Simplifying the system to find the money

Ben Yale Published on 21 September 2011


When I designed my office, the first plans came back bid at about two times more than I had budgeted.

I called in a long-time friend who was a builder. I went over the plans and pointed to areas where I thought I could cut costs – more siding, less brick, for example.

He gave me a lesson in building costs I have passed on to other facets of life.

“It starts with the foundation and a simple plan,” he started. “An unbroken, plain wall is the cheapest part of a building. Every time you put a hole in it for a window or door, add a corner, shorten or lengthen it, you add costs. The secret to keeping costs down is to keep the holes and corners to a minimum.”

He had given me good advice. The redone plans were bid at half of the original quote, and he, of course, was the general contractor.

Even at the near-record prices for milk, profits on dairy farms are still thin due to historically higher feed costs. For the dairy farmer, the options are few. Efforts to get more milk from a pound of feed or increase production to reduce overhead cost can help, but only in limited ways.

Congress will never be able to make up the difference. Prices for milk cannot go much higher without hurting sales. The current budget for dairy programs is about $500 million for the two trillion pounds of milk likely to be marketed in the next 10 years. That is not much to go around.

Milk at the farm equals the value in the plant silo less the marketing costs to get it there. Aside from feed costs, the biggest cost to a dairy producer is the cost of moving milk to the plant. In one way or another, producers pay for this.

These costs come in three major categories – assembly (pick-up, testing, reporting and accounting, paying), transporting to market and balancing.

Often we look at these as individual costs – the cost to the farmer for hauling milk to market, the cost of the cooperative to balance the market, the cost to the plant for testing.

Such an approach is trying to reduce the costs of the building by using a lower penny nail – the total of all of these costs paid by everyone are the costs that producers in one way or another must absorb. Lower the costs, raise producer net income.

On any given day more than 10,000 milk trucks make a total of about 35,000 stops at dairy farms to haul milk from the farm to a processing plant. In many cases, a single dairy filled one or more of these trucks. In other cases, groups of several to a dozen or more dairy farmers are needed to fill the truck.

Today, about 10 percent of the nation’s dairy farms that can fill a tanker by themselves produce more than 70 percent of the milk marketed. Because each of these pick-ups has an associated cost – paying a driver to haul from the barnyard to the plant, hooking up the bulk tank to the trailer and pumping milk, sampling and measuring the milk once unloaded – fewer stops means less overall cost, fewer turns in the wall.

Once assembled, the cost of moving the milk – an ever-growing cost with higher fuel – adds to the overall cost of moving the milk from the farm to the plant. While producers cannot control the cost per mile, the costs from different trucks crossing the paths of other trucks in moving milk inefficiently is certainly a cost that could and should be avoided.

To have enough milk to meet demand all the time, the system has to have too much milk some of the time. Unfortunately, the annual production cycle works against the demand cycle. Production peaks in the spring; demand climaxes in the fall.

But in addition to these macro-annual swings, milk production per cow varies from day to day. Every dairy farmer recognizes this. Between different plants, needs and schedules also vary from day to day. None of these agree.

Weekends and holidays present yet another challenge. Cows produce milk around the clock, seven days a week. Some plants operate on the same schedule, but not all of them. Many plants operate during weekday business hours with, maybe, a second shift.

When the plant is down, it needs no milk. Idled plants are corners added to the wall, adding to marketing costs.

Over the years, the industry – particularly its cooperatives – has developed the means to handle this discrepancy between plant demand and actual production. The cooperatives accomplish this by trying to move milk between the demand plants, taking advantage of one plant’s increased needs when another has less need (a function few demand plants can do on their own).

Scheduling and routing milk trucks and pick-ups can also absorb some of the variation. This removal of corners and unneeded openings simplifies the structure and reduces costs.

But ultimately, the demand plants are full and the trucks need emptied to return to the farm to pick up more milk. That milk has to go somewhere or be made worthless. Sell it or smell it.

To meet this need, cooperatives have – over the decades – built balancing plants, primarily powder plants, that can absorb the extra milk and convert it into a more stable product. These balancing plants, often operating at irregular hours and days, are expensive on a per-pound-of- product basis.

Although this product competes with the same product made from plants that operate year-round, the price is the same. There is no recouping the excessive overhead associated with owning and operating this balancing plant from the marketplace.

Balancing benefits the entire market, every buyer and every producer. It is a marketing cost, but a necessary one, just as a roof adds a necessary angled corner for any building.

In a fully efficient system, producers would keep the variation in milk production to a minimum, a tanker could fill up at one stop, regardless of contracts, milk would move from the closest farms to the plant and plants would receive milk all day, every day. There are no such plain walls in our world.

In some markets – the Southwest is the best example – cooperatives representing virtually all of the milk have been able to set aside individual interests and wring out as much efficiency as they can from the marketing system and pass that on to their members. Just coordinating the pick-up and delivery so haulers do not travel in opposite directions with loads of milk has brought savings of as much as 40 cents per hundredweight (cwt).

Coordinating balancing plants to have what is needed and no more and levelling deliveries to plants has reduced costs. When inefficiencies remain, the costs of those can be assessed against the market participant who refuses to adapt operations to eliminate the difference.

Between the efficiencies and recouping the costs, producer margins grow. But this is not possible when individuals seek to make their own price or plants seek to avoid the costs they create in the marketplace by insisting on four-day deliveries during business hours.

So long as there is a government regulation that insists on participation (class prices and blending is one of those), they cannot escape all of them, but if they can shift these costs onto others, they will and do.

A producer who can fill a tanker load, or a group of close-by producers who collectively can market the milk direct to a plant at a higher relative price than what they would otherwise receive, can shift the other marketing costs.

These costs do not go away from the market (when individuals market, they generally go up.) Rather, the costs are shifted to other and fewer market participants, almost always other producers.

Milk pricing is fiercely competitive. The cooperatives have to match the lower price of the plant buying milk from the individual producer. The dime saved by the plant now spreads as a gift to all plants on all milk.

Now the bargain between the producer and the plant is no longer a bargain for the plant. The producer, to maintain a relationship, must agree to take less for the milk. The co-ops respond again.

They are forced to do so to protect their customers. The plant and cooperative, spurred by the individual producer, race to see who can be the lowest-priced milk.

For the individual producer, he believes that by netting a higher premium than his neighbor he has gained, but in reality, because the overall level has been reduced, he is probably selling net lower than if he remained in the system.

Rather than tinkering with the structure and looking at a wall here or a door there, when producers collectively look at all of the marketing costs and work to reduce the unneeded corners or doors or windows, savings can be had and they can be for the producer and they can be significant.

In the end, such market cooperation would bring more money to producers than any government program ever would. PD

Illustration by Mercedes Opheim.


Ben Yale
Yale Law Office
