Agriculture in Illinois : Alternative Futures for the 1980s September 1979 aerr 172

The Dairy Industry Sheldon W. Williams

Agriculture in Illinois: Alternative Futures for the 1980s

AERR 165 AERR 166 AERR 167 AERR 168 AE RR 169 AERR 170 AERR 171 AERR 172 AERR 173 AERR 174 AERR 175

AERR 176

Earl R. Swanson and Harold D. Guither, Project Leaders

R oger E. Schneider, Research Coordinator

Publications in this series :

Future National Policies and Illinois Agriculture

International Trade and Illinois Agriculture

Farming in an Urban Environment

Changes in the Farmland Base

Illinois Farm Property Taxes

Illinoi s Crop Production

Livestoc k Production and Marketing

The Dairy Industry

Fertilizer and Pesticide Use by Illinois Agriculture

Farm Income, Expense, and Asset Structure

Market Structure in Illinois: Food Manufacturing and Distribution

Sectors

A Summary Report

Flu' ILh1/.()i.\ Agrintilll1'(l1 c"x/)('rirn(' 17l St lliion pr()uidf','" equallJppurl1"l.nil.ies in pr{).~·r(lnl.S an.d empLoynlell l.

CONTENTS Abstract/Keywords ..... . .......... .. ... . ...... . ....... IV

Foreword .. ........................ .. ................. v

Changes in Volume and Geography of Production ........ .. .... 1 Trends by Areas ...................... . ............. . . 3 Projections for the 1980s .................. . ..... ... .... 3

Competitiveness of Dairying ............. .. ......... ... .... 7

Changes in the Character of Dairy Farming ...... . ......... .. 13 Size of Herd ............. . .......................... 13 Milk Production per Cow .................... . ........ . 14 Trend to Dry-Lot Feeding ............................. 14

Structure of Dairy Marketing .............. . .... . ......... 15 Fluid Milk ............ . ............... .. ...... . .... 15 Manufacturing ......... .. ..... . ..... .. .............. 18

Demand and Consumption ..... . ................. .. ...... 19 Con sum ption Trends ................................. 19 Changing Fat to Solids-Not-Fat Ratios .................... 23 Dairy Substitutes .. ................. .. ......... . ..... 24 Implications for Illinois Dairying ....... . ... .. .......... . 25

Adapting the Illinois Dairy Industry to the Future ............. 25 Concentration of Production in Best Adapted Areas ......... 25 Increased Intensity of Dairy Farming Operations .... . ....... 26 Modifications of Products to Suit Developing Demands . ...... 26 Use of Innovative Retail Outlets . . . . ... .. ...... . ......... 26 Promotion .......................... . . . .... .. .. . ... 27

Notes .. .. .... . ............ .... ....... .. ........... . . 27

iv

ABSTRACT

KEYWORDS

Recent and prospective changes in illin ois milk production are ex­amined. Th e nature and chamcter of dairying-including its essential competitiveness-are explored for insights into its futurr. Funda­mental to that future are adaptations in dairy farming , manu­facturing, and marketing. Some ways in which illinois dairying can adapt to statewide and nationwide trends in consumption of dairy products are suggested.

Illinois; milk production; dairy processing; consumption of dairy products.

FOREWORD

v

This report is one of a series that describes the current structure and trends in the Illinois agricultural economy and provides projec­tions of potential future developments. The series is the product of a research project carried out in the Department of Agricultural Eco­nomics, University of Illinois at Urbana-Champaign, with the support of the Illinois Agricultural Experiment Station. Approximately twen­ty staff members cooperated in this analysis.

The participants and their reports deal with a range of specialized interest areas. The project took advantage of the participants' special­ized knowledge, while coordinating their efforts wi thin a common framework of research goals and methods.

Quantitative projections are given for 1985 and 1990. When com­pared to the description of curren t Illinois agriculture, these projec­tions suggest possible changes throughout the Eighties. Quantitative projections are supplemented by the authors' analyses of forces underlying the trends and resulting projections.

To provide a more meaningful analysis of some aspects of the state's agriculture, Illinois has been divided in to four geographic areas. These coincide with production areas previously outlined by the USDA, and therefore permit the greatest use of available data. The areas are illustrated in those reports dealing with analysis and projections at the subs tate level.

A major goal of the research was to develop projections consistent with changes that may occur at the national and international levels. Information from a national agricultural projections model was adapted to provide this desired national framework for the state-level projections. The National-Interregional Agricultural Projections (NIRAP) system consists of computerized simulation models devel­oped by the Economics, Statistics, and Cooperatives Service of the U.S. Department of Agriculture.

The component models link the national farm production sector to the natural resource base, the food consumption sector, the farm input supply sector, the general economy, and the world market. The NIRAP system provided the participants with projections of national and state-level agricultural outcomes, given alternative assumptions about the levels of certain key determinants of agricultural commod­ity demand and supply at the national level.

In this project, three alternative sets of assumptions on these basic determinants of agricul tural demand and supply were used to provide a range of alternative projections. These alternatives are illus­trated in the table.

These al ternative levels represent an attem pt to bracket their full range of possible or likely future variation. Thus, the column headed High Demand-Low Supply includes the highest levels the demand determinants are reasonably expected to reach by 1990,givenpresent trends. The Low Demand-High Supply column includes the lowest likely 1990 levels. For the sake of convenience, these alternative futures are referred to as the High Demand and Low Demand alternatives in the reports in this series. The assumed levels for the supply determinants represent the same extremes. However, the

vi

Assumed U.S. levels of major determinants of demand and supply: 1990

High Low Actual Demand- Demand-1973-75 Low High

Demand determinants Average Supply Baseline Supply

Population (millions) 212.0 253.7 242.3 234.9 Gross National Product

(biI.1972$) 1,210.2 1,987.6 1,848.4 1,718.2 Disposable income

(1972 $ per capita) 4,020 5,675 5,497 5,243 Percentage use of protein

substitutes for meat* 2-5% 2-5% 2-5% 2-14% Agricultural trade high high moderate low

Supply determinants

Public expenditures on agri-cultural research and ex-tension t (million 1972 $) 795 835 1,339.9 2,200.0

I ndex of inflation (1974= 100) 100 289.7 218.3 163.6 Climate neutral adverse neutral neutral to

favorable

*Included as a proxy for tastes and preferences

t Intended to be generally indicative of technological change

relationships are reversed, with the lowest assumed levels for supply determ inan ts matched with the highest dem and -determ man t levels and vice versa.

This matching of opposite supply and demand factors is explained in some detail in the Summary Report of this series. It essentially stems from one major futures research objective, which is to antici­pate necessary future adjustments, and projects situations that would require the most difficult adjustments. Such projections are most valuable for considering future change and necessary adjustments.

The Baseline assumptions and projections describe a future re­sulting from a gradual unfolding or continuation of current national trends. It would be essentially a future of natural evolvement from present conditions and would probably require only a minimum number of rather routine adjustments in the economy.

The High Demand assumptions, on the other hand, lead to a future of a different nature. Under the High Demand assumptions, aggregate demand increases more than under the Baseline assump­tions, while aggTegate supply actually declines. The result would be stronger competi[ion for agricultural commodities and, thus, higher aggregate prices and farm income.

At the other extreme, the Low Demand assumptions lead to a future wherein demand increases less, while supply increases more, than under the Baseline assumptions. The combination of higher supply potential with relatively lower effective demand results in a decline in production, prices, and income compared with projections of the Baseline.

Since projections of future change cannot be made with precision or certainty, it is useful to adopt the concept of a scenario for the future. In this set of reports, the alternative sets of assumptions and

vii

projections direct attention to such alternative scenarios, each char­acterized by its own set of features.

Most of the reports in this series focus on discussi on of the spe­cific sets of quantitative assumptions labeled here as the High De­mand, Baseline, and Low Demand alternatives, and on the specific projections and implications resulting from each. The authors gener­ally speak of these alternatives as "the" scenarios. Communication and exposition is simplified by discussing alternatives distinguished in such precise quantitative terms.

