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Dairy co-op consolidation affects farmers

Evolving dairy industry changing landscape for all stakeholders.

Consolidation of dairy cooperatives can affect farmers’ control of the cooperatives, and cooperatives’ investments in dairy processing can affect farmers’ earnings, a new Government Accountability Office (GAO) report has found. In particular, the report suggests that farmers’ control of cooperatives may be affected by the expansion of cooperatives to include competing interests and by voting structures that may create power imbalances.

According to the report, the dairy industry has changed significantly over time, with one major change being a shift to fewer and larger firms along the dairy production and marketing chain, including among farms, processors and retailers. As the industry has consolidated, so have the dairy cooperatives, the report noted. For example, GAO reported that four dairy cooperatives merged in 1998 to form Dairy Farmers of America, the largest dairy cooperative in the U.S., and as a result of consolidation, the number of U.S. cooperatives that market milk has decreased significantly over time.

According to U.S. Department of Agriculture data, from 1997 to 2017, the total number of U.S. dairy farms decreased by more than half (from 125,041 to 54,599), while the number of dairy cows per farm more than doubled (from 73 to 175).

After generally decreasing for many years, the number of dairy processors has increased since 2005. According to USDA data, in 1970, there were 3,749 dairy processing plants. By 2005, the number of plants had dropped to a low of 1,088. By 2017, however, the number of plants had increased to 1,305.

The USDA data showed that there were 1,244 dairy cooperatives in the U.S. in 1964, but by 2017, there were only 118.

According to the GAO report, having fewer players in the dairy industry can lead to a greater degree of concentration in the industry. In 2017, the four largest dairy cooperatives marketed 41.3% of all milk marketed by U.S. producers -- a percentage that has remained relatively unchanged since 2002.

Some dairy cooperatives have also diversified their operations to include investments in processing facilities. For example, the report said a cooperative may form a joint venture with a dairy processor, acquire a dairy processor or build a dairy processing facility to secure increased market access and the additional earnings from the manufacturing of dairy products. As of 2017, cooperatives owned and operated 198 dairy processing facilities in the U.S., which represented about 15% of all U.S. dairy processing facilities.

Farmer impact

According to the report, consolidation can create competing interests.

“As dairy cooperatives consolidate and potentially represent farmers across larger regions, some cooperatives may have increasingly diverse memberships. Cooperatives with diverse memberships may represent farmers whose farms differ in characteristics such as size, type of operations and ownership,” GAO reported.

Cooperatives’ members may also differ in other ways, including whether they are full-time versus part-time farmers or seasoned farmers with generations of dairy experience versus farmers new to the dairy industry.

The variation in membership can lead cooperatives to have different expectations and needs.

“Dairy industry stakeholders we interviewed commented that cooperatives may struggle to ensure they meet the differing needs of their members,” the report noted. “Further, according to studies we reviewed and industry stakeholders we interviewed, as a cooperative grows and encompasses potentially competing interests, some farmers may feel that they have lost control over the cooperative’s priorities and strategic direction.”

Despite this challenge, there is also some support among farmers for consolidation of cooperatives, given the complex and competitive nature of the dairy industry.

Another impact, the report pointed out, is that consolidation and voting structures can create power imbalances.

“Publications we reviewed and dairy industry stakeholders we interviewed indicated that, as dairy cooperatives consolidate, their voting structures can create control imbalances among farmers,” GAO noted.

The report explained that traditional cooperative voting structures often established equal voting rights among farmers based on the principle of one member, one vote.

“While many states require that cooperatives adhere to an equal voting rights structure, some states have permitted cooperatives to adopt a voting structure that ties voting rights to member productivity,” the report said.

A member who markets a greater volume of milk through the cooperative may have more voting power than a member who markets a smaller volume, the report explained, adding that the number of states that allow such a structure has increased over time.

“Equal voting rights are a disadvantage for members with large farms when compared with a voting structure that ties voting to member productivity; conversely, a voting structure that ties voting rights to member productivity is a disadvantage for members with small farms,” GAO said.

Further, the GAO report relayed that dairy co-ops’ investments in processing facilities and the mechanisms used to finance those investments can result in higher earnings for farmers in a cooperative in the long term but lower earnings in the short term while potentially reducing market access for farmers

Processing investment impact

The analysis also found that increased market access from cooperatives’ investments in processing can have a positive impact on earnings for farmers within the cooperative but may reduce market access for farmers outside the co-op.

“One dairy industry expert we interviewed told us that the best way for a cooperative to secure market share is to invest in processing facilities,” the report said.

One example noted is a joint venture announced in 2018 by Dairy Farmers of America, Select Milk Producers and nutrition company Glanbia Nutritionals to build a new cheese and whey processing facility in Michigan. Dairy Farmers of America and Select Milk Producers will supply milk to the facility.

“This joint venture may result in higher margins for these cooperatives and greater earnings passed on to their members; however, such a venture may restrict access to the processing facility and, thus, restrict market access for farmers who are not members of the cooperative,” the report suggested.

In reviewing a draft of the GAO report, however, USDA noted that while these investment opportunities may not grant market access to non-members, the market outlets resulting from these investments did not exist before the cooperative and its members decided to make the investment.

The investments can also affect farmers’ income in the short-term, because some cooperative my finance investments through the retention of patronage refunds. However, the aim is to help increase income in the long term.

“There is a trade-off between the amount of patronage refunds that cooperatives distribute as cash payouts to farmers and the amount that cooperatives retain for longer-term investments and other activities. In the short term, when cooperatives retain patronage refunds for investments, farmers may receive smaller cash payouts with the expectation that, over the long term, cooperatives will undertake investments that increase farmers’ earnings,” GAO explained.

The report said one farmer commented that the financial decisions of cooperatives can be complicated and stressed the importance of effective communication between the cooperative's board of directors and member farmers on decisions regarding the retention of patronage refunds.

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