Where Will Dairies Be Located in the Future?

Why Should Dairy Production Move in the Future?

The answer is simply: "it has moved in the past so why wouldn‘t it keep moving in the future?" We are all well aware of the dramatic changes that have occurred in regards to the location of dairy production in the U.S. over time. In 1970, the Midwest produced 51% of the U.S. milk compared to 17% for the West and Southwest regions combined. Thirty years later, the Midwest share of the national production had dropped to 35% while the West and Southwest accounted for 42%.

The location of dairy production has not changed just for the fun of it. Many factors, primarily of economic nature, were involved. Dairy (milk) is a commodity. Milk from many dairies is comingled to make mostly undifferentiated products. Milk payments are almost exclusively based on volume and simple characteristics related to yields of products (fat and protein). Commodities – all commodities – share the following characteristic: in the long-run, net returns per unit of production are small. Thus, their production is highly sensitive to cost of production. The total cost of producing milk across regions explains the migrations of the past and will explain the migrations of the future. Beware, however, that total costs of production is the driving factor. Total costs include direct costs, indirect costs, and hidden costs (such as unpaid family labor, opportunity cost of equity capital, and even the 'headache' cost of filing the paperwork to satisfy the government bureaucracies).

Does Change in the Location of Dairy Production Implies Relocation of Dairies?

There could be substantial realignment of regional dairy production without any dairy relocation within or across regions. But this has never happened in the past. Thus based on the principle that the past is the best predictor of the future, future changes in the location of dairy production will be associated with relocation of dairies.

So Where Will Dairies Be Relocating in the Future?

Dairies will be relocating in areas that offer them a competitive advantage. The concept of 'competitive advantage' is far broader than the simple direct costs of production. Many factors are linked to the competiveness of a production site. Some have a direct effect on the Profit and Loss statement; others are harder to quantify, but still have a definite 'utility'. In economics, the term 'utility' is a measure of relative satisfaction. It also does a marvelous job of confusing people. Its relevance to us can be illustrated as follows. Suppose that you can locate a dairy on 2 different sites. Both sites are identical in all of their characteristics (milk price, costs of production, water availability, labor, etc.) except that site A borders friendly neighbors, whereas site B borders unfriendly neighbors (say mostly PETA members). In this instance, the utility of site A would be greater than site B for most dairy people. Here, the neighborhood‘s friendliness reflects a hard to quantify ability to keep operating in the future.

To answer where dairies will be relocating requires the identification and valuation of the attributes associated with the desirability of a location for dairy production.

Identification and Valuation of Factors Involved in Dairy Relocation

A few years ago we conducted a large national survey of factors involved in dairy relocation. We all have our own personal opinion as to what factors are important. Our interest was in finding what the opinions were across the U.S., to rank the factors and examine regional differences. The survey consisted of a total of 906 respondents (250 agribusiness professionals and 656 dairy producers) from all regions (Central: 130, Midwest: 243, Northeast: 161, Northwest: 133, Southeast: 128, and Southwest: 111), and various herd sizes, gender, level of education, marital status, and family status. The survey instrument consisted of 110 location factors. Respondent were asked to provide a measure of importance for each factor using a 0 to 10 scale, where 0 = not important, 5 = somewhat important, and 10=critically important. In analyzing the results, factors were grouped into 13 location decision categories using standard criteria for relocation across various industries. Eleven of the 13 categories encompassed factors that were quantitative in nature and could be classified as traditional location decision factors that were related directly to business activities. The remaining 2 categories encompassed what are known as nontraditional or qualitative decision factors (i.e., community attributes and value-based community attributes). It is important to understand that respondents were NOT asked to rank the factors. The ranking that we present is based on the average importance attributed by the respondents. Although one‘s opinion might differ from the average importance and the ranking of factors derived from this survey, our tenet is that 906 people cannot be completely wrong… Table 1 (see full report) reports the results ranked by importance of location decision categories. What are some observations that can be made from these results?

1. Overall factors associated with cash flow and capital expenditures were (as categories) the most important, followed by tax structure and economic incentives, and waste management. Community attributes and infrastructure were deemed the least important.


2. The five most important single factors were:
   a. Availability of fresh water supply,
   b. Availability of land on which to incorporate animal waste,
   c. Average mailbox price of milk,
   d. Quality of fresh water supply, and
   e. Complexity of state and local laws governing waste handling and odor management.


3. The five least important single factors were:
   a. Number of hoof trimmers in the local area,
   b. Presence of established niche markets in the local area,
   c. Proximity of an airport with commercial, scheduled services,
   d. Proximity to cultural centers, and
   e. Proximity to recreational areas.


4. Ninety (90) out of the 110 factors were judged to be at least somewhat important (average importance > 5). Nearly one third (36 out of 110) of the factors were deemed very important to critically important (average importance > 7).


5. Likely, there is NOT a single location within the United States that meets all 36 factors deemed very important, let alone all 90 that were deemed somewhat important. Hence, there are and will be some trade-offs across the many possible areas of production.


