Why are Minnesota dairy farmers in the red?

Four years ago, Minnesota dairy farmers had few reasons to complain.

Milk prices were sky high and profits were through the roof. In 2014, the net income of the median dairy farm in Minnesota was US$137,962. The average dairy farmer in the state has around 200 cows, so that works out to $690 in profit per cow.

The good times didn’t last.

By 2016, the median net income of Minnesota dairy farmers had plummeted to $27,560, or $138 per cow.

“If your median net farm income (is) $28,000, that’s not a lot of money to feed the family,” said Nathan Hulinsky, University of Minnesota extension educator in Moorhead, across the Red River from Fargo, North Dakota.

Plus, that figure is the median profit, meaning half of the state’s dairy farmers made less than $28,000 in 2016. Some producers may have earned $10,000, $5,000 or less.

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The financial data comes from the Center for Farm Financial Management at the University of Minnesota. Every year, the centre produces FINBIN — a report on farm profits and losses, broken down into categories like dairy, pork and crop production.

“FINBIN data is not survey data,” the 2017 report states. “Producers complete a comprehensive financial analysis of their operation at the end of each year, with the help of a farm management educator.”

Hundreds of farmers participate in the report and the centre touts FINBIN as the “largest and most accessible source” of farm financial information in the world.

The FINBIN data illustrate the financial variability of dairy farming in America.

  • In 2010, the median dairy farmer in Minnesota had a net income of $76,112 (in 2017 equivalent dollars);
  • In 2012, that figure jumped to $132,034;
  • In 2013, it sank to $49,145, then skyrocketed to $142,625 in 2014;
  • In the three years from 2015-17, the median net income was $43,594, $28,208 and $42,260 respectively.

Not exactly consistent returns, except for three poor years between 2015-17.

From 2016 until now, dozens of dairy producers in Minnesota and hundreds across the U.S. have bolted the doors of their barns, mostly because of low milk prices and non-existent profits.

United States Department of Agriculture data show that the U.S. had 41,819 dairy herds in 2016 and 40,219 in 2017, a drop of about four percent.

In Minnesota, the seventh largest state for dairy production, the number of herds sank from 3,350 in 2016 to 3,210 in 2017, a loss of 4.3 percent.

From September 2017 until this September, more Minnesota dairy farmers have rushed for the exits.

“(About) 7.7 percent of dairy farms left the business… or decided to retire,” said Marin Bozic, assistant professor in agricultural economics at the U of Minnesota.

The number of dairy herds in the state has likely dipped below 3,000, compared to 5,000 only a decade ago, Bozic said.

The U.S. media has noticed that dairy farmers are struggling.

In 2018 there’s been many reports on producers like Steve Cordes, of Henning, Minn., who closed down his 50-cow dairy in August.

“I just got my milk cheque yesterday for July, and the base price was $14 per hundredweight. That’s the same price I got 25 years ago,” he told the ABC News station in Bemidji.

It’s undeniably tragic when a producer has to sell the family farm, but what’s happening in America’s dairy industry is not new.

In 2003, 15 years ago, the U.S. had more than 80,000 dairy farms. Now, the number is 40,000.

Consolidation has been a fact of life, for decades, in America’s and Minnesota’s dairy industry. And that consolidation is only going to continue, Bozic said.

“I anticipate that (of the) 3,000 dairy farms left in the state, probably 80 percent will be last generation dairies,” Bozic said earlier this year, when he testified before the Minnesota Senate agriculture committee.

“Minnesota will (still) have a thriving milk production. Unfortunately, the market has changed and many of the current dairy producers will not be able to survive.”

How have things changed?

Minnesota’s dairy industry is much different than California, where the average farm has more than 1,250 cows. Of the 3,000 or so producers in Minnesota, the majority are family farms with 75 to 150 cows. The minority are big dairies with 500 to 2,000 cows, or larger.

“In Minnesota, we have a lot of, I don’t want to say small, but we have a lot of family farms…. The average farm is Minnesota is a 200 cow dairy,” said Hulinsky, who grew up on a dairy farm.

The small operators have managed to survive, possibly because they have a mixed farm with 1,000 or 2,000 acres of cropland. But the FINBIN data clearly show that larger dairies, 500 cows or higher, have a huge economic advantage.

“Large herds produced milk at a lower cost than any other herd size…. The net return per cow was $466 for large operations compared to $295 for all smaller herds.”

The size advantage isn’t new but it becomes more painful for small producers when milk prices are low. Prices have been weak in the U.S. for the last three years for two basic reasons: slowing exports and continued overproduction.

The number of dairy herds in Minnesota and across America has shrunk. However, the number of dairy cows is more stable. After decades of decline, the number of dairy cows in the U.S. settled around nine million in the early 2000s. As of 2017, the U.S. herd was at 9.4 million cows.

While the herd is relatively stable, the improvements in milk production, per cow, has boomed. It has grown at a faster rate than demand growth for dairy products in the U.S. In simple terms, America produces too much milk for the domestic market.

Fortunately for farmers, U.S. dairy exports increased from 2000 to 2015, eating up the excess production. In 2000 exports were about four percent of total U.S. milk production. By 2015 the percentage reached had 15 percent.

But exports have been flat for the last three years and production continued to expand, the perfect recipe for surplus supplies and low prices.

As well, dairy producers in states like Michigan don’t have enough local processors to buy their milk. So, they truck their excess milk westward, to cheese plants in Wisconsin. The cheesemakers buy the Michigan milk at cheap prices, depressing the market for dairy producers in Wisconsin and Minnesota.

Refusing to quit

Despite three to four years of rock bottom prices and no profits, many small producers in Minnesota are sticking it out.

Some of those small-scale farmers are in denial. They don’t accept Bozic’s prediction that 80 percent of farms in the state will be last generation dairies.

“I’m not sure that producers see the handwriting on the wall,” said Pat Lunemann, who milks 800 cows in central Minnesota. “He (Bozic) got a lot of heat… (but) we need someone like that to tell us what’s happening.”

Dairy farmers may have other reasons for suffering through the hard times: such as family tradition and the hope that things will get better.

“Giving up, or selling the cows is not an easy decision to make. They don’t want to be the (generation) that loses the farm. They don’t want to be the one that sells out the cows,” Hulinsky said from his office in Moorhead. “(Plus) if you sell the cows you still need income. Where are you going to go next to get a job?”

Many people have hope that the situation will improve, especially farmers, but Bozic is convinced that many dairy producers in Minnesota are clinging to false hope.

The status quo is not sustainable. If small producers in Minnesota don’t expand or innovate to cut costs, they will fail.

“We are going to see a number of dairy farmers that are no longer competitive. The sooner they exit the sector, the more equity they will preserve,” he said. “We would be doing them a disservice by offering some handouts that would prolong their hope. But really, there is nothing there to hope for.”

Fast facts:

  • In 2010, the median dairy farmer in Minnesota had a net income of $76,112*
  • In 2012, that figure jumped to $132,034*
  • In 2013, it sank to $49,145*, then skyrocketed to $142,625* in 2014
  • In 2016, median dairy incomes had plunged to $27,560

*2017 equivalent dollars

Source: Staff research

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