There are implementation challenges, but individual dairy cooperatives can manage milk supplies through the establishment of base/excess milk programs, according to participants in a Wisconsin Farmers Union (WFU) webinar, July 19.
Members of Scenic Central Co-op, Dairy Farmers of America (DFA) and Land O’Lakes shared insights on programs to manage member milk supplies to match co-op processing and marketing capacities. The panel participants did not represent the views of their respective co-ops, but rather shared their own personal experiences and views.
Base/excess plans generally work by determining an individual co-op member’s historic level of milk production. The farmer is then paid for milk produced up to their base, but penalties or assessments are imposed on any excess milk. WFU officials are urging more cooperatives to consider the base/excess option as a way to discourage dairy expansions that lead to milk supply-demand imbalances and may drive milk prices down.
“While these internal programs alone will not bring up farmers’ milk price, they reduce the financial incentive to overproduce milk,” said WFU government relations associate Bobbi Wilson. “They also cut costs incurred by having to haul or even dump excess milk.”
Mertens: DFA Western Area Council
George Mertens, who chaired the Western Area Council of DFA from 2008-16, farms with sons Fred and Steve in California. During his tenure as chairman, he oversaw implementation of a base program in 2008.
Mertens said individual co-ops must implement base/excess programs designed for their own needs and markets.
“You can’t have a national base program because other parts of the country might be short of milk when you’re long; it’s something that has to be sized to the organization you’re shipping to,” said Mertens.
“There’s a lot of misinformation regarding base plans; it’s not a quota system,” Mertens said. “If someone wants to expand and their co-op doesn’t have outlets for that milk, that excess milk is costly. If you sit on a co-op’s board of directors, you soon realize you have some very different problems than you do on the dairy.”
Under the DFA Western Area Council program, individual farm bases were calculated on monthly production averages in 2007. To cover costs of moving excess milk, the hauling charge went from 6 cents per hundredweight (cwt) in 2007 to 25 cents per cwt on all milk in 2008. For milk produced above base, the hauling charge was more than $1 per cwt.
In addition, there was another assessment on any milk produced over the base; the first assessment was $13.30 per cwt. More than 50 loads of milk were dumped in February 2008.
A five-member committee was established for “hardship” cases seeking to produce milk above the base level. Of 24-25 who filed for waivers, only two were accepted, he said.
The economic pain had an immediate impact, and overproduction of milk was reduced within 1.5 to 2 months. Mertens said some producers just moved cows to other areas, including Texas, while others culled a little heavier to bring production into line.
Within months, both Land O’Lakes and California Dairies Inc. had also implemented base programs, he said.
The benefits of a base/excess program, Mertens said, included more honest communications between the co-op leaders and its member producers. Dairy farmers received clearer market signals not to overproduce.
With California’s milk production declining, the balance between supply and demand were more closely matched, Mertens said. Several years later, supply started creeping up and the region again found itself in an oversupply situation. Mertens said that all it took was for the co-op to mention that it was thinking of reinstituting the base program, and supply fell back to where it needed to be.
A challenge of administering a base plan is that once the co-op gets past the overproduction situation, establishing a new base isn’t limited to the old historical model, he said. Another challenge included the fact base took on value, and rules for transferring base can get messy.
“Base did take on value; some dairies were selling out and being transferred to new ownership,” he said. “If the base wasn’t transferred, the dairy wasn’t worth much.”
Strassburg: Land O’Lakes
Jeff Strassburg, a fifth-generation dairy farmer who milks about 900 cows near Wittenberg, Wisconsin, has been a member of Land O’Lakes since 1991.
To implement its base/excess program, Strassburg said the Land O’Lakes Upper Midwest area program calculated milk production bases between September 2014 and August 2015. In the first year of implementation (September 2015-16), monthly milk production levels compared to the base year were reported, but the information was used as an educational tool, with no enforcement action taken. Bases were adjusted for the September 2015-16 period. There were provisions for dairy farmers who had invested in facilities or already had an expansion plan in place.
Once enforced, there are assessments of up to $10 per cwt for exceeding an individual base to cover marketing and transportation costs to move excess milk into unprofitable outlets.
There is no assessment when the milk shed is not over base, and all farmers in the milk shed are notified one month in advance of a potential assessment.