6. Production destined to markets sensitive to costs of production (export markets, Class IV, and portions of Class III) will occur and grow in areas with a competitive advantage, including processing and transportation costs. The total cost for producing a storable product (cheese, butter, non-fat dried milk, milk powder, etc.) will be the primary determinant (i.e., not just the cost of producing the milk). Major non-direct costs, such as the costs to meet the often capricious environmental rules, key resources allocations (e.g., water), and various bureaucratic regulations will be increasingly important. By their own nature, these are determined by government policies that are highly unpredictable. Hence, it is impossible to identify the specific locations of long-term growth of the dairy industry in the United States. Based on the current political landscape, the central region would be best at meeting the very important factors, but this could be changed by one single vote in the U.S. Congress, or one major change in the interpretation of the current laws by one of the regulating agencies.

We Are Not Alone in This World

Within the Unites States, there are well-known areas of milk surpluses and deficits (Figure 1). Contrary to what is alleged by locavores, local or even regional self-sufficiency makes absolutely no economic sense. The flawed principle of local production violates an economic law as fundamental as what gravity is to the physical sciences. The national wealth is improved by increasing inter-regional trade. It doesn‘t make more economic sense to artificially support milk production in Florida than to encourage pineapple production in North Dakota. Therefore, the sight of a map showing large areas of milk deficit should be no more alarming than a map showing large areas of citrus deficits. Different regions possess an economic advantage at producing select goods and services and the trading of these goods and services across regions enhances the overall wealth.

Of course, the benefits of trading extend across a nation‘s boundaries. The U.S. population is currently estimated at 307 million people, or about 4.4% of the world‘s total population. Although the U.S. is still a dominant nation with the world‘s largest economy, the necessity to eat extends to every human being on this planet. Although dairy products are not considered as basic, staple foods as some plant products (wheat, rice, cassava), the demand for dairy products increases substantially as soon as a population moves above near subsistence. Hence, we can expect large changes in the world supply and demand for dairy products in the future.

Milk production occurs pretty much everywhere around the world, but on largely different scales (Figure 2). Although the U.S. production of 80 million metric tons (MT) per year is significant on a world basis, is represents only 51% of the total milk production by the countries members of the European Union (EU-27), and surprisingly only 65% of the milk production in India (albeit that the latter is predominantly not commercially traded). Milk is not necessarily produced where demand occurs (i.e., where there are people). The world map shows large areas of milk surpluses and deficits (Figure 3). The important milk surplus regions consist of the EU, the US, and Oceania (New Zealand and Australia). Deficit regions are located predominantly in the world tropical belt, the area of land located between latitude 23N and 23S. As a whole, dairy production does not flourish in the tropical belt. China, with its population exceeding 1.3 billion people is projected to be an area of large increase in demand for dairy products. Food import, however, has never ranked very highly as a strategic policy by the Chinese government. In short, the world demand for dairy will likely increase, but in markets that are not traditional for the U.S., and that bear considerably more uncertainty than our domestic market.

Figure 4 shows an approximate world supply curve for milk. Contrary to what many people think, the cost of milk production in the U.S. is not particularly low compared to the rest of the world. But it represents a large portion of 'tradable milk', as production in most of the countries with lower costs of production is primarily of subsistence type (i.e., not traded, or very locally traded). The exceptions to this are Australia, New Zealand, and Argentina. The first two in particular export a significant proportion of their production (>50%) and will therefore likely remain first in line for exports (i.e., will basically take whatever price the world is willing to pay). In the long run, most of the milk produced in the EU is at a cost that exceeds US cost of production. Hence, as long as the US remains a significant player, the world market price for milk should be relatively near U.S. costs of production. 'Relatively' is an important word here, and does NOT imply that world prices will be exactly at US costs of production, and deviation of up to 20% can be expected. Therefore, although a national strategy based on increased dairy exports can support additional milk production, such a strategy does nothing in terms of price stabilization and may in fact accentuate the wild fluctuations already experienced over the last decade.

What is more important in the context of this presentation is the opportunity for US dairy producers to look at the entire world map for areas of potential expansions/relocations. The factors identified earlier in this paper apply to the world as well, but additional factors must enter the process (the political stability and 'friendliness' of a country being two obvious factors). With all due reservations (i.e., 15 pages of legal mumbo-jumbo warning you that I might not have the foggiest idea of what I am talking about), I see the following regions as potential areas to explore:

• Western Canada, if and when the country ever gives up on its obsolete and trade-distorting quota system. Don‘t hold your breath on this one.
• South American countries, especially Argentina, Uruguay, and Southern Brazil. But you better warn Toto that these are not Kansas… Blending in with the local culture would likely require a 'local' partner.
• Select countries of Eastern Europe, including Russia. Here again, a local partnership might be an essential step to the entry process.
• Possibly a few select countries in the South African region (including the country of South Africa). The political instability in most of these countries makes this doubtful.
• Antarctica (if one listen too much to the global warming hyper-alarmists)…

Of course, a vast potential area would open up in the tropical belt if the problems associated with high dairy productivity in this zone would ever be resolved. This would require a different way of thinking along the lines followed by Norman Borlaug with the Green Revolution.

January 2012