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January 2010 Archive for Dairy Talk

RSS By: Jim Dickrell, Dairy Today

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

No Consensus on Supply Management

Jan 18, 2010

by Jim Dickrell

Dairy Farmers of America (DFA) hosted a conference call last week for a few hundred of its closest industry friends, dairy lenders and media riff raff. As usual with these types of affairs, the Q&A portion of the call turned out to be far more revealing than the formal webinar.

 

During the Q&A, Rick Smith, DFA CEO, revealed that DFA recently surveyed 2,500 of its members to get a sense of where they want the U.S. industry to head. “More than 90% see opportunity in participating in the global market place,” says Smith.

 

There was also strong consensus that dairy policy needs to change. But that’s where things started to break down. “Seventy-one percent think we should be trying to do something to manage growth [in production] going forward, and that transcended east/west and large/small,” says Smith.

 

But exactly what that program should be remains cloudy. Slightly less than half supported the Holstein Association’s Dairy Price Stabilization Program http://www.holsteinusa.com/association/dpsp.html .

 

Supply management programs, with a mandatory base for each farm, does not have support in the Midwest and only marginal interest in the Northeast. Only California, which has felt the brunt of the 2009 feed cost/milk price debacle, has majority support for such a program.

 

Smith also says “CWT (www.cwt.coop) has probably run it course.” The reason: DFA producer leaders say they are tired of free riders, with only 70% of the milk contributing the 10¢ assessment fee to support the program for the entire industry.

 

So there’s the conundrum Smith and DFA leaders face: Their members overwhelmingly want to participate in the global market. Yet they want to somehow control milk supply without mandatory production bases. And they’re tired of funding CWT.

 

I tend to agree with the 90% who want to participate in the global market. There clearly is opportunity out there. But dairy co-ops—who have taken the easier road of selling to the government rather than producing what the market needs and wants—need to change.

 

Supply management programs have their own problems. The first is quota value. Although the Holstein Association claims its program won’t accrue value, it can’t help but not. It might not be in quota per se, but it will get bid into land, facilities and cows. While cash flow might be better under a quota system, balance sheets likely won’t be. Plus, you can kiss the international market good bye because prices here won’t be competitive globally and imports will be screaming to come in.

 

I agree that CWT has probably run its course. In the early months of 2009, it took until May to get the first round rolling. By then, the damage was done. And with milk prices at or below support ($7/cwt in North Dakota), it became the only game in town because lenders wouldn’t let producers sell out because cow values had crashed along with milk prices.

 

Expecting co-ops, even co-ops as large as DFA, to fix volatility in global dairy markets is wishful thinking at best, naivete at worst. The world economic crisis, led by irresponsible U.S. lending practices, caused dairy markets to collapse. Global economic recovery, now starting to send up green shoots, is what will make dairy prices come back.

 

As the industry continues to argue about what needs to be done, you have a few choices. You can slowly rebuild your liquidity. Or you can get serious about risk management. Or both. Waiting for industry agreement on the next best dairy policy is like waiting for Godot, who never shows.

World Dairy Markets Show Signs of Life

Jan 04, 2010

By Jim Dickrell

It’s probably more than fitting that my first column of 2010 is on world dairy markets. In 2009, it was the collapse of said world markets that led to the most difficult price year in living memory.

Recall that a 50% decline in U.S. dairy exports last year resulted in a 3.5% increase in U.S. stocks, which resulted in a 35% decline in the All-Milk Price. Those are numbers worth paying attention to. You can be assured your lender is.

The good news, USDA reported last week, is that world dairy markets are staging “a dramatic and somewhat unlikely rebound given the availability of ample stocks of butterfat and nonfat dry milk (NFDM) in the United States and the European Union (EU).”

But the report goes on: “The reality, however, is that stocks of U.S. NFDM have been mostly committed while EU stocks are at this time unavailable to markets since any release would likely negatively impact on domestic prices and risk igniting political opposition.”

In other words, U.S. dairy producers have their ornery, cantankerous brethren in France and particularly Belgium to thank for keeping the lid on the release of EU milk powder surpluses.

The other good news is that there’s a hungry world out there, willing and once again able to buy dairy products. USDA notes that world trade in NFDM averaged just over 1 million tons per year between 2005 and 2008. Last year, despite a severe global recession, exports of NFDM dipped only 40,000 tons—or a mere 4%.

Still, surplus stocks are a concern this year. The EU is sitting on nearly 260,000 tons of NFDM and another 76,000 tons of butter. U.S. holdings of NFDM are close to 120,000 tons, but 75% of that has been committed to domestic feeding programs and is therefore (somewhat at least) isolated from the market.

Yet USDA economists remain optimistic, primarily because the gross domestic product of developed nations (like the U.S.) is expected to rise 1.7% in 2010. Developing nations are forecast to grow 5.5%, and China is forecast to grow by at least 9%. This contrasts with 2009, when world GDP shrank 2.2%.

While world milk production is expected to grow by 1.3 million tons next year, that’s less than 0.5% growth.  The EU is expected to show little or no growth, the U.S. and Australia are both expected to decline 1%, and New Zealand’s output has already been adjusted back to just 1.5%. 

Naysayers will counter this relatively good news with the fact that U.S. dollar is strengthening, and could cause a decline in importing countries’ purchasing power. Perhaps. But keep in mind that many of these countries, including Mexico and those in the Middle East, export oil—which also trades in dollars. So as we send them our dollars for their oil, they’ll be sending some of those very same dollars back to us to buy powder and cheese.

In the end, all of this is reason for cautious optimism: “The 2010 outlook for U.S. dairy exports is relatively bright, with NFDM and cheese exports expected to expand 16% and 7%, respectively,” says USDA. “NFDM exports are expected to be competitive on world markets; however, a decrease in U.S. production may lead to some rationing of NFDM if domestic demand is sufficiently strong.” For the complete report, click here.

In fact, powder prices are so strong they will likely be higher than cheese and therefore “the higher of” for setting Class I prices over the next month or two or three. In high fluid Federal Orders, powder prices are the driving force for rebounding prices.

One request: Later this week or early next, AgWeb will be e-mailing you a short survey on your on-line information needs. Please take a few minutes to complete and return the questionnaire so that our editors can better meet your farm’s information needs. Thanks!
 

—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 sign up.

 

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