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January 2011 Archive for Dairy Talk

RSS By: Jim Dickrell, Dairy Today

Jim Dickrell is the editor of Dairy Today and is based in Monticello, Minn.

Informa Study Fires Up Dairy Debate

Jan 31, 2011

Which states would contribute more under the Foundation for the Future’s growth management plan? Time, place and circumstance all play a role – and controversy follows.

 
Headlines can be both truthful and deceiving-- at the same time. Case in point: Our January www.dairytoday.com headline “NMPF Growth Management Plan Hits Midwest, Northeast Hard.
 
The headline (which I wrote) is accurate. It rightly describes the gist of an Informa Economics analysis of the growth management portion of the National Milk Producer Federation’s (NMPF) Foundation for the Future (FFTF) proposal had it been in place from 2000 through 2009. 
 
The study suggests that Wisconsin producers would have paid in $150 million last decade. Minnesota producers would have contributed $51.3 million; New York, $63.6 million; and Pennsylvania, $33.5 million. California producers would have contributed a “mere” $28.2 million.
 
Wisconsin, New York, Pennsylvania and Minnesota produce about 30% of nation’s milk. But these four states would have contributed nearly half of the $625 million in withheld milk payments under the plan. In contrast, California, which produces 20+% of the nation’s milk, would have paid in just 4.5% of the withheld payments.
 
But the headline is also deceiving. Just because the Midwest and Northeast would have paid in the most in 2000 to 2009, it does not mean these regions will be the biggest contributors going forward. Time, place and circumstance all play a role into which states pay and when they pay.
 
For example, in 2009, California producers had already cut back production because many of their plants were at capacity and had capped production. In addition, California producers buy much of their protein and energy. With high feed prices hitting them hard, they had already begun to scale back. So had the FFTF growth management been in effect, they would have already met the required 2% cutback.
 
In other regions of the country, high milk prices in 2007 and 2008 had encouraged more milk production. Plus, producers in these regions grow much of their own feed, usually only having to buy protein to balance rations. As a result, they were somewhat insulated from high corn prices and didn’t cut back as quickly. So when the production cutbacks kicked in, the Midwest and Northeast bore the full brunt of those deductions.
 
If you go back to 2003, however, the reason for FFTF going into effect was low milk prices, not high feed. Then, California would have paid in $14.6 million, or 13% of the nation’s total. Wisconsin, New York, Pennsylvania and Minnesota would have paid in $36 million, or 32% of the total. The biggest loser among this group would have been Wisconsin, paying in $28.2 million, or 25% of the total.
 
The biggest random effect that triggers whether a state’s producers will pay (or not) is weather, which, in turn, influences production per cow, says Nate Donnay, senior dairy analyst with Informa Economics. For example, had the growth management plan been triggered this past summer, Wisconsin producers might have gotten off scot-free in August and September when milk per cow was hammered due to high heat and humidity.
 
Season of the year also plays a role. If a growth management plan activates in May or June, most producers would likely have to pay in because June is a peak month as a result of the spring flush.
 
The International Dairy Foods Association (IDFA) would like NMPF to simply drop the Dairy Market Stabilization Program portion of the FFTF plan. But some very large co-ops are insisting a growth management plan be part of the total package.  
 
Plus, if the package does not contain some mechanism to restrain production, the margin insurance portion of the plan could become prohibitively expensive. The Informa Economics analysis shows milk production is highly inelastic. A 10% drop in milk price results in just a 0.75% drop in milk production one year later. 
 
In other words, if milk production keeps chugging along, prices won’t rebound. And if the margin triggers remain flipped for months and months because milk production is unrestrained, the cost of those insurance payouts could bust the federal bank (which, by all accounts, is already busted).
 
If, in the end, Foundation for the Future costs a penny more than the current program, it ain’t gonna happen. And then we’re left with the current mess – $10 support prices, complex Federal Order pricing formulas, make allowances and all the rest.

Dairy Margin Insurance Making More Sense

Jan 16, 2011

It seems to me relying on milk price enhancement, tweaking MILC (Milk Income Loss Contracts) or enacting supply management schemes are not only insufficient, they are the road to ruin. Here’s why.

 
Last week’s crop report and news of Fonterra’s most recent dairy product auction all make one thing amazingly clear: We are in a world market.
 
What happens in Argentina and China and New Zealand all directly affect the dollars in your milk check and the numbers in your feed bill.
 
Two weeks ago, in New Zealand, Fonterra saw milk powder prices jump 10%. In reaction, butter prices in Chicago jumped to above $2. Powder prices followed, and cheese prices shot up as well. And this at a time of rising milk production here in the U.S.-- and cheese stocks at billion-pound-plus levels.
 
On the feed side, we have long blamed domestic ethanol credits (subsidies) for at least 50¢/bu. (Food and Agricultural Policy Research Institute estimates) to $1.50 (common sense math) for higher corn prices. To keep pace, soybeans are bid up to be competitive as is every other feedstuff. Now, strong demand from China is pushing prices even higher. Peter Georgantones with Abbot Futures Trading in Minneapolis says $16/bu. soybeans (and $7 corn) are a possibility.
 