At the same time, it is useful and perhaps more realistic to con­sider alternative ranges or bands of possible fu ture change. From such a perspective, the High Demand, Baseline, and Low Demand alternatives can be interpreted as representing alternative scenarios, rath er than as being scenalios in themselves . Thus, the Baseline as­sumptions and projections provide a focus for an entire range of like­ly or possible variation in demand and supply determinants, given present conditions.

The High Demand and Low Demand alternatives bound this vari­ation . That is, each specifies or is based on opposite extremes of vari­ation. These extremes are not presently viewed as probable to any gTeat degree. A different set of features would exist in the agricultural economy should these boundaries in fact be exceeded; different scenarios would be involved.

Of course, the assessment of the degree of probability of change in the future is highly subjective. It would be erroneous to view the High Demand and Low Demand alternatives as absolute bounds. For that reason, it is necessary to evaluate the changes associated with each extreme. Also, while the range of possible or likely variation about the Baseline alternative includes many combinati ons of cir­cumstances with essentially the same implications, it also includes, at its outer limits, combinations more similar to the other alternatives. Thus, the implications of the High Demand and Low Demand as­sumptions and projections are both important in the consideration of potential future change.

A more complete description and evaluation of the NIRAP sce­nario assumptions, methods, and projections is presented in the Sum­mary Report. The three sets of assumptions outlined in the table pro­vided the basic projections for all the reports in this series. Most parti­cipants indicated that the most likely future for Illinois agriculture is bracketl"d by the specific assumptions and projections of the Baseline and High Demand alternatives. Each report author conducted an independent evaluation of the assumptions and projections included in each scenario and formed a separate judgment on po tential future change. Also, the authors considered additional factors relevant to their own report areas.

Users of the information in this set of reports should draw their own conclusions about the relative likelihoods of the various combi­nations of assumptions and projections. Hopefully the information will aid decision-makers in Illinois agriculture, as they evaluate chang­ing conditions, plan for adapting to those changes, or perhaps even attempt to influence the nature of the changes that do occur.

CHANGES IN VOLUME AND GEOGRAPHY

OF PRODUCTION

THE DAIRY INDUSTRY

S.W. Williams

Illinois was once a leading dairy state, bu t, in recent decades it has been producing a decreasing proportion of the nation's milk. In 1925 Illinois ranked fifth among the states with 4.3 billion pounds or 4.8 percent of the total U.S. milk production. In contrast, by 1977, Illinois ranked twelfth with production of 2.5 billion pounds or 2.0 percent of the nation's total.

The decline of dairying in Illinois has been associated with the increased specialization and commercialization of farming. A half· century ago soil fertility programs depended heavily on crop rota­tions and the use of manure from livestock. The prevailing cropping system at that time produced hay , much of it legume hay. Available power and equipment limited the ac reages of row crops farmers could plant, cultivate, and harvest effectively. Furthermore, to many farmers keeping one or a few dairy cows was the most practical way to have a supply of fresh milk. Under these conditions, small dairy herds provided a market for forage crops and employed seasonally surplus labor in winter months. They contributed to fertility main­tenance, supplied milk for the farm family, and, in some cases, pro­vided skim milk for hogs or other livestock.

During the past half-century, a number of developments have contributed to the decline in dairying. The use of synthetic nitrogen and of larger tractors, planting and harvesting equipment became extensive. With widespread production of soybeans as a cash grain crop, soybean meal became available and was used as a high protein supplemen t. Transportation and refrigeration facilities improved greatly. With these changes farmers in much of Illinois have become increasingly specialized in the production of corn and soybeans, which in some cases they supplemen t with meat animals. Many ceased to keep dairy cattle even to provide milk for family use.

Until recent decades, much of the dairying in Illin ois was a sup­plementary enterprise on grain or grain-and-meat-animal farms. Con­sequently, both herd size and average production per cow were below that of some of the states where dairying was more special­ized. While the Illinois farmers now keeping milk cows have become m ore specialized in dairying, the proportion of cows in herds of fifty or more still is smaller than in a number of states in the Northeast, South, and West, and average production per cow continues to be below such states as Wisconsin, New York , and California.

The decline of dairying in Illinois has been sharp and all­encompassing in recent decades. The number of milk cows on farms in 1977-approximately 234,000-was only one-third the average number on farms in the years from 1955 through 1959 (table 1). Between the late 1950s and 1977 average milk production P"f cow

2

TABLE 1 Milk cows and milk production in Illinois 1955-76

Total milk production

Average yearly Milk cows milk production Quantity Percentage of

Period (thousands) per cow (pounds) (million pounds) U.S. Production

1955-59 708 6,856 4,837a 3.9

1960-64 520 8,088 4,188a 3.3

1965-69 361 9,292 3,351 a 2.8 1970-74 278 9,867 2,739a 2.3

1975 243 10,041 2,440 2.1 1976 237 10,477 2,483 2.1

1977 234 10,598 2,480 2.0

NOTE : Adapted from Economics, Statistics, and Cooperatives Service , USDA, Milk Produc· tion, Da·1-1 (2178): p. 5. Revised estimates for earlier five-year periods from USDA Statis· tical Bulletins, 1961-78. aAverage yearly quantity .

increased by approximately 50 percent, but that was not enough to compensate for the sharp drop in the number of cows. Consequently total milk production in the state dropped from an average of slightly more tha n 4.8 billion pounds per year in the late 1950s to approximately half that amount in 1977.

The contraction in dairying in Illinois has been more pronounced than in nearby states. In the period from 1975 through 1977, the number of mill< cows in Illinois was only 31 percent of the number in 1955 through 1957, a sharper reduction than in any of the ad­jacent states (table 2). Over the intervening twenty-year period pro­duction per cow increased by a lesser percentage in Illino is than in Iow a, Kentucky, or Missouri. Consequently, Illinois milk production in 1975 through 1977 was only 46 percent of what it had been from 1955 through 1957; and the decline was greater than any adjacent state experienced. In fact, the only adjacent states in which milk production dropped by more than 10 percent over that period were other Corn Belt states. In Iowa, Indiana, and Missouri, 1975 through

TABLE 2 Milk cows and milk production, 1975-77, as compared with 1955-57

1975-77

Number Milk production Total milk State of cows per cow production

(percentage of 1955-57)

Illinois 31 156 46 Indiana 38 157 60 Iowa 39 166 65 Kentucky 49 190 93 Missouri 38 190 71 Wisconsin 78 150 118 United States 54 178 96

NOTE : Adapted from USDA Statistical Reporting Service, Milk Production, Disposition, and Income (Apri I 1961); and Eco'lomics, Stat is tics, and Cooperatives Service, Milk Produc­tion (Feb ruary 9.19781.

Trends by Areas

Projections for the 1980s

3

1977 milk production averaged approximately 65 percent of the 1955 through 1957 level.

Because of this continuing decline in relative importance, in Illi­nois milk production has become a minor enterprise in comparison with production of such farm products as corn, soybeans, and hogs. Moreover, the future of milk production in the state must be evalu­ated on the basis of the distinctive trends occurring in Illinois ra~her than broader trends of the North Central Region of the United States.

Accompanying the decline in dairying has been an increasing concentration of the industry into a few sections of Illinois. Over the past two decades, the percentage of cash receipts derived from the sale of dairy products decreased in all crop reporting districts. The decline was least in the southwestern and northwestern crop report­ing districts, which in 1977 derived 11 percent and 9 percent of their respective cash receipts from dairying (fig. Ib). Only one other district-the northeastern, with 6 percent-obtained more than 3 per­cent of its receipts from dairy products.

In 1974, the average number of cows per thousand acres of crop­land was 26.5 in the northwestern district, 20.4 in the southwestern and 18.1 in the northeastern. These ratios far exceeded those in other crop reporting districts, where they ranged from a high of 6.3 in the east sou theast district to a low of 2.5 in the sou theast.

