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February 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.

Whatever You Do, Don’t Give Up Milk

Feb 28, 2011

In calculating what it takes to make a respectable dairy margin when both feed costs and milk prices are high, three things are clear.  

 
On first blush, a $17.22/cwt. Class III average for the rest of the year (last Thursday’s prices) seems like a respectable price. Tack on another $1.50 basis here in the Midwest, and you have a very respectable price—and one you’d think leaves ample room for margin.
 
At least you’d think that was the case. But $7 corn and $350 soybean meal can eat up margin very quickly. To get an idea how quickly, I used a spreadsheet made available by Robert Tigner, a Nebraska Extension specialist. The spreadsheet is geared toward the Midwest, and looks at 300-cow freestall herds producing 20,000 lb./cow and 24,000 lb./cow annually.
 
I went on to AgWeb and plugged in March through December Class III + $1.50/cwt. basis. I also plugged in corn and soybean meal prices for each of those months as well. Keep in mind that last Thursday’s prices took a dive—Class III, corn and soybeans were all lower. But relatively speaking, the previous price relationships of high milk prices and high feed prices held up.
 
What I found was surprising, to say the least. The 20,000-lb. herd is spending about $205 per month in feed costs. The 24,000 lb. is spending roughly $20 more than that each month. You’d expect that—more milk takes more feed—but not on one-to-one ratio because you’re diluting out maintenance feed costs with more milk. (Ten percent more feed yields 20% more milk.)
 
Both the 20,000 lb. herd and the 24,000 lb. herd had respectable income over feed costs. The 20,000 lb. herd averaged $6.41 IOFC for the remainder of 2011; the 24,000 lb. herd, $7.41.
 
But then things got dicey. Total breakeven cost for the 20,000-lb. herd came in at $19.56/cwt. For the 24,000 lb. herd, the total breakeven was $17.64/cwt.—almost $2/cwt. less. (Not only are higher producing herds diluting out maintenance feed costs, they’re spreading their labor and other fixed costs over more hundredweights of milk.)
 
And with the milk price averaging $18.72 for the year, the 20,000 lb. herd only had one month in the black—March, with income over total cost of just 40¢/cwt. For March through December, the 20,000 lb. herd lost an average of 84¢/cwt.
 
In contrast, the 24,000 lb. herd saw $1.08/cwt. profit March through December, even though it was spending $20 more per cow per month for feed.
 
That $1.08/cwt. profit translates into $260 net per cow on an annual basis. The 20,000-lb. herd was losing $168/cow—or a swing of $428.
 
The bottom line is simply this: Pounds of milk shipped matters. And to make money, you have to spend money. Spending $250/cow/year more on feed actually nets a profit. Not spending it pretty much guarantees a loss. The third lesson is that you have to lock in prices—milk and feed—when they offer a margin. Even a 24,000-lb. herd average won’t guarantee black ink if milk prices drop a $1 and feed remains high.

Fluid Milk Sales in Crisis

Feb 14, 2011
It was a stunning admission: Generic fluid milk advertising doesn’t work, or at best doesn’t work very well.
 
That confession came at the Dairy Forum in Florida in January, when MilkPEP officials rolled out new research that examines who is drinking milk, when they’re drinking it and why they’re drinking less each year.
 
Over the past 10 years, per capita milk consumption has fallen 1.8 gln., a 9.3% decline. On its face, 1.8 gln. doesn’t sound like a big number—but multiply it by 307 million Americans. Then it becomes a big number. A very big number.
 
Like 540 million gallons of lost milk sales per year. Or, 6.4 billion pounds of milk production. Or, 3.3% of 2010’s U.S. milk production of 193 billion pounds.
 
To get some sense of how big that number is, it’s the annual milk production of no less than 21 states: Alabama, Alaska, Arkansas, Connecticut, Delaware, Hawaii, Louisiana, Maine, Massachusetts, Mississippi, Montana, Nevada, New Hampshire, New Jersey, North Carolina, North Dakota, Rhode Island, South Carolina, Tennessee, West Virginia and Wyoming.
 
Granted, these are our smallest dairy-producing states. But they still represent the blood, sweat and toil of some 2,800 dairy producers.
 
And things could be even worse. According to USDA’s annual report to Congress, generic fluid milk advertising is somewhat effective. It shows that for every 1% increase in fluid milk advertising, per capita milk consumption climbs 0.06%. And for every 1% increase in non-advertising fluid milk marketing, per capita consumption climbs 0.032%. Those ratios look paltry. But without $100 million pumped into fluid milk advertising and marketing annually, it’s likely another 6.9 billion pounds of fluid milk sales would be lost.
 
Total annual beverage consumption in the United States is 222 gln. per person. That consumption has remained flat for 30 years. “To increase milk consumption requires stealing market share,” says Steven Goldbach, an analyst with Monitor, the company which conducted the study.
 
The biggest surprise out of all of this is that water, not soft drinks, soy ‘milk’ or sports drinks, is milk’s biggest competitor and threat. “Water is the highest volume and most ubiquitous milk competitor,” says Goldbach. “One third of the decrease in milk consumption is due to the increase in water consumption, and it’s the Number 1 source of the decline in milk sales.”
 
The easiest way to grab market share back is to go after those occasions where milk is already being consumed: breakfast, lunch and dinner at home.
 
Milk grabs a 32% share of beverages consumed during breakfast. But that share has eroded by a half-gallon per capita over the last decade because of the decline of cereal sales and breakfasts eaten at home. Partnering with cereal makers to defend and bolster this position makes sense.
 
“In any given day, there are 140 million alternative beverages that are chosen by all consumers in-home at breakfast,” says Donna Armstrong, a MilkPEP communications specialist. In other words, this is the size of the opportunity to steal market share from other beverages at home during breakfast, she says.
 
After breakfast, extend milk’s dominant share to lunch and dinner. Milk only commands a combined 12% market share at lunch and dinner. But there are 304 million alternative beverages consumed at home at lunch and dinner every day-- another huge opportunity, says Goldbach.
 
I’ve been around the dairy industry long enough to be both skeptical and hopeful. Skeptical in that I don’t know how many times in my 30+ years covering this industry the milk promotion folks have come and said they’ve found the solution to declining milk sales. First, it was the institution of the checkoff programs in the 1980s and ‘90s. Then it was the “got milk?” campaign and milk mustaches. Then it was a more recent demographic study targeting moms as the great salvation.
 
But I’m hopeful as well. This time around, the MilkPEP folks realize they can’t do it alone. They only have $100 million or so to advertise with. Red Bull sports drinks—one brand—spends some $135 million by itself each year.
 
So the MilkPEP folks realize they must partner with Dean’s and Kroger’s and General Mills and Kellogg’s and other big, national companies to leverage marketing efforts. The opportunity is there. Let’s hope they get it right this time.

 

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