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July 2009 Archive for Dairy Talk

RSS By: Jim Dickrell, Dairy Today

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

Should Dairy Price Supports Be Raised?

Jul 21, 2009

By Jim Dickrell

 

In last week’s congressional hearing on the dairy crisis, Rep. Michael Conaway (R-Tex.) asked Undersecretary of Agriculture James Miller what was the shortfall between milk prices and the average cost of production. After consulting with the USDA economists seated behind him, Miller turned back to the committee and flatly responded: “$7 billion.”

The gasp from committee members, even as I watched the hearing via the Internet, was clearly audible. Miller pointed out USDA has already mailed $450 million in Milk Income Loss Contract (MILC) payments through April. He further testified the agency expects to send out another $450 million in MILC payments through the end of 2009. Given current futures prices, that could be an under-estimate.

Earlier in the hearing, Rep. Dennis Cardoza (D-Calif.), who represents the 18th Congressional district that includes the San Joaquin valley and many of California’s 1.8 million cows, already expressed budgetary concerns. When the 2008 Farm Bill was written, Congress certainly didn’t anticipate milk prices at support levels, he says. “But we also have to weigh budgetary costs of altering prices now…remember, we have 27 Blue Dogs on this committee,” he told Miller, referring to the budget conscious, pay-as-you-go Blue Dog Democratic coalition.

In late June, the National Milk Producers Federation (NMPF) called on USDA to raise dairy price supports. Then late last week, 20 Democratic Senators from 14 states—including eight of the top 10 dairy states—called on USDA to raise support prices “a significant level to restore a meaningful safety for American dairy farmers.” 

For struggling dairy producers everywhere, the reaction to raising support prices from the current $9.90 is immediate and visceral: Hell, yes.

The NMPF proposal is actually pretty modest: Raise the support price for cheddar blocks from $1.13/lb to $1.19; barrels from $1.10 to $1.16, and nonfat dry milk, from 80¢ to 84¢/lb. These increases would raise the Class III price about 57¢/cwt and Class IV about 35¢/cwt., estimates Roger Cryan, an NMPF economist. He adds NMPF has not done an analysis of what the proposal would cost USDA and taxpayers.

But raising the support price comes with other costs as well. Commercial disappearance is starting to pick up. Increases in basic commodity prices will be reflected on grocery store shelves. With national unemployment at levels not seen since the early 1980s and possibly the 1930s,  higher dairy prices will undoubtedly mean softer sales. That will only add to surpluses--and prolong the agony.

Keep in mind, too, that we’re beginning to see some hope on cow numbers. USDA projects cow numbers will decline to 9.035 million head by the fourth quarter this year, and to 8.870 million head by the first quarter of 2010 (follow this link to access USDA charts). Those numbers are right in the range where we’ll balance supply with falling export demand.

Remember, too, that herds going out of business are really business as usual in the dairy industry. In 2007, the U.S. lost 2,935 herds—in a banner milk price year. Last year, 2,003 herds called it quits.

To take 295,000 cows out of production, the U.S. will need to lose about 1,800 herds this year (at the U.S. average herd size of 163 cows). The seventh round of the Cooperatives Working Together (CWT) program has already idled 367 farms—and these herds averaged 275 cows each, or 1.7 times the average U.S. herd size. In other words, those 367 CWT herds equate to 625 average dairy farms. And with bids for the 8th round of CWT due this Friday, it’s quite likely the program will idle the equivalent of at least another 500 farms.

In other words, industry programs are starting to work and will continue to whittle away at excess milk supply. NMPF’s proposal to raise support levels a few cents probably won’t throw a huge monkey wrench into the recovery. But increasing support prices to a significant level to restore a meaningful safety net for American dairy farmers,” as the 20 Senators put it in their letter to Secretary Vilsack last week, could be too much of a good thing.

—Jim Dickrell is editor of Dairy Today. You can reach him via e-mail at jdickrell@farmjournal.com.