The proportion of Illinois' milk produced in two of the state's four types of farming areas in which dairying is most important, northern Illinois, a meat animal and dairy farming area, and southern Illinois, a mixed farming area, increased from 68 percent in 1960 to 78 percent in 1977 (fig. la). During the same period, the proportion of the state's milk produced on fanns in the northwestern and south­western crop reporting districts increased from 39 to 53 percent (fig. Ib). With increasing urbanization, the northeastern crop reporting district has not maintained its share of the state's production, but in 1977 it still accounted for 17 percent. During this period, milk pro­duction decreased in all but the southwestern district.

By 1977, the twelve leading dairy counties produced 59 percent of the state's milk, and two counties-Stephenson and Jo Daviess-produced 22 percent (fig. lc). Five of the twelve leading counties were in the northwestern crop reporting district, three in the northeastern, and two in the southwestern. Milk production in­creased from 1960 to 1977 in Jo Daviess, Clinton, Washington, and Effingham counties. (See also fig. Id.)

Projections point to continuing sharp declines in the number of milk cows, only partially offset by increases in milk production per cow (table 3) . Consequently, the state's milk production is expected to continue to decrease to some 1.6 to 2 billion pounds by 1985 and from 1.3 to 1.75 billion pounds by 1990. These quantitities would represent some 1.3 to 1.6 and 1.0 to 1.3 percent of projected U.S. milk production in those years.

These projections have been made assuming moderate economic and population growth, an intennediate level of agricultural exports, normal climate, and the other conditions specified in the National­Interregional Agricultural Projections (NIRAP) Baseline scenario.

4

STATE TOTALS 100 percent of Illinois milk

4 percent of cosh form receipts from dairying

Mea! animals and dairy 49.1 percent of IllinoIs milk 11.9 percent of cosh form

receipls from dairying

Cosh grain 11.0 percent of Illinois milk 1.1 percent of cosh form

receipts f rom dairying

Fig. 1a. Percent of Illinois milk production and percent of cash farm receipts from dairying, by type of farming area, 1977.

Mixed Forming 29.4 percent of Illinois milk

6 .3 percent of cosh form receipts from dairying

36.9 percent of Illinois milk } 9.2 percent of cosh receipts --+-- ­

from dairying

3.7 percent of Illinois milk } 1.5 percent of cosh receipts

from dairying

3.0 percent of Illinois milk 0.9 percent of cosh receipt

from dairying

7.5 percent of Illinois mitk } 2.2 percent of cosh receipts

from dairying

16.2 percent of Illinois milk } 11.1 percent of cosh receipts

from dairying

NORTHWEST

EAST

{

16.a percent of Illinois mitk 6.1 percent of cosh receipts

from dairying

{

4.2 percent of Illinois milk 1.3 percent of cosh receipts

from dairying

{

9.7 percent of Illinois milk 3.1 percent of cosh receipts

from dairying

2D percent of Illinois milk 1.7 percent of cosh receipts

from dairyin ..

Fig. 1b. Percent of Illinois milk production and percent of cash farm receipts from dairying, by crop reporting districts, 1977.

Fig. lc. Percent of Illinois milk production by counties producing 2 percent or more of the to­tal, 1977.

5

Fig. ld. Percent of cash farm receipts from sale of dairy products for counties in which they ac­counted for 5 percent or more of the total, 1977.

The volume of milk produced in Illinois migh t be sligh tly affected by the differing condi tions specified under the al ternative High Demand scenario and Low Demand scenario, though the differences probably would be small.

As is discussed later in this report, Illinois dairymen produce milk primarily for fluid use in Chicago, Sa in t Louis, and 0 ther urban areas in Illinois and adjacent states. The milk produced in the state is only a small part-roughly one-third-of the milk consumed here in all dairy products. Consequently, milk production here need not re­spond as precisely to changes in consumption of dairy products as it would if Illinois were entirely dependent upon its own milk. More­over, the competitive position of dairying in Illinois is greatly affected by conditions that influence the profitability of the major crop and livestock enterprises in the state.

6

The NIRAP High Demand scenario postulates strong export de­mand for farm products. By increasing returns from corn and soy­bean production and raising the price of dairy ration, this condition would weaken the competitive position of dairying in Illinois and accen tuate the decline in m ilk production. High income levels and limited substitution of soybean protein for meat, also assumed under that scenario, would have a similarly detrimental effect by main­taining the profitability of beef and hog production. Both enterprises may compete directly with dairying. The fluid milk market might be strengthened by the relatively high population and income levels postulated for that scenario. Nevertheless, on balance, there would probably be somewhat less milk-possibly 2 to 5 percent less-than in the Baseline scenario.

The conditions specified in USDA's Low Demand scenario would result in somewhat greater milk production in Illinois than would Baseline scenario conditions. Because exports of corn and soybeans would be fewer, these crops would be somewhat less competitive with dairying in the Low Demand scenario than under Baseline con­ditions, and the price of dairy ration would be lower. The compara­tively heavy substitution of plant protein for meat assumed in this scenario would be expected to make beef and hog production less strongly competitive. On the other hand, the lower income and

TABLE 3 The scope of dairying in Illinois projected to 1985 and 1990 for the state and by areas

Illinois milk production

Milk cows (thousands)

Production per cow (pounds)

Total production (millions of pounds)

Percentage of U.S. total

Sources of Illinois milk production

By type of farming area:

Meat animal and dairy

Meat an imal and grain

Cash grain

Mixed farming

By leading crop reporting districts:

Northwest

Southwest

Northeast

East Southeast

West Southwest

By leading counties:

Stephenson

Jo Daviess

Clinton

Washington

McHenry

Effingham

1985

140-70 11,500-12,000

1,600-2,000 1.3-1.6%

46%

8 10 36

36-37% 20 12

10-11

8

14-15% 10-11

8-9

5 5-6

4

1990

110-40

12,000-12,500 1 ,300-1.7 50

1.0-1.3%

44%

7 9

40

36-37% 22-23

9 11-12

8

15-16%

11-12 9-10

6 5 5

COMPETITIVENESS OF DAIRYING

7

population levels would result in weaker demand for t"iuid mill" Con­sidering all these differences, milk production in the state presum­ably would be somewhat greater-perhaps by 2 to 5 percent in this scenario than under Baseline conditions. Over time, however, milk production probably would continue to decline under Low Demand conditions though by less than under the other scenarios.

Straight-line projections based upon trends during the period from 1966 to 1977 suggest that the proportion of the state's milk produced in the northern Illinois meat-animal and dairy-farming area will be about 46 percent in 1985 and 44 percent in 1990, while the mixed farming area of southern Illinois is expected to produce 36 percent in 1985 and 40 percent in 1990.

Similar projections indicate that the northwestern crop reporting district will maintain its importance during the 1980s as a source of 36 to 37 percent of the state's milk (fig. 2). The southwest district will expand its portion to about 20 percent in 1985 and 22 percent in 1990 and the east-southeast district to some 11 and 12 percent respectively. Thus, by 1985 these three districts will produce about 67 percent and, by 1990, about 70 percent of the state's milk. At the same time, the share of the northeastern district will decline to ap­proximately 12 percent in 1985 and 9 percent in 1990.

. Projections of the percentage of Illinois milk production in the leading dairy coun ties indicate that Stephenson, J 0 Daviess, Clin ton, Washington, and Effingham counties will be producing increasing proportions of the state's milk while the other seven of the present twelve leading counties barely will hold their own and may decline in importance (fig. 3). These projections suggest that by 1985 these five leading counties will be producing 40 to 45 percent of the state's milk and, by 1990,45 to 50 percent.

The level of the price of milk relative to other product prices is one factor that may affect the competitive position of dairying. Be­tween 1956 and 1976 dairy product prices in Illinois trended rather steadily upward (fig. 4). Prices of meat animals showed a similar but more fluctuating trend. From 1972 through 1975 the meat price index increased more relative to its base than did the dairy-product price index. On the other hand, crop prices showed little upward movement until they rose sharply after 1972.

This lack of a crop price increase before 1972 reflects the fact that improved production technology assured abundant supplies without much of a price increase.

Comparatively less technological change was introduced into milk and meat animal production. Consequently milk and beef prices gradually increased even before 1973, when the effects of food short­ages, increased grain exports, and inflation moved prices of all these farm products upward sharply.