In light of all this craziness, what dairy policy makes the most sense? It seems to me relying on milk price enhancement, tweaking MILC (Milk Income Loss Contracts)  or enacting supply management schemes are not only insufficient, they are the road to ruin. Here’s why:
 
To keep pace with feed prices, milk prices will have to continue to increase and increase and increase. When you do that, particularly with fluid milk, consumers react. And not in a good way. Even in 2010, we were seeing continued slippage in fluid milk consumption. And that’s at moderate prices. Imagine what will happen if Class I prices again exceed $20?
 
Tweaking MILC triggers to reflect higher feed prices has already been done. And yes, more could be done to get more dollars back to producers. But these are mere pennies on the dollar, and then only 45% of the spread anyway, and on only the first 2.985 million lb. of annual production. What happens if/when Congress reins in USDA expenditures, perhaps reverting to 2007/2008 levels of 34% of the cost/price spread and 2.4 million lb. of annual production? If it does, even fewer dollars will be coming back through the MILC program.
 
Supply management is just another way to increase milk prices. But you have to unemploy cows to do so. And if you have the desired effect, and milk prices go up, you stifle demand, consumption falls and revenues follow. So then you have to unemploy even more cows to raise prices further, which stifles more demand, and the death spiral continues.
 
What makes more sense is LGM-Dairy (livestock gross margin insurance) and/or the Foundation for the Future plan (the supply management component not withstanding). Under these programs, producers insure themselves an income-over-feed-cost margin. With LGM-Dairy, the producer decides his/her level of protection. Under the Foundation plan, all producers are provided a minimal level of protection and can purchase more based on need and choice.
 
The beauty of these programs is that they guarantee IOFC protection if feed prices go up or milk prices come down. And they don’t rely on schemes that place dairy consumption--both domestic and export--at risk.
 
It’s unclear when, or whether, Foundation for the Future will move forward. LGM-Dairy insurance is available now. Learn about it. Talk to your insurance agent. Act.

Federal Order Issues Frustrate Dairy Reforms

Jan 03, 2011

The biggest obstacle to passage of the National Milk Producers Federation (NMPF) “Foundation for the Future” dairy reform proposal won’t be MILC payments or supply management. Those can and will be dealt with.

The biggest stumbling block has been and continues to be issues involving the Federal Milk Market Orders. Still unresolved is what to do with Class IV pricing. The biggest bugaboo is trying to come up with a new system with California still outside the Federal Orders and not prone to join.
 
But even dealing with Class IV issues within the Federal Order system is no walk through the alfalfa. Consider the issue of “higher of” pricing.
 
Recall that “higher of” pricing came in with the last round of Federal Order reform in 2000. It stipulates that the “higher of” advanced Class III or IV prices will become the Class I mover. The logic is that the Class I price must exceed manufacturing prices (both Class III and IV) to encourage cheese and powder manufacturers to supply Class I fluid needs. If there’s no economic incentive to move milk to fluid plants, cheese and powder producers will simply keep producing cheese and powder. Simple enough.
 
The Foundation for the Future does away with “higher of” pricing. In its place, the plan calls for some kind of (yet to be determined) competitive pay price based on what Midwest cheese plants pay for milk.
 
The Dairy Cooperative Marketing Association (DCMA), made up primarily of southern dairy co-ops, released a position paper on its “higher of” concerns last month. It notes that since Federal Order reforms took place on Jan. 1, 2000, Class IV prices were the “higher of” 58 (44%) of those 132 months. Had the “higher of” provision not been in place, dairy producers who share in Class I proceeds would have lost on average 48¢/cwt., or $213 million per year. Times 11 years, that’s a revenue loss of $2.343 billion. That’s a big chunk of money, with losses concentrated in high Class I regions. So it’s not surprising that these folks are concerned.
 
NMPF believes using a competitive pay price, where cheese plants actually bid for milk, would likely result in higher Class III prices. And so there would be less need, if any, for “higher of” pricing.
 
Well, maybe. The need for competitive Class III pricing comes from a strong belief, bordering on religious fanaticism among some producers, that the Chicago Mercantile Exchange (CME) is not a free and competitive market. Many of these producers believe the CME is a den of iniquity, manipulative speculators and processor cronies who set prices at their whim and only to their benefit.
 
But a more rational view (yes, admittedly, prices can be bid up and down on emotion) is the CME is fairly and generally reflective of supply and demand. Whether you’d see huge and sustained increases in cheese prices when plants are forced to bid for milk is open to debate.  
 
For the sake of argument, assume that CME prices are within a plus/minus 5% spread of what cheese plants would bid. (I used +/-5% because that’s well within the 48¢/cwt. “higher of” difference mentioned in the DCMA analysis.) When I did, I found that Class III prices surpassed Class IV prices 24 of those 58 “higher of” months cited in the DCMA position paper. In four of those months, it only took a 1% jump in Class III to make it the “higher of.” But it took a full 5% jump in eight months to push Class III above Class IV.
 
Remember, though, that competition works both ways. If milk is plentiful and cheese plants are full, you might see even lower Class III prices. (And keep in mind, the Foundation plan would also do away with price supports. So there would be no floor to how far prices could fall when no one wants or needs your milk.) When I ran my analysis, Class IV would have become the “higher of” 19 more months if Class III prices fell 1% to 5%.
 
The bottom line is that there are no easy answers. Producers, cooperatives and processors are going to have to make some very tough choices. Informed decisions, based on good data, are our best hope. Even then, leaps of faith, hope and charity will have to be made.
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