A Column Offered by WCMA Executive Director John Umhoefer
What are the hurdles blocking dairy processing growth in Wisconsin? With milk production continuing to rise in a state running tight on processing capacity, WCMA asked members to rank their concerns.
Wisconsin finished 2017 with less than 1 percent more milk than the previous year, but a record 30.32 billion pounds. Dairy farms have improved output in the face of difficult margins, and last week Mark Stephenson, Director of Dairy Policy Analysis at the University of Wisconsin, forecasted further milk price declines this spring before modest recovery (a $17 all-milk price) in the fall of 2018.
Stephenson reported to the Wisconsin Agricultural Outlook Forum that reduced milk prices haven’t been “bad enough” to cause changes in production decisions. In fact, Wisconsin’s milk production gains gathered steam in the second half of 2017. However, he noted, “we are seeing evidence of the impact with open accounts at input suppliers growing and capital purchases being delayed.”
Wisconsin matched the approximately 200 million pounds of new milk in 2017 with plant expansions such as the Agropur feta operation at Weyauwega and the expanded BelGioioso plant in Freedom. Numerous manufacturers upgraded equipment, added shifts and improved production efficiency to take on new milk from Wisconsin and surplus milk from Michigan.
At least three new production facilities will come on line in 2018, but Wisconsin cheese manufacturers uniformly report plants strained to capacity today. Rising milk production presents the opportunity to build cheese production, but what factors are cheesemakers weighing before spending to grow?
WCMA put this question to members who together use the vast majority of fresh farm milk in Wisconsin. Processors handling about half the state’s milk replied. Three concerns were shared by both smaller and larger-capacity cheese manufacturers in the state:
1. Cost to construct new dairy facilities. The hurdle of high capital costs to design, construct and equip a dairy facility ranked highest as a barrier to growth. In addition to the potential to incur hundreds of millions of dollars of debt on a large, new facility, processors cited the rising cost of environmental compliance and facility upgrade requirements driven by the Food Safety Modernization Act.
2. Saturation of domestic markets. While cheese consumption continues to grow in the U.S., members reported softening sales and diminished price premiums. USDA Cold Storage data for natural cheese reveals a steadily rising trend line peaking at 1.33 billion pounds of stored cheese in the summer of 2017. On the bright side, cheese exports have been solid in 2017 and when year-end data arrives, 2017 will be the second-highest volume year for cheese exports, reaching more than 750 million pounds.
3. Workforce shortages. Members of all sizes noted difficulties in recruiting and retaining workers, with some specifically citing a lack of applicants for skilled positions in maintenance and technology. Labor challenges are not specific to dairy processing, with nationwide unemployment hovering at four percent, and Wisconsin nearing what is considered full employment, with a jobless rate of just three percent.
Following close behind these top three hurdles to dairy processor growth was industry concern with an out-of-date make allowance for cheese. Federal milk marketing orders set the milk price for dairy farmers in orders across the nation, and the cheesemaker’s share of the value of milk transformed into cheese is a make allowance. That allowance, 20.03 cents per pound, has remained unchanged for nearly ten years while the price of, well, everything else, has risen. Federal orders, with their ponderous hearings and decision-making, would delay an increase in this stipend for at least another three years.
Finally, cheesemakers responding to WCMA revealed a grab-bag of marketplace concerns that give pause to growth decisions. Several cited declining access to markets due to European Union bilateral trade agreements that are, country by country, allowing Europeans alone to sell in well-known cheeses such as feta, parmesan, asiago and more. Some expressed concern with the U.S. negotiation posture as the North American Free Trade Agreement is renegotiated. Mexico and Canada are the largest dairy export markets for U.S. dairy products.
Despite these challenges, Wisconsin’s cheese industry continues to grow. The cure for capital needs, workforce woes and new market penetration is profit – and profit is driven by research & development, superior product quality and unmatched innovation.