Because farm product prices provide no information about the levels of and changes in production costs, the product price level considered by itself is not a reliable indicator of relative profitability. Nevertheless, price data indicate that during most of the past two decades the decline in dairying in Illinois was due to factors other than the failure of milk prices to keep up with meat animals prices and crop prices. However, from 1973 to 1975, milk prices in Illinois were low relative to the prices of these competing products.

8

o +--o +--Q)

+--o

+-­If)

...-o Q) (J)

o +-­c Q) u ~

Q)

0....

42 ~--~.-.--.-;-------r-----.----r----;------'

36

30

24

18

12

crop report ing

.............. _._.-., \ .. , £ Northeast crop reporting '" d ist rict ---" '",.

, '" /" " '" " (All other crop', /"

, reporting districts . /'

" ,/' , . ",. ~-, .~ , . , /

'........ .. h

-, _ .. J .... Sout west crop y ~/ ... , reporting district \./.. -- ,

/ ",., East-Southeast

.;/ c~op .reporting ",/ ._ .. _ .. -" district ~ ........ ~~"""'" ....... ~~- ... \ ........................................ .

~~.-. -../~ .. - .... ...... L

1960

West -Southwest crop reporting district

1965 1970 1975 1980 1985 1990

Fig. 2. Milk production in leading crop reporting districts in percent of total production in Illinois. 1955-77. with projections to 1990 based on trends in 1967-77.

o -o -Q) -o -If) -o Q)

01 o -c: Q) u ~

Q)

a..

15 Stephenson

12

Jo Daviess

9

-"", A McHenry

6 ~, -\ ------..•.•• • .... _-.. -.......... carrolh ------

.-.... . ____ "o:--".-.--.~."--3 ................. -- ... -.............. _. __ ...... ----. ---.

_.-' .... -.::. 'j"' •• ' ._ . ../' Boone ~ ."'" .'" .....

9

JKane

___ r~~': __ .... 1~ __ --- -_.-=---______ - __ -

3 ---'" Washington . A::::: ...... .... ·v·'

t---~ ...... = .. ~ .. ,..,... __ .. ~._. -'" ..... -' ........ '-- E ff i ngham ... ----_.-

6

::.:::..-:.:----- r Ogle ---L_ ...................... ----'--Kan~·--·_ .

O~----------~---------------~----------~------------~----------~------------~-------J 6.-----------r-----------~----~----------~----------,--------_r-------~

Winnebago

Madison \

-~--= ---_\.._-3 ------ ....--"" .... --... -'C------ --- .... ........... ."".,--

Madison

O~------~----------~---------~-----------~--------~----------~-------~

9

1955 1960 1965 1970 1975 1980 1985 1990

Fig. 3. Milk production in leading counties in percent of total pro· duction in Illinois, 1955-77, with projections to 1990 based on trends in 1967-77.

10

o o

x Q)

-0 C

250~----~----'-----~----~-----'-----'-----'-----'----~~---'

I \

220

190

160

130

100

",(Meat animals ",""

..... ,", J? __ ' __ ..-7/

",/""-.--',\,- ----I' ----=-_---- ........ / '" ... /

C,op, ''''/

I

"

\ \

.........

I, I , , ,

I ' I \ I

, I

1 \I I

,'/ I

,'/ //

I

1./ ';Y'

-- /' "- ./ --,,'" -_/

70

1956 1958

Dairy products

1960 1962 1964 1966 1968 1970 1972 1974 1976

Fig. 4. Index numbers of annual average prices received by Illinois farmers for dairy products, meat animals, and crops, 1956-77 (1967 = 100). (Data from Illinois Agricultural Statistics, 1957-78, con­verted to 1967 base.)

Because th e cost of concentrate feed is a m ajor cost of milk production, the milk :grain p rice ratio is an im portan t factor a [fecting returns from dairying. The milk:grain ratio is the number of pounds of d airy ration equivalent in value to one pound of milk. From 1957 through 1966 in Illinois this ratio ranged between 1.4 clOd 1.6 . The ratio was above that level-that is, the price of milk was more favor­able rela tive to the price of dairy ration-from 1967 through 1972 but was below that level in the period from 1973 through 1975, when gra in prices were comparatively high. (See fig. 5.)

Using data from Illin ois farm business re co rds, the productivity of major types o f farms in Illinois and the returns they earned were compared by five-year periods beginning with 1956·60 th rough 1971-75 and for the years 1976 and 1977 (see table 4). Because human labor is an important and expensive factor of prodllction, productivity was indicated by value of farm production per man (or an equivalent amount of labor).

Northern Illinois dairy farms were found to be at a disadvantage in tenns of value of farm production per m an, particularly in com­parison with hog farms, but also relative to beef farms and gra in farms, throllghout th e two decade comparison. The disadvantage of dairy farms in sout hern Illinois was not as great though value of far m production per man on other types of farms generally did exceed that on dairy farms.

2.00

1.90

1.80

1.70

0

-0 1.60 a::

1.30

1956 1958

11

TABLE 4 Comparisons of average value of farm production per person and management return per tillable acre on dairy, beef, hog, and grain farms of 180-499 acres

Northern Illinois farms Southern Illinois farms ---Dairy Beef Hog Grain Dairy Beef Hog Grain

Average value of farm production per person (thousands):

1956-60 $12 $15 $15 $16 $10 $12 $11 $12 1961-65 15 21 20 22 15 16 16 16 1966-70 25 30 30 29 21 24 23 21 1971-75 36 51 57 67 35 42 44 42 1976 45 52 66 90 37 39 51 54 1977 48 55 62 74 51 42 57 51

Average management return per tillable acre :

1956-60 $ $ 4 $11 $ 6 $ 5 a $ 6 $ 5 1961-65 4 8 20 12 14 $11 22 13 1966-70 5 -5 12 3 17 3 17 6 1971-75 4 9 76 51 21 19 51 29 1976 -35 -97 -17 33 15 -70 -2 3 1977 -31 -90 -45 -39 9 -95 -14 -11

NOTE : Data a re unweighted averages for farms approximating acreages indicated in annual summaries of Illinois Farm Business Farm Management Records from 1956 through 1977 . aLess than $0.50.

1960 1962 1964 1966 1968 1970 1972 1974 1976

Fig. 5. Number of pounds of dairy concentrate that could be pur­chased with one pound of milk: Illinois annual average, 1956-76. (Data from Illinois Agricultural Statistics, 1957-78.)

12

Profitability was measured in terms of m<:U1agement return per tillable acre. This is the net return remaining after meeting all other expenses-including charges for interest on equ ity capital and for unpaid family labor-divided by the number of tillable ac res. For three of the four five-year periods, management return per tillable acrc on northern Illin ois dairy farms was considerably below that on hog farms and somewhat less than that on grain farms and beef farms. Dairy farm returns in southern Illinois also were commonly below h og farm returns, but managem ent returns per tillable dairy farm ac re eq ualed or exceeded th ose on grain farm and beef fanTI acres in th ree o f the four fiv e-year periods and in 1976 and 1977. In both areas re turns fro m dairy farms compared le ast favorabl y with th ose from o th er types of farms from 1971 through 1975, when the price of milk was low in re la tion to grain prices and meat anim al pnces.

From 1973 through 1977, reported costs of milk productio n on specialized dairy farms in th e Illinois Farm Business Farm Ma nage· ment Association generally exceeded prices p aid for milk (table 5). Costs per 100 pounds of milk averaged 5 percent higher o n farms betwee n 40 and 79 cows than on those with herds of 80 or more cows. This difference reflect ed higher production per cow in the larger h erd s and lower costs per hundredweight fo r feed, labor, and most other items used in productio n. I

With this difference in productio n costs, the amount by which the computed cost of production exceeded the price received for milk during th at period averaged 9.9 percent on farms with 40-79 cows as against 4.0 percent on farms with 80 or more cows. This period included two years-1974 and 1975 - which were particularly unfavo rable for dairying. Nevertheless, the relatively low returns even from herds 0 f 80 or m ore cows provide added evidence o f the com· para tively unfavorable competitive position of dairying in Illin ois in most recent years.

