I received a sad text from a friend of mine who is a dairy farmer. They are being asked to dump milk as the processors to whom it is assigned can’t use it right now
This is difficult to understand in a time where we are seeing empty grocery stores shelves. Supply chains are complex systems.
Many supply chains are built for efficiency and stability and when there is a significant shock to the system it takes some time adjust. That’s exactly what is happening here. While not directly involved in the diary supply chain, I do have some understanding of how it works and have spoken with a number of people who are directly involved. Here is my perspective of why this is happening.
There have been significant disruptions to demand. In many cases this has led to shortages at the grocery store. Grocery store demand has increased for several reasons:
- Consumers are concerned about availability in a time of uncertainty. This is exacerbated by the fact that they see empty shelves.
- Food service demand has been severely curtailed as restaurants close and consumers exercise physical distancing. We still need to eat and, as such, are buying larger volumes at the grocery store.
- Many consumers are shopping less frequently to reduce their risk of exposure to COVID-19. When we shop less frequently, we buy more in each shop.
These shortages are demand driven rather than supply driven. We continue to have stocks of food and to produce more of it. The supply chains are driven by forecasts (predictions of demand) and product is processed and shipped in anticipation of those forecasts. When there are demand spikes such as we are seeing now, we may have short term shortages like those we are seeing, but the system catches up. The system is catching up.
That then begs the question of why we would be dumping raw milk. While grocery demand has increased, food service demand has gone down. These different markets have distinct distribution systems. That means they are often served by different processors and distributors. Redirecting product takes some time and coordination.
This is compounded by the fact that the product mix and packaging is different in these distinct supply chain. We drink more fluid milk at home than in restaurants. We eat more cheese (think pizza, for example) in restaurants than we do at home. We not only need to divert from one supply chain to another, we also need to change the product the milk turns in to. That doesn’t happen with the snap of a finger, but it is happening, and we are adjusting. This dumping of milk is a short-term phenomenon. The system is adjusting.
There are suggestions that the supply management marketing system for dairy contributed to the requirement to dump some raw milk on a short-term basis. I believe that this suggestion is misguided. While there may be value in a discussion of supply management broadly, I believe that this issue is not a supply management one. There are two main reasons for this.
First, this is not unique to milk. There are reports of large volumes of produce being ploughed down in Florida due to loss of restaurant demand.
Produce has a narrow window within which it needs to be sold. Farmers who produce for a specific customer (in this case restaurant distribution) must scramble to find other customers when demand for their primary customer disappears. This takes time. Those adjustments will happen. They just take time.
Second, milk is being dumped in other countries that don’t have supply management. There are reports from several states that producers and processors are having to dump milk because of demand disruptions. The state of Wisconsin produces large volumes of milk and most of it is processed into cheese.
As food service cheese demand decreases the demand for Wisconsin milk decreases. Given this concentration of production and the difficulty in transporting milk long distances, it may well be that the need to dump milk will be more long term in markets like Wisconsin where there is less processing diversity.
People may argue that the milk allocation process under supply management constrains the ability to divert milk to processors making products and serving customers who have increased demand.
On the other hand, the central coordination of both marketing and transportation may facilitate diversion to demand. At the very least it will protect individual farmers. In markets like Wisconsin, individual farmers have relationships with individual plants. When that plant reduces production or shuts down altogether, that farmer must scramble to find another market. That market may not exist the farms direct vicinity.
We are seeing some raw milk being dumped. This is likely short term. The system is responding to an unprecedented shock and is adjusting. It is not the time to point fingers or make rash assessments as to blame without some fulsome understanding. Try to imagine the anguish that farmers feel when they open the valve and see their hard work flowing away. No one is happy about this and blaming is not helping.
The writer is an associate professor in Food Agriculture and Resource Economics at the University of Guelph.