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October 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.

CWT is Working—Sort Of

Oct 27, 2009

By Jim Dickrell

USDA’s September milk production report, released a week ago is a good opportunity to evaluate the effectiveness of the Cooperatives Working Together program.

My reasoning: The production report comes on the heels of the conclusion of the 3rd round of CWT cow culling completed this year. Timing is everything, and when you start counting cows, it is important in this type of number crunching.

The CWT’s Web site breaks down culling by region rather than state. So I did the same when I started counting cows. The problem is that USDA offers monthly, state-by-state analysis only for the 23 major dairy producing states—those which account for roughly 90% of U.S. milk production. Numbers for the remaining states are reported by quarter.

So to start, I used USDA’s January production report which gave cow numbers for all 50 states for the 4th quarter of 2008. I figured this was a good place to start, since it should have been prior to the 2008 CWT culling round that started in December.

I compared those numbers to last week’s report. Here, I used September numbers for the 23 major states, and third quarter averages for the remainder. Granted, cow numbers for the 25 “minor” states (I excluded Alaska and Hawaii because they’re not included in the CWT), could lag and some CWT culls might have been missed in this quarterly average.
Unfortunately, those are the number I had to work with.

The results are intriguing, nevertheless. Over the three rounds of CWT culling completed this year, the program removed nearly 226,000 cows. But U.S. cow numbers in the lower 48 states declined just 153,000 head. In other words, to remove a cow from the U.S. herd, the CWT needs to remove 1 ½ cows.

Regionally, the picture is even more interesting. If you consider the ratio of CWT cows removed to actual cow number decline, the Northeast and Southeast have the best performance. In the Northeast, 13,000 cows were taken through CWT but total cow numbers are down 23,000 head. The numbers are roughly the same in the Southeast, with 14,000 CWT cows and 23,000 total head decline.

In the West, 86,000 cows were removed through CWT. In terms of actual cow numbers, USDA reports 70,000 fewer cows in California. The rest of the West is down another 22,000 head (with Idaho and Washington both down 7,000 cows)

The Southwest is a fascinating picture. This region had the most CWT cows culled—92,000. And yet USDA is reporting the region down just 28,000 head. The big story here is that Texas continued to grow during this price debacle, up 26,000 head since the fourth  quarter of 2008. Kansas is +2,000.
The Midwest, despite 20,000 CWT cows removed, is actually up 12,000 cows over last year. The only state in the Midwest region to see cow numbers drop is North Dakota, down 4,000 head.

CWT also idled some 827 dairy farms since the end of 2008. By region, Midwest, 257; West, 169; Southwest, 140; Northeast, 132 and Southeast, 129.

So what’s the message? CWT works in regions which are suffering severe economic stress. In regions where the stress is less severe, CWT isn’t nearly as efficient.

And it also begs the corollary question: Would this culling have happened anyway?
 

—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.

 

Vilsack Wants to ‘Restructure’ Dairy

Oct 13, 2009

By Jim Dickrell

Last week, Secretary of Agriculture Tom Vilsack was quoted by the Associated Press  saying the U.S. dairy industry must restructure.

The exact AP quote: “I think really what will be next in line is a longer-term discussion about whether we need to make structural changes in the way the dairy industry is currently operated so we no longer have these stark contrasts between boom and bust.”

I have several calls into USDA to get clarification. Is the Secretary advocating a Canadian-style supply management program? Has he bought into the Holstein Association’s Dairy Price Stabilization Program ? Or, does he have something else in mind?

All of this comes on the heels of the Bain and Company report, which suggests the gap between the world’s ability to produce milk and its hunger for more dairy products will soon reappear. I gave you a sneak peak at that study in one our eUpdates from World Dairy Expo last week. By 2013, the world could again be facing a “latent demand gap” of 7 billion lb of milk.

Although the Europeans are currently dumping milk in Belgium farm fields, they will be unlikely to meet this need. Their quota system, which keeps a lid on production, isn’t set to expire until 2015.

New Zealand would have to add perhaps 600,000 cows to its 5.6 million head herd to fill a 7 billion lb. bulk tank. The North Island is already tapped out, and it’s questionable how much more South Island land could be converted.

The United States is really the only current player who could add 250,000 to 300,000 cows in reasonably short order. In the last 11 months, we’ve killed more than 225,000 cows through the Cooperative’s Working Together program. While many of those facilities will be permanently retired, more than a few could be re-modeled, re-equipped and re-energized. By 2013, anything is possible.