TABLE 5 Production costs and returns on dairy farms in the Illinois Farm Business and Farm Management Association

Herds of 40-79 cows Herds of 80 or more cows

Cost of Net Cost of Net Year production Price return production Price return

(per 100 pounds of milk) (per 100 pounds of milk)

1973 $6.82 $6.53 $-0.29 $6.45 $6.59 $0.14 1974 9.21 7.97 - 1.24 8.41 7.90 - 0.51 1975 9.70 7.97 - 1.73 9.33 7.99 - 1.34 1976 9.89 9.25 - 0.64 9 .31 9.30 - 0.01 1977 9.34 9.18 - 0.16 9.16 9.23 0.07 Average 8.99 8.18 - 0.81 8.53 8.20 - 0.33

NOTE: Adapted from D.F. Wilk en and R.P. Kesler, Fifty·second Annual Summary of Illinois Farm Business Records, 1976, Circular 1140 ; and Fiftv·third Annual Summary of Farm Business Records, 1977, Circular 1162 (Urbana: Cooperative Exte nsion Service, Unive rs ity of Illinois at Urbana·Champaign, 1977 and 19781.

CHANGES IN THE CHARACTER OF DAIRY

FARMING

Size of Herd

13

Infonnation available since 1962 has shown marked Increases in the size of dairy herds in Illinois since that time (table 6). In 1962, a large majority of the dairy herds consisted of fewer than 30 cows, and not many included 50 cows or more. The predominance o f small herds was m os t pronounced in those parts of Illinois in which dairy­ing was least developed. Yet, even in the northeast crop reporting district, in which dairying was most intensive, two-thirds of the herds were of fewer than 30 cows and less than one-tenth included 50 or more cows.

TABLE 6 Relative numbers of various sizes of dairy herds and proportion of milk cows in those herds, by selected crop reporting districts, Illinois

Percentage of dairy Percentage of milk cows farms with herds of in herds of

Under 100 or Under 100 or 30 30-49 50-99 more 30 30-49 50-99 more

Northwest crop reporting district:

1962 82.1 14.1 3.7 0.1 58.4 28.3 12.1 1.2 1970 62.1 28.6 8.8 0.5 36.9 39.7 20.6 2.8 1975 42.2 35.2 21.1 1.6 19.0 38.1 37 .1 5.8

Northea5t crop reporting district:

1962 64.7 26.8 7.8 0.7 35.3 41.3 19.2 4.2 1970 46.3 36.9 14.5 2.3 21.9 42.4 26.8 8.9 1975 36.1 37.5 23.5 3.0 13.0 37.0 37.4 12.5

Southwest crop reporting district:

1962 95.3 4.2 0.4 0.1 79.8 16.3 3.1 0.9 1970 70.8 20.9 7.6 0.7 38.2 36.1 21.9 3.8 1975 60.9 20.9 16.6 1.7 21.9 30.0 40.5 7.6

All other crop reporting districts:

1962 96.4 2.9 0.7 0.1 78.9 14.2 5.6 1.4 1970 84.1 11.2 4.3 0.5 46.4 29.4 18.9 5.2 1975 76.1 13.7 8.9 1.4 30.6 28.1 31.1 10.2

NOTE: Adapted from data obtained in the annual assessor's farm census of Illinois. aTotals may not exactly equal 100 due to rounding.

By 1975, some one-fifth of the herds in the more important dairy districts consisted of 50 cows or more, and these contained 40 to 50 percent of the cows. The fact that the proportion of the cows in herds of fewer than 50 was not main tained suggests that those smaller herds were losing out competitively. Although herds of 100 or more cows still are relatively few in number, in 1975 they con­tained nearly 10 percent of all cows. These upward shifts in herd size have occurred quite uniformly in the major dairy regions of the state. If they continue at recent rates, by 1985 perhaps 70 percent of the milk cows in Illinois will be in herds of 50 or more cows and 15 percent in herds of 100 cows or more. By 1990 the percentages could be approximately 80 in herds of over 50 and 18 in herds over 100.

14

Milk Production per Cow

Trend to Dry-Lot Feeding

12,000

11,000

~ 10,000

0 CJ ... ~ ~ 9000 E

..... 0 en -c I:: 8000 ::::l 0 a..

7000

6000

1955

During the twen ty years ending in 1977, average m ilk production per dairy cow in Illinois increased by approximately 50 percen t [rom around 6500 pounds in 1955 and 1956 to about 10,500 pounds in 1976 and 1977 (fig. 6). The rate of increase slackened during the second decade, and average production per cow in Illinois, which had been from 5 to 10 percent above the national average, failed to keep pace with it and was 5 percent below by 1977. Projections made in estimating future milk production in the state suggest th at average production per cow in Illinois might be some 11,500 to 12,000 pounds in 1985 and 12,000 to 12,500 pounds in 1990 (see also table 3) .

In recent years Illinois dairymen increasingly have been fe eding their cows in dry lots rather than pasturing them. The average number of pasture-days per animal unit on dairy farms in the Illinois Farm Business Farm Management Association decreased from 142 in 1959 to 28 in 1976." As dairy farmers have reduced their use of pasture they have Cllt back the amount of land per cow used to produce grass-legume forage. This has been accompanied by in­creased feeding of soilage and silage crops and of grain. Both herd size and milk production per cow have been larger on farms using dry-lot feeding than on those with full-se ason pasturage.

/ /

,/ /

,/ ,/

,/ ,/

,/,/,/

,/ ,/

./ ,/

1970 1975 1980 1985 1990

Fig. 6. Average milk production per cow in Illinois: Historical, 1955-77, and projected to 1990.

STRUCTURE OF DAIRY MARKETING

Fluid Milk

15

Some farmers who have land that is better suited for pasture than for crops may continue to pasture their dairy herds. Nevertheless, it seems likely that on most dairy farms dry-lot feeding will have largely replaced pasturing within another decade.

In most of Illinois, a large portion of the milk produced for sale is qualified for use in packaged fluid milk products and sold on one of the federal milk order markets in or near Illinois. In 1976, receipts on federal order markets comprised more than 90 percent of re­ported production in the northeast, southwest, and east southeast crop reporting districts. 3 In the northwest district, federal order re­ceipts were approximately 65 percent of production, confirming that a substantial volume of manufacturing grade milk con tinues to be marketed in that part of the state. In the other crop reporting dis· tricts the volume of production is relatively small, and comparison of federal order receipts with production does not provide a reliable indication of the extent to which milk produced for sale is qualified for use in packaged fluid milk products.

Producer cooperatives are an important element in the structure of fluid milk markets. For many years these cooperatives were mostly market-oriented, frequently with one dominant and other smaller organizations representing producers in each of the larger markets.

In the late 1960s, however, there was a wave of federations followed by mergers among dairy cooperatives. 4 As a result, major marketing cooperatives supplying milk to the Chicago and Saint Louis markets in the 1970s are large regional organizations. These multimarket cooperatives operate both milk receiving and manu­facturing facilities and provide a wide variety of sen/ices to handlers as well as producers. Major market services include providing handlers with milk in the quantities and at the times they need it, disposing of surplus milk, and maintaining a standby pool of reserve milk. Multimarket cooperatives provide promotion and advertising services and handle payrolling and collective bargaining for pro­ducers. Central agency control of functions like balancing milk sup­plies with milk needs and manufacturing surplus milk reduces marketing costs and strengthens bargaining position. Bargaining ac­tivities of these multimarket cooperatives include representing pro­ducers in federal order hearings and seeking passage of favorable legislation. Prices above established federal order Class I fluid milk prices are charged to handlers partly as compensation for the coop­erative's services.

Associated Milk Producers, Inc., a large regional cooperative that operates in the North Central and West South Central states, is the dominant producer organization in the Chicago regional federal order market. It has a major role in intercooperative activities of coordi­nating fluid milk supplies in that market. 5 Mid-America Dairymen, Inc., a large regional cooperative in the West North Central states, is the major cooperative in the Saint Louis-Ozark market. Both it and Associated Milk Producers represent types of producer organizations and cooperative activities which seem likely to continue during the 1980s. Although they do not yet serve all the larger markets in the state-for example, Mississippi ValJey Milk Producers, a smaller coop­erative, serves the Quad Cities market-they seem likely to dominate producer cooperative activities in Illinois within Lhe near future.

