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Tumultuous times for Magic Valley dairy


Ricky Jones, operations manager at Magic Valley Quality Milk Transport, opens up the valve of a milk bulk tank Wednesday. PAT SUTPHIN TIMES-NEWS

The Magic Valley dairy industry has gone through brutal lows and record highs during the COVID-19 pandemic.

Back in early April, restaurant closures tanked dairy demand so dramatically that some Magic Valley farmers had to dump their milk. A lot of Idaho milk ends up as cheese, butter and cream, and about 60% of that goes to restaurants. When restaurants stopped buying, much of the Magic Valley dairy industry started hurting.

“For a short period of time there, milk had zero value,” StoneX Director of West Coast Dairy James Carr said.

Even Magic Valley dairymen who had buyers for their milk struggled. The price of milk dropped from around $16 per hundred pounds to $12. Magic Valley farmers break even at around $16.50 per hundredweight.

Some Magic Valley dairymen feared they’d go out of business. A farmer can only lose thousands of dollars every day for so long.

“We were close to going broke,” Buhl dairyman Richard Azevedo said. “If milk wouldn’t have went up in the next month or two, we would have been done. There’s no doubt about it. It just would have been too big a hole.”

But milk did go up in the next month or two, soared to record highs, in large part due to a massive government dairy purchasing program that buoyed demand.

Peaks and valleys

Many dairymen went into 2020 with high expectations. After six years of prices at or below the break-even point, milk finally got into profitable territory toward the end of 2019. A lot of Magic Valley farmers felt some relief after struggling for more than a half-decade straight.

Then the pandemic happened. When COVID-19 destroyed demand for dairy this spring, some experts thought the industry was facing months of misery.

“To have recovery within two months was not expected at all,” Idaho Dairymen’s Association CEO Rick Naerebout said.

CARES Act payments and food purchasing programs likely prevented many Magic Valley farmers from going out of business.

 

Congress passed the $2.2 trillion CARES Act in late March in an effort to stave off a complete collapse of the U.S. economy. If you received a $1,200 deposit in your bank account or a $600 boost to your unemployment benefits, those payments were part of the CARES Act.

Agriculture was allocated $16 billion in the CARES Act, and that $16 billion can effectively be broken down into two categories: $13 billion in direct payments to ailing farmers and $3 billion in government purchases of meat, dairy and produce to help feed struggling families. (There were also some programs outside of the U.S. Department of Agriculture, such as Dairy West’s Curds + Kindness initiative. Curds + Kindness donated nearly 1 million pounds of finished dairy products made from 7.5 million pounds of milk — milk that dairymen in Idaho and Utah couldn’t have otherwise sold.)

The direct payments were a lifeline for many Magic Valley farmers.

“I’d be done (without them),” Azevedo said. “That helped tremendously.”

Payments went to most types of Magic Valley producers, although there were snags — potato growers and aquaculture farmers didn’t qualify at first, for instance. According to documents given to the Times-News through a Freedom of Information Act request at the end of July, Magic Valley producers had received $34 million in direct CARES Act payments.

The largest payments went to dairies, which typically have expensive overhead costs. Three Magic Valley dairies received $600,000 each, distributed through the USDA. Most of the bigger payments — the 113 in the six-figure range — went to dairies. The maximum individual payment was $250,000, but some operations are split among multiple partners, so they qualified for multiple payments.

On the other extreme, some producers received just $73.60. The average payment for a Magic Valley farmer was $47,000, while the median was around $9,000. There were 733 payments to Magic Valley producers, but many producers received multiple payments.

A $100,000 payment from the government sounds like a lot, Naerebout said. But it’s important to keep in mind how massive Idaho dairies are, he said. Some Magic Valley dairies have more than 10,000 cows. The bigger operations actually fared worse, Naerebout said, since the payments maxed out at $250,000 per partner for up to three partners and didn’t cover the losses of the biggest dairies.

For some farmers, the payments were enough to make them financially whole, Naerebout said. Others lost money overall, despite the payments. He said the pandemic has probably been a net financial positive for Magic Valley dairymen so far, but there’s still a lot of market volatility expected in the future and each dairyman’s situation is different.

“It depends on the farmer,” Carr said, “whether they’re a cheese guy or a non-fat guy.”

Historic intervention

Fast food sales began rebounding during the early summer. Those restaurants typically have cheese-heavy menus, so their success boosted demand somewhat for Idaho dairy. Restaurant sales as a whole still aren’t where they were, though.

The USDA’s food box program is the biggest reason milk prices are so good right now, Carr said. The government bought hundreds of millions of dollars of meat, dairy and produce each month this summer.

Those purchases have completely changed the dairy market and demand.

According to StoneX’s research, government purchases made up about 0.1% of the U.S. dairy market before the pandemic.

StoneX estimates that the government bought 1.1% of U.S. dairy products in May, more than 2% (around $400 million) each month between June and August and a whopping 3% ($500 million) in September.

“When the government’s using 3% of the milk production in the country, it doesn’t seem like a big number,” Carr said. “But that’s a big number.”

 

That government intervention is why the price of milk jumped to about $25 per hundredweight in mid-July, the highest price ever. Blocks of cheese hit the $3-per-pound figure in mid-July, too, also a record. For comparison, 40-pound blocks of cheddar averaged $1.10 a pound in April and only exceeded the $2 plateau for two months in 2019.

Those high prices have helped Magic Valley farmers make up for the early-April lows. The sky-high prices didn’t last forever though. They’ve been fluctuating wildly during the past few months, from $25 in July back down to $16 in September, now back around $20 in October.

Natural demand for dairy is still down. The reason milk prices are still strong is because government purchases for food boxes are creating demand that wouldn’t have existed otherwise.

The problem for the Magic Valley dairy industry is that government payments aren’t going to go on forever. October is still a strong month for government purchases, but the situation could change soon.

The extreme volatility in the market causes problems. For instance, the Magic Valley has long needed additional processing capacity. A new processor is unlikely to start a $100-million project in the middle of a pandemic.

“It’s probably going to negatively impact the investment in processing expansion, at least in the short run,” Naerebout said. “Companies are going to be a little less willing to jump into big investments right now.”

At least one major dairy project — Gem State Dairy Products’ $130-million milk bottling facility next to Glanbia in Twin Falls — has been put on hold.

And while today’s prices are good, dairymen have also seen new cutbacks in some cases. Processors are penalizing producers who don’t reduce their production. Naerebout said some Magic Valley dairymen have had to cut back their production between 5% and 20%.

Carr said StoneX is projecting $15-dollar milk prices in 2021, back below the break-even point for Idaho farmers. He also emphasized that while the food box program helped the Magic Valley dairy industry enormously, it also has at least one negative impact: It made it seem like demand was good when it really wasn’t. Production should have gone down, he said, but it didn’t because the prices were so good.

“We should have been reducing production because of the demand destruction that COVID has had on this country,” Carr said. “I worry about what happens when the government purchases are done. Where’s the demand going to come from?”


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