Why Milk’s Best Sales in a Decade Won’t Save Struggling Dairy Farmers

The Wall Street Journal | By Jesse Newman | June 15, 2020

Grocery stores are selling more milk for the first time in a decade as U.S. consumers use more of the staple during months at home because of the coronavirus pandemic.

It isn’t enough to reverse the fortunes of many struggling dairy farmers.

Sales of cow’s milk at supermarkets in the U.S. have risen 2% by volume this year from the comparable period last year, and more than 7% since the beginning of March, according to Nielsen, reversing 10 years of declines.

Overall, though, domestic demand for dairy has dropped, as restaurants and hotels that purchase nearly a third of U.S. dairy products have closed because of the pandemic, and exports are expected to suffer, said Tom Bailey, senior analyst for agricultural lender Rabobank.

That means milk’s most promising year in a decade won’t be enough to stop the long decline in the fortunes of some farmers that produced it, farmers and analysts said.

Dairy farmers have been steadily closing milking parlors in recent years because of low prices brought on by declining milk consumption, a supply glut and trade conflicts.

“Many farmers are still going to have a tough year,” Mr. Bailey said. “We’ll see continued exits.”

Dairy farmers had hoped 2020 would be a better year because of reduced milk supplies and strong demand, said Dan Kowalski, vice president at CoBank, an agricultural lender.

Then coronavirus hit, erasing sales of dairy products to chains like McDonald’s Corp. and Starbucks Corp., and slashing milk prices. About half of milk produced on U.S. farms is used to make cheese, and roughly half of that is sold to burger chains, pizzerias and other institutions, Rabobank’s Mr. Bailey said.

Cooperatives that sell milk from farmers to processors raced to curb production, asking members to dump milk, cull herds or stop milking cows early. One Wisconsin cooperative, Ellsworth Cooperative Creamery, devised a plan to buy out farmers willing to sell their herds. Jake Kolodzienski, a farmer who milked 70 cows, took the coop up on the offer in April, collecting the equity he had built up in the coop over decades in exchange for a promise never to sell them milk again.

Mr. Kolodzienski, who now hauls milk for the creamery, said he cried the morning that cattle trailers arrived to take half his herd away. He said the pandemic was the last straw for his dairy, which hadn’t been profitable for four years because of low milk prices.

“I’ve been beat with a stick long enough,” he said. “I’m ready to be done.”

Just as farmers were ratcheting back milk production, shoppers were loading up on milk and other staple goods as the pandemic spread in the U.S. Parents who once shuttled children to school without breakfast now are pouring milk into cereal bowls each morning. Adults are brewing coffee at home, adding milk to their mugs, and using more in baked goods.

Devin Dailey, an interior decorator in Norwalk, Conn., said her family has doubled its milk consumption to two gallons a week since she and her husband began working and caring for their young son from home in March. Now, her son drinks 24 ounces of milk each day at home rather than at day care, and she has traded her breakfast of Greek yogurt and fruit for bowls of Cheerios or Rice Chex with her son.

“It’s such an easy breakfast meal, and something we can do together,” Ms. Dailey said.

Milk sales at Stew Leonard’s Inc., a Northeast grocery chain that began as a dairy goods store, have increased 46% by volume since March. After customers cleared beverage cases of milk that month, Chief Executive Stew Leonard Jr. said he made panicked phone calls to milk suppliers, inspiring one to drive through the night to restock shelves in time for the morning rush.

“Restaurants and schools closing up pushed all the sales opportunities into retail,” Mr. Leonard said.

Higher milk sales, reduced milk production, government purchases of dairy products such as cheese and increased demand from reopening restaurants have sparked a marked recovery in dairy prices and profits for producers, analysts and milk processors said. The U.S. Department of Agriculture in April said it would buy $3 billion of dairy, meat and produce to be distributed through food banks.

Futures prices at the Chicago Mercantile Exchange for Class III milk, which is used to make hard cheeses, have surged more than 80% since mid-April, with certain contracts hitting a record.

That is giving some farmers an opportunity to lock in some profits. Direct aid payments to farmers pledged by the Trump administration also would help offset losses incurred due to Covid-19, particularly on smaller farms vulnerable to volatile milk prices.

Still, analysts and farm lenders say milk’s resurgence will likely be short-lived. They expect prices for cheese to drop again as government purchases slow and restaurant inventories are refilled. While restaurants have reopened in many states, capacity is limited and traffic has been slow to rebound, constraining demand for dairy and other goods.

Rabobank’s Mr. Bailey said high prices, meanwhile, will encourage farmers to produce more milk to boost their balance sheets, pushing up supplies while the industry still faces reduced demand from restaurants and foreign buyer.Exports, which account for 15% of U.S. milk production, are expected to drop this year as the pandemic weakens economies of major buyers such as Mexico, he said. China, a top U.S. customer, is expected to import 15% less dairy this year.

Brian Preston, a dairy farmer in Michigan, said stronger dairy prices combined with federal aid, loan and insurance programs will help his farm survive, but he thinks more dairy farmers will be pushed out of business.

Last year, Mr. Preston purchased a 600-cow dairy farm whose owners were unable to keep it operating, and he said other farms have been selling heifers, which become dairy cows when bred, to generate cash.

“It’s been really, really tough for four years,” he said. “A lot of farms aren’t going to be able to be helped.”