16

Prairie Farms Dairy, Inc., a cooperative that processes and dis­tributes milk in Illinois and adjacent states, is another important pro ducer organization. This organization has become, partly by merger, the dominan t fluid milk processing and distrIbuting firm in southern Illinois. It has paid its members high basic prices for milk and, in most recent years, substantial patro nage refunds. While it is th e only large cooperative fluid milk processing and distributing firm in the state, its future appears promising.

Illinois fluid milk plants have decreased sharply in number and increased markedly in average volume in recent years (table 7). By 1976, the number of plants was less than one- third the number in 1964, while average volume per plant was more th an two and one-half times as large. During this period the proportion of the total volume of fluid milk processed by small plants declined while the proportion processed by the larger plants increased.

Survivor analysis postulates that, be tween two time periods, plants of optimum size maintain or increase their share of industry volume. 6 That criterion suggests that in 1968 fluid milk plants pro­cessing 10,000 or more gallons per day were of optimum size but that by 1976 most plants needed to process at least 20,000 gallons per day to be competitive. These trends suggest that there will be further decreases in numb er and increases in average size of plants in the future and that, for most plants, optimum output will be even greater than 20,000 gallons per day.

Marked changes have occurred during recent years in the propor­tion of the state's fluid-grade milk processed by different categories of dairy plants. The percentage processed by plants of national and region al chain dairies declined from 52 in 1964 to 33 in 1976 (fig. 7). One fact o r in this decline was a retrenchment in milk processing operations of some large national chain dairies. During the same

TABLE 7 Total numbers of Illinois fluid milk processing plants, average volume, and proportion of total volume processed by plant size

1964 1968 1972 1976

Total plants in operation 151 98 72 48 Average volume per plant (gallons/day) 7,623 11,792 15,274 19,859

(percentage of Illinois milk processing volume)

Plant output (gallons/day)

Under 5,000 13.9 8.5 5.9 3.6 5,000 to 9,999 12.7 10.6 .8.5 6.7 10,000 to 14,999 9.1 9.0a 5.7 5.2 15,000 to 19999 7.6 5.7 10.7a 9.1 20,000 to 29,999 10.6 9.5 8.9 15.1a 30,000 or more 46.1 56.8 60.3 60.3

All plantsb 100 100 100 100

NOTE: Adapted from data from Bureau of Milk Control, Illinois Department of Health. aPercentage for group having smallest volume of optimal size. . hToials may not exactly equal 100 percent du e to rounding.

0 +-0 +-

<+-0 Q)

0'1 0 +-c Q) u ~

Q)

D...

17

60~----------~----------~-----------r----------~

50

40

30

20

10

Plants of national and reg ional da iry chains

J Single unit nonintegrated plants

------------------"." Plants operated by ~ retail food cha ins > ................

/". / ---

/" ---/" .,...",----~. .,...",(

_~~~ __ .,....",.,....,....,....", Other vertically integrated . plants

1964 1968 1972 1976 1980

Fig. 7. Proportion of fluid milk in Illinois processed by different categories of plants, 1964, 1968, 1972, 1976. (Adapted from data from Division of Milk Control, Illinois Department of Public Health.)

period the proportion processed by plan ts of food chains increased from 7 to 26 percent. The total share of other vertically integrated plants (those owned by producer cooperatives and those having captive dairy stores) increased from 7 to 16 percent while that of single-unit nonintegrated plants declined from 34 to 26 percent.

There is little basis for fonning judgmen ts as to the ex ten t to which these trends will continue. Potential savings and other advant­ages of vertical integration suggest that it may increase further, 7 but the extent to which major food chains have already established their own milk plants and national chain d airies have withdrawn from the state suggest that these trends will slacken in the fu ture.

18

CJ +-o +-

'+­o <1l Ol CJ +­C <1l U ~

<1l Q.

c o +­U ::J

U o ~

Q.

(f)

o c

Manufacturing Cheese is the most important type of manufactured dairy pro­duct made in Illinois. It is produced mainly in Stephenson and Jo Daviess counties and is the chief use of the 20 to 25 percent of Illinois milk which does not meet fluid milk standards. More Swiss cheese is produced in the state than any other type. Illinois produced approx imate ly one-fourth of the total national output of Swiss cheese in recent years (fig. 8). Illinois also produces about 4 percent

48r------r------r-----~------~----~------~----~

40

Swiss cheese 32

24

16

8 /

Italian cheese

cheese

"", .... _-... - .. _-........ ---..

.. ::.--:-_ _ , ........... ______ ..... fAmerican

............... ... .......... -.. -. O~----~------~----~------~--~~~~~~~==~ 1955 1960 1965 1970 1975 1980 1985 1990 16r-----,------.------.------,-----.------~----~

8

C reamed cottage cheese

Ice cream

................. __ ................ _-.-- _ •••• -. ___ a ... _ .... _ ••••• _ ••••••• _._

~=55~---~19~6~0---~19~6~5~---1~9~70~---~19~7-5-----~~~~19~8-5--~1990

Fig. 8. Percentage of U.S. production of selected dairy products manufactured in Illinois, 1955-77, with projections to 1990.

DEMAND AND CONSUMPTION

Consumption Trends

TABLE 8 Average annual production of selected types of dairy manufacturing plants

1955-59a

Illinois as percent of

United United Product Illinois States States

(1,000 pounds)

Butter 766 672 114% American cheese 727 823 88 Swiss cheese 1,331 597 223 Ital ian cheese 584 709 82

• Creamed cottage cheese 487 415 117

19

1973-77

Illinois as percent of

United United Illinois States States

(1,000 pounds)

1,567 2,686 58% 1,088 3,254 33 4,738 2,539 187 2,485 3,600 69 3,407 1,884 181

NOTE : Adapted from data in USDA. Production of Manufactured Dairy Products and Dairy Products, Annual Summary for the periods.

Comparable data for the two periods were not available for ice cream plants. aData for Swiss and Italian cheese are for 1957-59.

of the creamed cottage cheese, 3 percen t of the Italian cheese, and 1 percent of the American cheese made in the United States. During the past decade Illinois has produced from 5 to 6 percent of the nation's ice cream, though perhaps partly from dairy products brought into the state. It also has made a declining proportion of the butter, recently about 1 percent. Projections suggest that Illinois will produce a shrinking proportion of all these products except ice cream, though it will continue to be a significant Swiss cheese pro­ducer, making about 10 percent of the nation's Swiss cheese by 1985.

As with fluid milk plants, dairy manufacturing plants have been increasing in size. In the United States average output of butter plants and of most types of cheese plants was four or five times as large in 1973 through 1977 as in 1955 through 1959 (table 8) . However, perhaps as a consequence of limited supplies of milk and failure to upgrade manufacturing facilities, for most of these types of plants increases in volume were proportionately less in Illinois than in the United States as a whole. In 1973 through 1977, Swiss cheese plan ts and creamed cottage cheese plan ts in Illinois were between 50 and ioo percent above United States averages in size, but butter plants and American and Italian cheese plants were considerably below the national average in size. There is no readily apparent reason to expect these size relationships to change drastically during the 1980s.

Nationally, the consumption of milk equivalent per person in fluid milk and cream declined by nearly one-fourth between 1960 and 1977 (fig. 9) . The amount of whole milk per capita used in producing manufactured dairy products, which approximates milk consumption per person in those products, also declined in the early

20

0 -c.. 0 u ~ Q) c.. II)

-0 c: :J 0 a...

350~----~----~------~----~------~----~

325

300

275

250

225

200

\ \

1960

Manufactured dairy products

' ...... '",

1965

\ \ ,

Manufactured product

'" ',,/", Fluid milk and cream

\

1970

\ \ \ \ l_~ ,

1975

, ',Fluid products , , , ,

1980

, , , ,

1985

, , , , 1990

Fig. 9. Consumption of milk equivalent per capita in fluid and in manufactured dairy products, in the United States, 1960-77, with projections to 1990.

