Is COVID-19 the dairy industry’s ‘Black Swan’ event?

(FOX 9) - On the outskirts of the Twin Cities, a dice throw from Mystic Lake Casino, the Kreuger Farm might seem like the biggest gamble of all. 

“It’s terrible,” said Tim Krueger.  “On our dairy we’re expected to lose $40,000 to $50,000 a month.”

Krueger, the fourth generation to run this farm in the town of Jordan, said he has dairy in his blood.  But the odds may be better at the casino.

After five years of a losing streak, whole milk prices picked up at the end of 2019.  The Krueger’s were breaking even.  And at the beginning of 2020, started making real money. 

“Last month we received $20 for our milk. We were profitable, very profitable,” said Krueger. 

Then, came the Coronavirus. The bottom quickly dropped out of the commodities market, with milk prices dropping 45 percent, to their lowest point in 20 years.

Asked if he thinks some dairies might go out of business, Kreuger was direct.  “Yeah, ours may be one of them.”

Another Farm Program

On Friday, the White House announced yet another program to help farmers get through the difficult economic times, with President Donald Trump calling farmers “great Americans” who "never complain.”

The Coronavirus Food Assistance Program (CFAP) includes $16 billion dollars in direct payments to farmers, with $2.9 billion going to dairy.  

The program also includes $3 billion in USDA direct purchases of dairy, meat, and agricultural products for local food banks and nonprofits.  

“Having to dump milk or plow under vegetables ready for market is not only distressing, it's heart breaking as well,” said Sonny Perdue, U.S. Secretary of Agriculture.

Around the country, some farmers are actually dumping their milk, because of too much supply, and not enough demand. In Minnesota, where the dairy market is more diversified and dairy cooperatives have more capacity, no one is dumping milk - not yet.  

Still, many Minnesota dairy coops and are asking farmers to voluntarily cut production by 10 to 20 percent. 

“We are like a grocery store,” said Lucas Sjostrom of the trade group Minnesota Milk.  “We operate on razor thin margins.  A three percent profit is an awesome year for most farms, a three percent loss is a horrendous year.”
 
Dairy’s ‘Black Swan’ Event

Professor Marin Bozic, an expert on risk management in the dairy industry at the University of Minnesota, called COVID-19 a ‘Black Swan Event’ for dairy.  A phrase meaning a totally unpredictable event with devastating consequences.

It has brought “short term, very deep, demand destruction,” said Bozic.

He said the loss of demand from school closures has been offset somewhat by a 45 percent increase in grocery store purchases. 

The biggest impact, he said, is that no one is eating out.  The shuttered restaurant industry accounts for one-third of all diary purchases in the U.S., and half of all butter consumption. And no one knows when, or if, that market will come back.  

“We may see 10 percent of farms not make it through this,” said Bozic. “It’s going to be carnage.”

The new federal program will help by getting much needed cash directly to dairy producers.  

But like many who study the industry, Bozic is concerned about the medium-sized dairies.   

Federal insurance programs are geared towards small dairies or larger operations. 

With prices up at the end of last year, many farmers didn’t bother signing up for Dairy Margin Coverage, an insurance program geared towards small farms that makes payments when market prices dip below production costs.  

At the other end of the spectrum, the Dairy Revenue Protection is a risk management program tied to the futures market and geared more towards large producers and agribusiness. That program was already expected to pay out more than $1 billion in 2020. 

A Losing Hand?

In places where social distancing is easier, it is getting harder to understand the sacrifice. 

“All these programs are borrowed money,” said Paul Kreuger, 74, Tim’s father, who has worked on the farm all his life. 

“We’ve got to get this economy up and going or the cure is going to be far worse than the disease,” said the older Kreuger. 

The Krueger’s sold some of their cattle for extra cash, but that market is also down by half.  

Even with new federal payments, the question on the Kreuger farm, and so many others this spring, is how long they can play a losing hand.