There’s little question U.S. dairy policy needs restructuring. For starters, serious thought must be given to whether the combination of the meaningless $9.90 dairy price support floor and the Milk Income Loss Contract program offer any type of real protection.

I’ve argued before that the price support level was allowed to fall to current levels when the average cost of production, at least in “surplus” milk areas, was closer to $12.
A comparable level now, with $15/cwt COP, would be a $12 support price. Giving up the MILC payment might be a good trade.

But care must be taken to ensure the $12 floor isn’t too high to make the U.S. uncompetitive globally.  The $12 floor certainly would be competitive with most of Western Europe, but maybe not against emerging industries in former Soviet bloc countries. The Kiwis could certainly compete at $12, but see above. The Aussies could as well, if it ever rains there again.

Federal Orders (along with arcane dairy product standards of identity) also need reforming. Reducing the number of classes—perhaps to just two—makes sense. One class for fluid and the second for manufactured products would allow manufacturers to experiment with new products.

More risk management tools are also needed. Livestock Gross Margin Insurance needs to be simplified, and perhaps subsidized, to entice more producers to use it. More contracting between producers, co-ops and processors—at specific prices for specific volumes for specific periods of time—also needs to be explored.

Yes, the Secretary is right. The U.S. dairy industry does need to be restructured. The questions are: Where will we pour the footings and where will we place the doors?
 

—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.

 

Control What You Can

Oct 05, 2009

By Jim Dickrell

In turbulent times, worrying about things you can’t control is just wasted effort. Not only does it do no good, it distracts you from focusing on doing things that can improve your situation both now and for the future.

Tim Swenson, a dairy business consultant with Lookout Ridge Consulting, offered these tips at one of the final World Dairy Expo educational seminars Saturday.

Income over feed cost (IOFC). “Understand what goes into your dairy’s income over feed cost number because it is what is left over to pay all your other expenses,” he says. Make forage production and quality a priority, because it can make a huge difference on your cash expenses and milk production.

Also manage your feed inventories carefully. Do everything you can to minimize shrink. “Now is also not the time to build inventories to have enough feed for two years. You have too many other things you can do with that cash,” Swenson says.

Critically review all discretionary ingredients in your rations. “Don’t rip every additive out of rations, but look at each one and ask why it is there,” he says. “You need to look at profit maximizing rations, not least cost. Least-cost rations can reduce milk and IOFC can actually go down.”

Manage your replacement rate. Identify areas where cows are being “wrecked” on your dairy. “Especially focus on the first 60 days in milk, because you have all the expense of getting cows to freshen but have no opportunity to recover those costs if you lose them so early in lactation,” says Swenson.

At the same time, re-think when you’re culling cows. The old rule of thumb was to cull when milk production dropped to 30 or 35 lb. But with higher feed costs, the breakeven in many herds has risen to 45 lb. If the cow is pregnant, consider early dry off.

“Also treat heifer raising costs as an investment in your future,” says Swanson, “and make sure you’re having that discussion with your banker. He might want you to sell 12 heifers to create $12,000 in immediate cash. But then you’ll have 12 empty stalls next spring that you’ll have to fill.”

Manage labor efficiency. “Don’t expect $8 or $10 per hour employees to manage your herd because you usually get what you pay for,” he says. “At the same time, don’t expect your herd manager to also scrape alleys in his ‘spare time.’ You need to leverage the talents of your current employees.”

Employee turnover also drains labor efficiency. One dairy Swanson works with had decided it would pay no more than $8 per hour for milking labor, but it was constantly having to hire new milkers. It actually cost them more to train new milkers because they needed an extra worker in the pit to do the constant training.

Structure debt properly. “Make sure term debt is amortized over the useful life of the asset,” says Swanson. “If you put a forage chopper on a 20-year note, it can put you in real pickle when it wears out in five years.”

Also consider deferring principal (interest only) when cash flow is tight. But Swanson offers this warning as well: Most lenders are not extending the term of these notes. So when you go back to paying principal, the payments per month will go up to get the loan paid off in time.

Swanson concludes: “There is no silver bullet out there to fix all of this. Make decisions that fit your dairy and your situation. The choices you make now will impact your business for years to come.”

Jim Dickrell is editor of Dairy Today, you can reach him at jdickrell@farmjournal.com.

 

U.S. Dairy’s Future Starts Now

Oct 02, 2009

By Jim Dickrell

The U.S. dairy industry has come to the proverbial fork in the road, and as the New York Yankee’s most quotable catcher Yogi Berra says, we’ll have to take it.

