It’s a three-billion-dollar economic engine, and it runs on milk.

Minnesota’s dairy industry is the state’s largest agriculture sector, employing more Minnesotans than 3M, Target and Northwest Airlines combined. The industry adds $600 million to the value of the state’s corn and soybean crops every year. And for every 1,000 cows that farmers milk, they pump $2.6 million into local communities.

But many of the state’s 7,500-plus dairy farms are in trouble, threatened by milk-market oversupplies, inequitable federal price formulas, high production costs and competition from western producers and processors, says Michael Sparby, AURI project director in Morris.

Shrinking in the middle of oversupply

Minnesota and Wisconsin once dominated U.S. milk production. But over the last decade, the dairy industry has moved west. California — now the nation’s top milk producer — and other western states are rapidly expanding in dairy. Idaho will soon overtake Minnesota as the fifth leading dairy state.

“Our milk production is flat,” says Harold Stanislowski of Fergus Falls, Minn., a dairy specialist for the Minnesota Department of Agriculture. “California and Idaho are predominantly where the growth is.”

Minnesota lags in adopting larger, more cost-effective dairy farms. The state’s aging dairy plants are also less efficient than those of western competitors, Stanislowski says. “Our largest plant processes three million pounds of milk a day.” New plants in western states have a capacity of four to eight million pounds.

Greater efficiencies in milk production and processing mean “there is cheese now being produced in California and delivered to our markets in the Midwest for four to five cents less per pound than we can do it here.”

Meanwhile, 29 months of consecutive growth in production have boosted national milk supplies 1.5 percent above demand. That’s pushed raw milk prices to the lowest level in two decades, Stanislowski says. “Prices now are below the cost of production for many Minnesota dairy farmers.”

Also weighing on Minnesota dairy farmers are unfavorable federal price formulas. These formulas, which set minimum prices, vary by region and are intended to encourage more milk production in population-dense regions — penalizing producers in Wisconsin and Minnesota. Only 19 percent of Minnesota milk is sold for drinking; 80 percent is made into cheese, which yields less profit for farmers.

Time for a turnaround

Yet the outlook is not all doom and gloom, Stanislowski says. He points to four areas that could help spur a turnaround for Minnesota dairy: planning, regulation amendments, financing and federal price reform.

“We need to help farmers do a better job of planning for change,” Stanislowski says. He notes that Wisconsin has had success with dairy planning grants. “For every $1 spent on planning, they’ve gotten $168 back in new dairy investments.”

Minnesota dairy farmers would also benefit from increased diagnostic services to identify limits on productivity, he says. And better benchmarking methods would let farmers compare their performance with competitors across the country.

Minnesota should lower public policy barriers that discourage dairy production in the state, Stanislowski adds. “We’ve had a hard time in Minnesota with the permitting process.”

Better financing mechanisms would help the industry, he says. Cash-strapped farmers “are at a disadvantage when it comes to upgrading to increase efficiency and improve quality.” He points out that in California, where dairy ventures are better capitalized, interest expense averages 30 cents a hundredweight less than in Minnesota.

Finally, there must be national dairy price-formula reform. “The federal governmenttreats our dairymen as third class citizens, and that’s not fair.”

AURI exertions

AURI is a part of the effort to strengthen Minnesota dairy, Sparby says. For example, AURI is participating in a study with the state agriculture department to calculate the costs and benefits of new feedlot rules. The research will examine “the economic costs of losing dairy farmers and the subsequent effects on the state’s dairy processing,” he says.

AURI continues to help dairy entrepreneurs with business and market planning — an essential component of success, says Bob Lefebvre, executive director of the Minnesota Milk Producers Association. “Dairy producers are looking at options to increase revenues, and adding value is one way to do that.

”But you don’t want to just jump into a new venture. You have to make sure you have a well-researched and thought-out plan. That’s where AURI comes in. It’s one of the places that can help producers.”