Strassburg admitted he initially thought a base/excess plan was “un-American” and was concerned the co-op’s leaders would be less accountable for finding new markets. However, he said the benefits include keeping the co-op strong while providing price stability for producers and reducing the need to dump milk.
“I commend the Land O’ Lakes staff for implementing this,” Strassburg said. “Did they take some heat? Yes, and I was probably one of the ones who gave them that heat. Looking back, it was a good move.”
He said the program was implemented without adding staff to manage it, and no milk contracts have been terminated due to oversupply. The co-op never turns away a member's milk.
He said the program helped improve communications between the farmer members and the co-op. Another benefit, he said, is that the co-op and individual producers are now working together on longer-term planning – two to five years – instead of making one-year decisions.
With the base determined by pounds of milk, the program has forced producers to take a look at increasing milkfat and protein components.
Strassburg said base under the program has taken on de facto value; cows under base probably have a higher value. A new or expanding producer would have to purchase cows from a farm with an existing base.
“Nobody should be afraid of a base plan,” Strassburg said. “It’s just another management tool a dairyman has to take into consideration in their day-to-day operation. At the end of the day, it could not only help the producer, but also the co-op. I don’t think it will negatively affect the export market. If the export market is there, the base will be there. At the end of the day, if we can balance the milk supply, the farmers will probably get a little fairer price for their product.”
Volenec: Scenic Central
Jerry Volenec, a fifth-generation dairy farmer milking about 350 cows near Montfort, in southwestern Wisconsin, has been a member of Scenic Central Co-op since 2000. Scenic Central is a marketing co-op with about 300 producer members; it does not own any processing facilities. Scenic Central launched its base-excess program when the co-op lost milk contracts and found itself selling spot loads of milk for $4 under the Class III price.
Volenec said he was caught a bit by surprise when he received a letter from the co-op in March 2018 notifying him that base levels of production had been established. The letter didn’t, however, explain how bases were determined or how penalties would be imposed.
"There were producers who wanted to add cows or bring on another family member, but the co-op just couldn't take any more milk,” he said. “The spot-load price, which historically could be at a premium, was driving everybody's mailbox price down.”
He took an active role in ironing out details of the program, which calculates base using the highest consecutive three months of production over last three years. Penalties for going over base included being paid the spot-price average on excess milk for the month and a $1 per cwt deduction on that milk for hauling. He estimated overbase production for April received about $5 per cwt less than the contract price.
It’s still early in the program’s implementation history, so Volenec isn’t sure of the economic impact it will have on his dairy. He said it can be a challege to calculate monthly bases and hit daily production goals, because months vary in the number of days.
Limited by acreage and facilities, Volenec said he has reached his maximum herd size. However, through breeding and feeding improvements, he has increased production about 4,000 pounds per cow over the past four years, so his milk production continues to grow without adding cows. He knows he’s probably over his base, but isn’t sure what the financial impact will be. That’s meant higher-producing cows he normally would have kept in the herd are now culled based on other criteria, such as elevated somatic cell counts. With the base determined by pounds of milk, he’s also putting more focus on boosting components.
Scenic Central’s program had no exemptions for small farms. The co-op board has discretion on individual cases, but as it stands now, the program provides for zero growth.
“This doesn’t prohibit expansion, but any farmers who want to expand must bear the brunt of costs for the extra milk; it doesn’t dilute everyone’s pay price,” he said. “It shifts the burden of an expansion to those who are expanding and will be a deterrent at times when there is excess milk out there.”
Like Strassburg, Volenec said the program has helped improve the interaction between the co-op and individual producers.
WFU’s Wilson said the webinar was a step toward a more viable economy for farmers and rural communities. “Dairy farmers need a fair and predictable pay price, and there is a lot of work that needs to be done to get there,” she said. “By holding this presentation, we are not saying that this is the answer, or that base/excess plans will solve the dairy crisis, but we are trying to demonstrate one thing that co-ops can do that is a step in the right direction.”
The Wisconsin Farmers Union base/excess webinar is archived. Individuals wishing to watch the webinar will be asked to register. For more information, email WFU government relations associate Bobbi Wilson or phone (608) 234-3741. 
-
Dave Natzke
- Editor
- Progressive Dairyman
- Email Dave Natzke
