Every year, U.S. dairy farmers produce 3 billion more pounds of milk than the year before. For the past few years, production growth has outpaced processing capacity growth, and dairy processors are struggling to keep pace, according to a new report from CoBank's Knowledge Exchange Division.
As a result, "Dairy processors are faced with the challenge of handling an ever-growing milk supply while anticipating the right product mix to meet consumer demand," said Ben Laine, CoBank senior dairy economist. "An additional 27 billion lb. of U.S. milk processing capacity will be needed over the next 10 years if current trends persist."
Numerous new plants and plant expansion projects are underway or were recently completed, but available capacity remains a challenge at times -- especially in the Northeast and Mideast areas -- and has strained the ability of dairy cooperatives to fill the role of market balancers. Since these co-ops largely bear the brunt of the near-term oversupply of milk, they are increasingly looking for ways to discourage producers from expanding production.
Meanwhile, recent lower milk prices have led to lower input costs for processors, strengthening balance sheets and opening the door to expansion opportunities, Laine noted. "In some cases, this may mean upgrading existing, aging facilities, while in other instances, it may mean new plant projects," he said.
Many dairy cooperatives and some independent processors have focused on building and expanding milk powder processing plants, the report noted. “These newer, large-scale plants are better able to meet international demand and position companies for export market competitiveness. These plants have been popular in California and the Southwest," CoBank said.
Conversely, without updates, some of the midsize aging commodity plants -- those that produce butter and nonfat dry milk -- will struggle when competing against more modern powder plants, Laine said.
Although U.S. consumer fluid milk consumption has been slowing, investments are occurring in fluid milk bottling plants to process specialty products like organic milk and extended-shelf-life products or to upgrade and replace existing, aging infrastructure.
Recent expansions of cheese-making plants with the potential to handle much more substantial amounts of milk than other processing plants have been completed in the Southwest. Also, new plans for cheese plant expansions in the Upper Midwest are expected to relieve some of the region's recent capacity constraints once they come on line.
Increasingly, cooperatives are setting their sights on cheese plants as opposed to commodity-balancing plants and are looking to joint ventures as a means to do so, the report explained.
In addition, many international companies are looking for ways to establish a U.S. manufacturing footprint to gain access to the U.S. milk supply for what is expected to be long-term growth in global demand.
"There have been international partnerships and joint ventures for years in the industry, but the interest seems to be gaining momentum," Laine said.
U.S. milk production shows no sign of slowing, but the report said that growth will not be sustainable unless processing capacity is able to keep pace. Similarly, the expansion of processing capacity will not be sustainable without the consumer demand to back it up.
Finding the proper supply and demand balance as processor capacity is built will be a challenge and will likely cycle through periods of near-term surplus and shortage, according to the CoBank report.
Processors will need to stay focused on the consumer, whether domestic or international, and form partnerships as needed to meet demand.
"At times of surplus milk, the need for added processing capacity in any form seems critical, but for the long-term health of the industry, the focus should be on building the right type of capacity to meet growing global demand," Laine concluded.
Live cattle futures were mixed this week, but mostly lower. October contracts closed lower Monday and Thursday at $107.20/cwt. and $106.925/cwt.
Feeder cattle futures were mixed. October contracts closed lower Tuesday at $149.35/cwt. but turned higher Thursday to $148.80/cwt.
The Choice closed higher at $190.00/cwt. while Select closed lower $186.72/cwt.
Lean hog futures were mostly lower this week. October contracts closed higher Monday at $61.575/cwt. and fell to $59.025/cwt. by Thursday’s close.
Pork cutout values continued to fall this week. The wholesale pork cutout closed lower at $79.20/cwt., down from $82.91/cwt. the prior week. Loins were higher at $81.48/cwt. while hams were higher at $69.58/cwt. Bellies plummeted this week, closing at $104.13/cwt., down from $118.81/cwt. the prior week.
Hogs delivered to the western Corn Belt continued to fall, closing Thursday at $55.80, down from $61.52/cwt. the prior week.
The U.S. Department of Agriculture reported the Eastern Region whole broiler/fryer weighted average price at 93.24 cents/lb. on Sept. 14.
According to USDA, egg prices were steady, with a steady to higher undertone. Offerings were light to, at times, moderate. Supplies were light to moderate mixed, while demand was moderate to good.
Large eggs delivered to the Northeast were higher at 99 cents to $1.03/doz. Prices in the Southeast and Midwest were also higher at $1.06-$1.09/doz. and 95-98 cents/doz., respectively. Large eggs delivered to California were higher at $1.54/doz.
For turkeys, USDA said the market was steady to weak. Offerings were mixed, while demand was light to moderate. Prices for hens and toms were lower on the lower end of the range at 90 cents to $1.03/lb.