21

1960s but has leveled off since 1965. The leveling reflects inCi"easing consumption of cheese (table 9).

By 1977, total milk consumption per person of both fluid and manufactured products was approximately 550 pounds. Straight line projections of trends from 1967 to 1977 suggest that milk consump­tion per person of manufactured dairy products will be slightly below 300 pounds during the 1980s. Per capita consumption of milk in fluid milk and cream will be about 205 pounds in 1985 and 185 pounds in 1990. These projections point to lower aggregate rates of milk consumption than USDA projections, which approximate 520 pounds per person in 1985 and a range from roughly 500 to 530 pounds in 1990. If the rate of decline in fluid milk and cream con­sumption moderates, as may be indicated by the data for 1974 through 1977, aggregate consumption in 1985 could approximate the USDA projection.

Most milk in Illinois is produced for fluid markets in the area. Consequently, trends in consumption of fluid milk products are especially im portant to the dairy industry 0 f the state.

During the past decade, the trend in the Chicago market has been downward. The quantity of milk used in Class I (fluid) products was 12 percent less in 1977 than in 1968 (fig. 10) . The quantity of whole, lowfat, and skim milk items sold in the marketing area de­clined 8 percent during that period. In contrast, Class I use by Saint Louis-Ozarks handlers was 41 percent greater in 1977 than in 1968. This increase evidently was due in part to expansion of sales by those handlers outside the marketing area of the order. Nevertheless the quantity of whole, lowfat, and skim milk items sold within the marketing area was approxim ately the same in 1977 as it was in 1968, contrasting with a decline of 8 percent in Chicago.

Estimated per capita consumption of fluid milk products (total pounds of fluid whole, lowfat, and skim milk, buttermilk, and flavored milk drinks) in the Chicago regional order market declined approximately 10 percent, from 0.769 to 0.694 pounds per day,

TABLE 9 Trends in civilian consumption of major manufactured dairy products, United States

Cheese: Evaporated, Frozen Nonfat American Cottage condensed dairy dry

Period Butter and othera cheese whole milk productsb milk

(pounds per person per year)

1960-64 7.2 8.9 4.7 12.5 25.2 6.0 1965-69 5.7 10.2 4.6 9.2 27.0 5.7 1970-74 4.9 13.0 5.2 6.4 27.3 5.0 1975 4.8 14.5 4.8 5.3 28.3 3.3 1976 4.4 16.0 4.8 5.1 27.3 3.6 1977c 4.4 16.3 4.8 4.6 27.0 3.4

SOURCE: Economics, Statistics. and Cooperatives Service. USDA, Dairy Situation. OS·367. OS-370, and OS-371 (Washington. D.C .: Septernber 1977. May 1978, and July 19781. aWhole milk and part skim milk. bExcludes mellorine. cPreliminary figures.

22

...-0 0

1\

ro (!) m

)( Q) "0 c:

150~----~------~-----,------~------r-----,

140

130

120

110

Chicago Class I use

Saint Louis-Ozarks Class I use

.. ,_ __ _ _ _ sales of fluid products ! Saint Louis - Oza rks

,<.... " .... , " .... , '- " , " " " ' " / .. ...." ........

/ '\... " 100 / "'- -- ' ........ .......... --- ~ .... , ................ /

90

1968

.... ,~~,,~--- "'" ,,' ---.... ........ " / ........ '\: ,--Chicago so les of fluid products

1970 1972 1974 1976 1978 1980

Fig. 10. Index numbers of quantities of producer milk used in Class I (fluid) products by regulated handlers and of quantities of whole, lowfat, and skim milk items sold in the marketing area, Chicago regional and Saint Louis-Ozarks federal milk marketing orders, 1968-77.

between 1969 and 1977 (fig. 11). During this period, estimated per capita consumption of those products in the Saint Louis-Ozarks market fluctuated but, after dropping sharply in 1976 and 1977, showed a net overall decrease of 2 percent. The correspond in g de­crease for the country as a whole was 5 percent.

Reasons for differences in these trends are not evident. Through­out tbe period the level of incomes was higher in Chicago and in

Changing Fat to Solids­Not-Fat Ratios

23

Milwaukee, the other major metropolitan area in the Chicago re­gional order, than it was in Saint Louis. During the period, con­sumers' incomes increased by about the same percentage in all three markets. 8 The limited information available suggests that the retail price of milk was slightly higher in Chicago than in Saint Louis. However, the difference appeared to be too small to account for any appreciable disparity in trends between the two markets. 9 Conse­quently, there is no substantial basis for assuming that future trends in per capita use of fluid milk in the Chicago regional and Saint Louis-Ozarks markets will differ significantly from the national trend.

Increased substitution by consumers of lowfat and skim milk for whole milk, together with decreasing consumption of fluid cream, have markedly reduced the average fat con ten t of flu id dairy prod­ucts in recen t years. In the Chicago regional market, the average fat content of fluid product sold dropped from approximately 3.9 per­cent in 1956 to 2.9 percent in 1977, while the average fat content of producer milk increased slightly (fig. 12). In the Saint Louis-Ozark market, a small decrease in the fat content of producer milk accom­panied the decrease in the fat content of fluid products sold, which was somewhat less than in Chicago. In these markets, the average fat

0.80~--------~--------~----------r---------.---------~

>-o 0.75 "0 ~

<U a. c o <f) ~

<U Co- 0.70 ... <U a. <f)

"0 c :J

E{ 0.65

Chicago regional market

" /" [ -- '\.. / "---- --- -r--- ,/ "-

United States / "-.:" '\ -.: ,

/ "",."

\. J

"{sainI Louis - Ozarks markel

1969 1971 1973 1975 1977 1979

Fig. 11. Trends in per capita consumption of fluid milk products, Chicago regional and Saint Louis-Ozarks federal order markets and United States, 1969-77.

24

+-0 ...-

...-0 Q) t:J)

0 +-c Q)

0 ~

Q)

a..

4.0 ...-----~----_;_----__r_----____r---___,

3.5

3.0

1956

...... -- "-

............ , --'-- ... "- Chicago producer milk " ----

----...

1960

... "-

......... ..

' .......

Saint Louis-Ozarks fluid sales

1965

"'-

1970

----.--­Saint Louis- Ozarks producer milk

1975

Fig. 12. Trends in fat content of producer milk and flu id milk sales, Chicago regional and Saint Louis-Ozarks federal milk markets, 1956-77. (Data for Chicago, 1966, and for Saint Louis-Ozarks before 1959 are not available.)

content of producer milk in 1977 was 0.7 to 0.8 of a percentage point above that of fluid products sold. If this disparity continues to grow, excess fat cou ld become burdensome to fluid milk processors in these markets.

Dairy Substitutes One factor contributing to the declining per cap ita consumption of dairy products, particularly some that are high in milkfat, has been the expanding use of substitutes. Between 1960 and 1977, annual per capita consumption of butter in the United States dropped nearly 3 pounds, while consumption of margarine increased nearly 2.5 pounds. 10 However, there is evidence of decreasing LIse of some substitutes; during that period meIIorine declined in impor­tance from roughly 5 percent to 2 percent of production of frozen dairy products. I I Similarly, filled and imitation milk, which at no time exceeded 0.3 percent of total beverage milk products in volume, have been losing ground in recen t years. I 2

On the other hand, though specific data on the extent of substi­tution are not available , it is recognized that both co ffee cream and whipping cream have been extensively displaced by substitutes during the past two decades. Likewise, part of the recent sharp drop in use of nonfat dry milk has resulted from replacement by whey and

Implications for Illinois Dairying

ADAPTING THE ILLINOIS DAIRYINDUSTRY

TO THE FUTURE

Concentration of Production in Best

Adapted Areas

25

soy proteins. Synthetic and filled cheeses and cheese products, though not yet of major importance, also may become important substitutes in the future.

Continuing competition from substitutes is to be expected. Sub­stitutes seem likely to compete increasingly with the nonfat constituents as well as the milkfat in dairy products. Some possibly less 0 bvious subs ti tu tion occurs as people replace dairy products wi th alternative items, as when they drink beverages such as coffee, tea, or soft drinks in place of milk.

