms to start up.
Amongst the American farmers I talk to, there is general agreement that, within their system of farming, there are size economies up to at least 2000 cows. Many of the larger farmers say that 5000 cows is about the right size for one unit, all going through the same milking parlour on close to a 24/7 schedule. But there are advantages in having two adjacent units, which gives a total of 10,000 cows.
The American dairy system has 12-month non-seasonal calving. On the large farms, the lactating and dry cows are typically kept inside 24/7. The cows are housed in large free-stall barns, where each cow chooses its own stall which has soft bedding. It is a system which does not appeal to many New Zealanders – and also some Americans – but it is certainly very cost-efficient. And in a good barn, the cows are contented, with shelter, feed, bedding and plenty of room to move about, and even back-scratching brushes for which they queue up and rub against.
Domestic demand rising
The main use for American milk is in cheese. Americans consume about 15 kg of cheese per person per year. Then comes fresh milk, followed by a myriad of other uses such as yoghurt, ice-cream and custards.
Fortunately, the Americans are showing no signs of losing their love affair with cheese, and consumption keeps going up. Also, butter consumption is now increasing again after a 60-year decline.
Before looking at American global competitiveness, we need to put one notion to rest. We can forget about trying to get improved access for our dairy products into the USA.
This improved access is not going to happen. The Americans made that clear in the TPP negotiations. Indeed it is totally unrealistic to think that America would ever allow itself to be dependent on imports for key food products such as dairy.
Currently, about 14% of American milk is exported, mainly as cheese. Mexico is the largest market, followed by Korea and Japan. However, the Americans are also interested in China and I have seen American UHT milk in Chinese supermarkets.
Also, although exports of 14% may not sound much, these exports total about half the volume of New Zealand’s dairy exports. So small changes in American supply and demand can have a big impact on export supplies.
The export challenge
Given the cost efficiencies, both capital and operating, that exist with free-stall mega dairies, the key question for New Zealand is whether the US can be a long-term global force with exports.
Although the simple answer is ‘yes’, there are some caveats.
The first caveat is that the American competitive advantage is with products that are produced 12 months a year and create value-add above basic commodities. In particular, the US will struggle with commodities such as whole milk powder (WMP) which can be produced with low cost seasonal systems.
Being non-competitive in WMP is not going to worry the Americans greatly. As long as they can be competitive in everything else, they will be happy to leave the WMP commodity market to New Zealand as a one-trick pony.
However, there are exceptions even with WMP. I am aware of two new medium-sized WMP dryers in the US which will focus on export markets.
A second caveat for American competitiveness is the strength of the US dollar relative to the NZ dollar. If the New Zealand dollar is worth only 60c US, then the competitive advantage pendulum swings towards New Zealand. If the NZ dollar is worth US85c then the advantage swings to the Americans.
The mailbox price
The American system of determining payments to farmers (which they call the ‘mailbox price’) is complicated, with four payment classes depending on the use of the milk, and many different ‘orders’ for different regions. But the key price determinant is the value of commodity cheese, known as the Class 3 price. This then flows through to the other payment classes and the various orders.
Converting these ‘mailbox’ prices in the USA to a ‘farm gate’ milksolids price in $NZ is fraught with difficulties and it is seldom cone correctly. As a starting point, the Americans quote their milk price per cwt (100lb) of milk. Often unstated, is that this is for milk of 3.5% fat and 3% protein. Premiums are then paid for components above the minimum. However, things get further complicated because the Americans measure protein as true protein whereas we in New Zealand estimate it from the total nitrogen content. So our measuring technique over-estimates true protein by about 0.18 percentage units; i.e. milk measuring 3% protein in America would measure as 3.18% in New Zealand.
A further adjustment that needs to be made is that we measure the components per unit of volume (a litre) whereas the Americans measure it per unit of weight. A litre of milk weights 1.03 kg.
Bringing all of these factors together, a ‘rule of thumb’ is to take the Class 3 price in $/cwt and divide by 3. This will be the $US per kg milksolids. This can then be converted to $NZ at the appropriate exchange rate.
Right now, the American Class 3 price of $13.74/cwt equates to $NZ6.64 per kg milksolids. One reason this is so much better than current prices in New Zealand is that cheese has been paying better than WMP. The other reason is that American dairy supply chains from farm to consumer are highly cost-efficient compared to in New Zealand. This cost efficiency relates to the 12-month production system which optmises processing and marketing costs. In America, both consumers and farmers seem to get a good deal !
In summary, it is clear that the US dairy industry is very complex, but there is a ‘big picture’. This picture is that the American dairy industry is increasingly based around mega farms that can compete on global markets with value-add products that are produced 12 months a year. But for basic commodities, like WMP, the USA is largely out of the picture.
Keith Woodford is Honorary Professor of Agri-Food Systems at Lincoln University. He combines this with project and consulting work in agri-food systems. His archived writings are available at http://keithwoodford.wordpress.com