Bain and Co., a global management consulting firm, is in the process of completing a massive study of the globalization of dairy supply and demand. As the U.S. industry struggles to recover from its worst price year since the Great Depression, it is also facing major decisions on what it wants to be as the global market grows and matures.

By 2013, the Bain study suggests there will be a “latent demand gap” of 7 billion lb. of milk worldwide. In other words, as economies around the world recover, demand will resume its long-term trend of growing faster than milk supply.

The U.S. could be well positioned to take advantage of that demand gap, as it did in 2007 and 2008, if the carnage of the past nine months can be repaired quickly. Longer term, however, the U.S. will have to make a strategic decision on whether it wants to compete globally for these growing markets.

As the Bain authors see it, the U.S. industry has a range of options. It could become an insular industry, much like Canada. Or it could go the New Zealand route, which is almost exclusively export focused. Or it could maintain the status quo.

Simply doing nothing, however, doesn’t mean the industry won’t face change. Some of the major challenges:

  • Severe price volatility.
  • Market distorting pricing mechanisms, such as the dairy price support program.
  • Insufficient customer focus which leads to narrow product diversity, inconsistent customer service and variable product quality.

If the U.S. doesn’t change, it likely will give up potential export markets to emerging dairy powers such as the Ukraine and Brazil, both of which will become far more competitive as they develop their dairy infrastructure. The right kind of change could also allow U.S. companies to displace some of current U.S. imports, currently valued at $2.3 billion. “If U.S. suppliers improve capabilities to displace 70% of imported milk protein concentrates, 50% of imported casein and 10% of imported cheese, it will deliver about $600 million back to the U.S. industry,” concludes the study.

U.S. dairy producers may have little current interest in worrying about dairy export opportunities three and five and 10 years down the road. But the decisions made over the next few months, as the National Milk Producers Federation refines its strategic dairy policy objectives, are critical. In fact, what’s decided in the next six months could go a long way in trying to avoid the debacle of the last nine.

The Bain study was funded by the Innovation Center for U.S. Dairy, which is funded by the 32 companies within the U.S. Dairy Export Council (USDEC) and the National Milk Producers Federation. The study was assisted by staff from USDEC and Dairy Management, Inc., who manage a major portion of the dairy checkoff program.

 

Dairy Exports Start Slow Rebound

Oct 01, 2009

By Jim Dickrell

The financial crisis that gripped the global economy—and dairy exports—is slowly loosening its hold. It appears U.S. dairy exports bottomed in May and June, and are started their slow rebound in July.

“Milk powder sales in July were at their highest levels so far this year,” says Margaret Speich, VP of communications with the U.S. Dairy Export Council. “And cheese export volumes in July were at their highest level since October 2008.”

The bad news, of course, is that total volumes will be down this year following a record year in 2008. For the first seven months of 2009, total export tonnage was down 26%, and total value of export sales was down nearly by half.

In 2008, the United States exported 10.8% of its production on a milk solids basis. January through July exports totaled 8.5%, and the lowest they’ve been has been 8%. “We were expecting it to average 7.5% for 2009,” says Speich.  “So we’re above those expectations.”

Mexico, which is and has been our biggest customer, has remained so even through this downturn. Cheese volumes to Mexico are actually up this year, says Speich.

The other positive, at least through the price slump, is that the U.S. Dairy Export Incentive Program (DEIP) has been reactivated and has begun moving product. Because of the time lag needed for filling DEIP bids, some of the tonnage already approved won’t actually show up in export sales until this month or next.

China has also re-forecast its economic growth expectations for next year, now saying it expects its economy to grow 5% to 6% next year. While that’s about half the level of growth it has seen over the past few years, it is still better than earlier forecasts.

The two flies in the export ointment are credit issues and dairy inventories.

  • Buyers are still having trouble securing credit for purchases, though the weaker dollar will make U.S. products even more attractive as credit issues ease.
  •  Inventories of powder, butter and cheese—both in government warehouses and in private hands—have now returned to 2004 levels. “The European Union alone is sitting on one billion lb. of milk powder and butter,” says Speich. “Dairy buyers look at these inventory levels, and they’re not panicking or placing orders. World inventories will have to be depleted before they start placing new orders again.”

It’s anyone’s guess how long it will take all of us to collectively eat our way through these mountains of powder, butter and cheese. But it could take much of next year—if not even longer—to do so.

“By 2010, we should be in another demand-driven market,” says Speich. Let’s hope it doesn’t take that long.

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