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Dairy industry future: Was Earl Butz right?

Dairy industry future: Was Earl Butz right?
Almost 50 years ago, agriculture secretary Earl Butz rudely told farmers to “Get big or get out" and indeed today's dairy industry appears headed in that direction.

Walmart announces a 200,000-sq. ft. beef processing facility in Georgia, employing 350 people. The colossus of the bricks and mortar retail business made a $90 million commitment to supply Black Angus beef to approximately 500 retail stores in the southeast, not the much larger markets in the Northeast. No mention of plans for the South and Northwest. Yet. it does serve as a distant early warning of a possible and massive corporate effort to consolidate agriculture.

Walmart won’t ‘officially’ own the cattle. That’s a duty belonging to 44 Farms, Angus seedstock operation which will source Angus calves from ranchers and send them to Mc6 Cattle Feeders in Hereford, Texas, for finishing. Mc6 will ship cattle to Creekstone Farms Southeastern Kansas for harvesting. They’ll ship the primals to the new Georgia facility to be packaged and further processed.

If you’ve paid the slightest bit of attention to Walmart, you know that such a complicated distribution cycle is anathema. Too many hands in the mix usually means extra costs that can be wrung out of the system and Walmart is an expert at making its supply chains very cost efficient. Sooner or later, after as much is learned as possible, the retail giant will undoubtedly begin to consolidate ownership of this supply chain.

Just like Costco is doing with its new Iowa poultry plant; taking more control of its distribution chain seems to be the new market mantra. Retailers such as Kroger and Publix, who joined Walmart in investing in milk processing facilities, want direct, hands-on management of their costs of supply. Walmart’s Indiana dairy plant, for instance, should save them a considerable amount of cash. It also reduced the milk supply it sourced from Dean Foods by an estimated 100 million gallons, probably the kill shot that ended an already badly wounded business.

More bad news

Did you know the dairy business lost 17,000 farms, a decline of 30% in the last 10 years? Or that the cow numbers are holding steady, meaning herds are becoming much larger? According to Lowell Catlett, a futurist and the retired dean of Agricultural, Consumer and Environmental Sciences at New Mexico State University, a single Texas dairy operation is milking 100,000 cows.

If we have 9 million cows, he says, we only need 90 good dairy farmers to supply all the milk and dairy needs of our country.

How’s that for serious consolidation? From a top end of near 60,000 farms in 2008 to a potential market- and technology-driven low end of just 90 sometime in the coming decade?

Numbers that could quickly approach that worst-case scenario aren’t as far-fetched as you think. Remember, the two largest dairy processors declared bankruptcy within a few weeks of each other. Dean Foods led the way in late 2019 and Borden followed just a few weeks later.

Bankruptcies that upended dairy

In its November bankruptcy filing, Dean Foods said, “While milk remains a household item in the U.S., people are simply drinking less of it. The decline in dairy sales has occurred in conjunction with the rise of oat, nut, soy and other alternative ‘milk’ products at retailers and food service locations across the country.”

Borden had its own problems, many unrelated to the declining market it was trying to serve. It didn't have a marketing department or research and development groups. Investment firm KKR, its owner since 1995, took what little cash generated by Borden’s milk business and invested it in other business ventures, effectively ‘harvesting’ Elsie the Cow and selling her carcass at auction. As the business deteriorated, sales dropped 82% from a peak of $7 billion in 1991 in less than two decades. Borden, which once had a presence in all 50 states, was forced to retrench to just a few southwestern states before management turned out the lights.

Here is what Wikipedia said about the demise of the once dominant 163-year-old dairy company: “In 2004, KKR sold Borden Chemical (what was left of the original business) to Apollo Management, a private equity firm. Borden Chemical was merged with Resolution Performance Products, Resolution Specialty Materials, and the German firm Bakelite AG to form Hexion Specialty Chemicals. With the merger (which settled in 2005), the last vestige of Borden, Inc., ceased to exist except as spin-offs and brand names. Hexion retained control over the Elsie the Cow trademarks and Borden name until Dec 2014 and has now assigned all Borden/Elsie trademarks in the U.S. to Grupo Lala of Durango, Mexico.”

Whatever happened to dairy case?

The supermarket dairy case didn’t shrink as category managers re-imagined what should be included, found plenty of new, non-dairy products and expanded their cold cases with hundreds of highly processed imitations. Today, it’s a section that might be properly called a ‘dairy-style’ or a 'dairy-lite' department. Approximately one third of the space is taken by non-dairy products.

The Dean and Borden bankruptcies have left many more traditional, family-run dairy farms in serious financial straits. Passing along a business that’s been losing money for several years without hope of improvement to the next generation will be nearly impossible. Consolidation with nearby farms on a massive scale – remember that giant operation Catlett mentioned?  It seems to be the most feasible dollars-and-cents future.

Almost 50 years ago, agriculture secretary Earl Butz rudely told farmers to “Get big or get out.” A few months ago, Sonny Purdue, a kinder and more gentle secretary, rephrased Butz’s comment. When asked about the plight of dairy farmers in Wisconsin, he said, “[The] big get bigger and small go out and that’s kind of what we’ve seen here. Everyone will have to make their own decisions economically whether they can survive.”

Bottom line

Whether you agree or not, whether it angers you or not; the trend in dairy farms as well as other ag operations is definitely away from small, family-owned and strongly toward ‘mega-farms.’ Some will still be family-owned and incorporated for tax purposes; many will be corporate entities financed by Wall Streeters like KKR and foreign interests like JBS or Chinese-owned Smithfield Foods. According to National Public Radio, “Today nearly 30 million acres of U.S. farmland are held by foreign investors. That number has doubled in the past two decades, which is raising alarm bells in farming communities.”

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