This column is part of the Dairy Today eUpdate newsletter, which is delivered to subscribers biweekly and includes dairy industry analysis, dairy nutrition information as well as the latest dairy headline news. Click here to subscribe.

 

Rays of Hope in Dairy Gloom

Jul 06, 2009

By Jim Dickrell

While it’s way too soon to say the horizon is clearing on dairy’s gloom, there are a few shafts of sunlight poking through.

• Last week’s USDA acreage report showed planted U.S. corn acreage to be the second largest crop since 1946 and the soybean crop to be the largest in history. That should mean some price relief for feed costs come harvest and this winter. By harvest, feed costs could drop to 7¢/lb. of feed. That’s a 30% drop from a year ago, and a 12% drop from even today. While 7¢ is still historically high, it’s far better than 10¢.

• Demand is also starting to pick up. Through April, commercial disappearance of dairy products is still down 0.9%. But that’s considerably better than a month ago, when commercial disappearance through March was down 2.5%. Fluid sales are 1.2% above a year ago through April, and up 1.5% year-to-date. Total cheese sales were up 5.1% in April, and 4% year-to-date.

• Dairy Management, Inc., the dairy checkoff guys, have shifted $25 million in their budget (20%) to immediate and near-term sales efforts. They’ve poured $12 million of that into Domino’s American Legends six new pizza’s with 40% more cheese. The first phase of that, which started last October,  has already grabbed 13% of Domino’s total sales mix. Domino’s just launched the second phases of its promotion last week. Click here to read more.

• Last December, DMI also signed a three-year agreement with McDonald’s to develop its McCafe line of dairy beverages. DMI has committed $5 million per year to the effort. McDonald’s is pouring $1.2 billion to upgrade, update and equip 12,000 stores. In 2009, McDonald’s will spend $100 million on promoting the McCafe’s, which are primarily dairy-based drinks.

• This spring, Pizza Hut announced it will offer Nestle-brand chocolate milk in single-serve milk chugs, the first time the chain is offering milk in this form. The 4,000 Pizza Hut restaurants included bring the total number of fast food outlets that will now offer single-serve chugs to 65,000 stores. These stores will sell an additional 250 million lb. of milk this year.

• The U.S. Dairy Export Council (USDEC) has also shifted gears, putting more effort in immediate export sales. In Mexico, for example, USDEC has increased retail and food service cheese promotions, resulting in a 19% increase in cheese export volume south of the border. In Asia, USDEC is conducting seminars with feed suppliers to bring dairy ingredients back into animal feed formulations, now that prices have plummeted from their 2007 highs. Total whey exports are also slightly above (3%) last year’s levels.

Despite this good news, there are lots of gray skies in front of us. The biggest problem continues to be exports, down 51% through April. With exports accounting for some 10% of U.S. production last year, that means that much of that milk that would have been exported is now backing up in U.S. warehouses.

Cheese in cold storage is the prime example, with inventories up some 9% to 10% from  last year. “May was a record high,” says Bob Cropp, a University of Wisconsin dairy economist. “Cheese buyers see that there is plenty of cheese around and that milk production is not coming down…. Production has got to start dropping below a year ago before we see price recovery.”

Hopefully, milk production will start backing off with the June milk production report, due out in 10 days. The Cooperatives Working Together 7th round buyout should start having an impact, with 101,040 cows and 818 heifers sent to slaughter. Follow this link to read more.

Still, as I’ve reported here before, it likely will be harvest or later before we see significant milk price recovery and even marginal improvement in income over feed cost.
I wish I had more good news, but some is better none.

—Jim Dickrell is editor of Dairy Today. You can reach him via e-mail at jdickrell@farmjournal.com.

This column is part of the Dairy Today eUpdate newsletter, which is delivered to subscribers biweekly and includes dairy industry analysis, dairy nutrition information as well as the latest dairy headline news. Click here to subscribe.

 

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