The Dairy Decline

Complicating the issue is that the dairy industry has several distinct markets, all regulated by the federal government. The Class I market, representing bottled or “fresh” milk, is supplied primarily by national and regional companies that purchase what they need from local milk suppliers and also do contract packaging for other dairy brands. The Class II market, of which Old Home is a part, represents perishable products like yogurt, cottage cheese, sour cream, and ice cream, and is still a fairly diversified, local market with some national players. The Class III market represents cheese, a much more storable and commodity-type product. Then there’s Class IV, which represents milk powders and butter, products that have much longer shelf lives.

From a bottom-line standpoint, it makes sense to produce the bulk of the storable and easily transportable products wherever production is the most cost effective, places like California, New Mexico, and Idaho. According to Ault, the cost to move cheese from California to Minnesota is approximately 8 to 9 cents per pound. California cheese plants are paying 15 cents a pound less for milk than Minnesota plants. (It takes roughly 10 pounds of milk to make one pound of cheese.) Minnesota’s cost of raw material alone to produce a pound of cheese is as much as 6 to 7 cents higher than what it costs California processors to make and deliver cheese into the Minnesota market. “Competitively speaking, that’s a huge difference,” Ault says.

All this has Minnesota dairy plants worried. “My dad was concerned about the local milk supply back in the 1980s,” says Mitch Davis, managing partner of Northern Plains Dairy in St. Peter, a holding of the Davis family. The family also owns Davisco Foods International, a large cheese and food-ingredient manufacturer in Le Sueur. “In 1989, my dad went to Idaho and put everything he had on the line to build a cheese plant in Jerome,” Davis says.

Davisco’s Minnesota and Idaho cheese plants provide a startling contrast in supply markets. “We process 2.3 million pounds of milk per day in Le Sueur and we buy that milk from 240 dairy producers,” says Jon Davis, manager of Davisco’s cheese division. “In Jerome, we process 6.3 million pounds of milk per day and we buy from 55 dairy producers. In Minnesota, we bring milk into Le Sueur from a distance of about 175 miles, one way. In Jerome, the farthest we go to get milk is 42 miles. Our top 10 dairy producers in Idaho would produce more than enough to keep the Le Sueur plant running at capacity.”

Compared to the Davises’ plants, Old Home’s production was modest. At its peak, its plant processed 17 million pounds of milk and 3 million pounds of cream annually. But the supply of milk and the cost to obtain it weren’t factors in Old Home’s decision to shutter its manufacturing plant, says John Bonifaci, the company’s executive vice president and chief financial officer. Old Home had more pressing problems: an out-of-date plant, high labor costs, and growing obligations in the Central States Pension Fund. 

Despite the competitive advantage of its larger scale compared to Old Home, Davisco was so concerned about the milk supply in Minnesota in the 1990s, that it invested in several dairy farms. “All went broke and we ended up with two dairies,” each with about 500 cows, Mitch Davis recalls. Within six months, though, the Davis family realized that even those dairies were too small to be efficient.

The company’s next step was to try to consolidate and expand the farms into one much larger operation and take advantage of econ-omies of scale similar to those enjoyed by Davisco’s Jerome suppliers. “One reason we wanted to build a larger dairy was to supplement the erosion of the milk supply,” Davis says. “Another reason was to learn that side of the business.” Davisco also needed a large supply of homogenous milk to develop the bioactive proteins used in some of its products, and that just wasn’t available near Le Sueur. In 2002, Davisco broke ground on its own 3,000-cow dairy near St. Peter and began milking a year later.