On the demand side, the condition of its fluid milk markets is the most important concern of Illinois' dairy industry. Consequently, the decreasing percentage 0 f Class I utilization on the Chicago regional federal order market; which reflects both qualification for the market by large numbers of former manufacturing milk producers, mainly in Wisconsin, and declining consumption of fluid milk, is a matter of serious concern to dairymen in northern Illinois. Fortu­nately, there has been no similar recent decrease in Class I utilization nor aggregate decline in fluid milk sales on the Sain t Louis-Ozarks market. This maintenance of t1uid milk sales may have been one factor contributing to the relatively stronger competitive position of dairying in the southern part of the state than in the northern part.

Consumer shifts from whole to lowfat and skim milk, together with the sharp reduction in sales of coffee cream and whipping cream, have led to decreasing use of milkfat relative to solids-not-fat by fluid milk processors. If the fat content of producer milk does not decline, t1uid milk markets may be burdened with excesses of fat in the fu ture.

The potential for increasing substitution by lower priced fats and proteins from plant sources appears to limit possible gains to pro­ducers from increasing the price of milk. These possibilities for sub­stitution emphasize the continuing importance of a high level of efficiency in milk production;

Unless these conditions are halted or reversed, their aggregate effects on the demand for dairy products will be to continue shifts ou t of dairying into other types of farming in those areas in Illinois where relatively attractive alternatives to dairy farming are available.

In the years ahead, the dairy industry of Illinois needs to con­tinue to adapt to the conditions in which it operates. A few pos­sib iIi ties are suggested.

Over time, operation of the principle of comparative advantage has concentrated Illinois milk production largely in the northwest, southwest, and northeast crop reporting districts of the state. With increasing urbanization in the northeast, production in the future increasingly will be in the northwest and southwest districts and in a few additional counties, such as Effingham, in which dairying is most competitive with alternative enterprises. Special markets or other unusual circumstances may justify milk production in a few situa­tions in other areas to which it is not generally well suited.

There is no basis at this time for expecting major change in these trends in the comparative advantage of dairying. This is particularl y

26

Increased Intensity of Dairy Farming

Operations

Modification of Products To Suit

Developing Demands

Use of Innovative Retail Outlets

true in southern Illinois, where market conditions seem most favor­able to dairying. The market environmen t may be less favorable for dairying in northwestern Illinois, depending to a considerable extent on consumption and utilization trends in the Chicago regional market. Developments in that respect may further affect the com­parative advantage of dairying in that section of the state.

Growing specialization in dairy farming has been accompanied by increases in herd size, in milk production per cow, and, on farms keeping dairy cattle, in the ratio of cow numbers to the acres of tillable land. These trends will continue. Research has shown that high production per cow and herd size: that is well above the average are essential to efficient milk production. Accordingly, the recent failure of milk production per cow in Illinois to increase proportion­ately with the national average is a concern that deserves increased consideration.

The marked shift of the past two decades from pasturing cows to dry-lot feeding as a means of using land more intensively will be maintained. Making effective use of resources in these ways will con­tinue to need emphasis on Illinois dairy farms of the future.

Consumers accustomed to the highly sophisticated foods avail­able to them in the United States will increasingly demand products that are tailored to their wants. Recognizing this, the dairy industry should devote increased attention to developing products to con­sumer specifications. This adjustment might logically begin in milk production. Widespread substitution of vegetable fat for milk fat suggests that increased attention should be given to production of nonfat solids and less to milkfat.

Creativity is needed in developing finished dairy products that appeal to present-day consumers. The popularity of fruit-flavored yogurts raises the question of whether enough consideration has been given to fruit-flavored milk beverages of other types. The very limited developmen t of aseptically packaged milk products suggests that may be another possibility which merits further investigation. There may also be potential for further developmen t of low-fat cheese, which could be aggressively demanded if people become more generally aware of the high fat content of whole milk cheeses. Moreover, considerable opportunity should exist to fOlmulate pro­tein-rich products of high nutritive content from whey, which pre­sently is a buden to the dairy industry.

The sale of fluid milk and other dairy products to Illinois con­sumers is largely by various types of food chains, to which dairy products are only a few among the thousands of items they merchan­dise. The dairy industry could benefit from more competition in distribution from other types of outlets. The success of processor-owned dairy store chains, such as Cumberland Farms in the eastern states and Lawson's in Ohio, indicates that these neighborhood-type stores, which feature milk at relatively low prices, can operate profitably white marketing milk at relatively low margins. More operations of that type could be bene ficial to the Illinois dairy industry as well as to consumers.

Promotion

NOTES

27

The dairy industry, especially the fluid milk sector, continues to be criticized for shortcomings in advertising and merchandising. During the past decade the industry has taken some steps to expand promotional activities. These efforts have been limited by th e rela­tively narrow margins o n which processors operate, some uncertain­ties as to the effectiveness of advertising, and perh aps other factors. Yet, milk and other products must compete for consumer acceptance with other items, many of which are widely advertised. Moreover, advertising and other promotional measures are especially needed to inform consumers of new or modified dairy products, innovative methods of distribution, and similar developments that may be at­tractive to them.

1. D.F. Wilken and R.P. Kesler, Fifty-second Annual Summary of Illinois Farm Business R ecords, 1976, Circular 1140 (Urbana: Illinois Cooperative Ex­tension Service, 1977), pp. 10-11.

2. A.G. Mueller, D .F. Wilken, and F.J . Reiss, Thirty-fifth Farm Business Analysis R eport (Illinois Farm Bureau Farm Management Service, 1960), p . 10; Wilken and Kesler, Farm Business R ecords 1976, p. 11.

3. Milk production by counties, as reported in Illinois Department of Agri­culture and U.S. Department of Agriculture, Illinois Agricultural Statistics, Annual Summary, 1977 (Springfield : Illinois Cooperative Crop Reporting Service, 1977) , pp. 84-85 , compared with producer deliveries in federal milk order m arkets by counties, as reported by Agricultural Marketing Service, Sources of Milk for Federal Order Mark ets by State and County, AMS-565 (Washington, D.C.: USDA, March 1978), pp. 22-23.

4. Ronald D. Knutson, Cooperative Bargaining Developments in the Dairy Industry 1960-70 ... with Emphasis on the Central Un ited States, Research Re­port 19 (Washington, D.C. : USDA, Farmer Cooperative Service, 1971).

5. Ronald E. Deiter, "U.S. Dairy Cooperative Service Behavior: An Overview of the North Central Region and a Case Study of the Chicago Market." Ph .D. dissertation, University of Illinois at Urbana-Champaign, 1979.

6. Sheldon W. Williams and james W. Gruebele, "Estimating Optimum Size of Food Processing Plants Using Survivor Analysis," American Journal of Agri­cultural Economics 58, no. 4 (November 1976): 740-744 .

7.James W. Gruebele, " Increasing Efficiency in the Distribution of Milk through Vertical Integration," in Dairy Marketing Facts, AE-4272 (Urbana: Uni­versity of Illinois at Urbana-Champaign, March 1971), pp. 1-9 .

8. Sales Management and Marketing Magazine (and previously , Sales Manage­ment Magazine), Annual Surv ey of Buying Power, 1968-76 (New York: 1968-76).

9. Economic Research Service, USDA. Fluid Milk and Cream Report (Wash­ington, D .C. : january 1956 through june 1973) ; Bureau of Labor Statistics, U.S. Department of Labor, Estimated Retail Prices in City Mark ets (Washington , D.C.: july 1968 through December 1977).

10. Economic Research Service, USDA, Dairy Situation, DS-368 (Washing­ton, D .C.: December 1977), p. 20. Also DS-364 (March 1977), p. 15; USDA, Agricultural Statistics, 1969 (Washington, D.C.: 1969), p . 140.

11. Economic Research Service, Dairy Situation, DS-367 (September 1977) , p . 15.

12. Economic Research Service , Dairy Situation, DS-366 (July 1977), p . 16.