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November 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.

World Dairy Markets in Recovery

Nov 24, 2009

By Jim Dickrell

If there was a clear consensus in last week’s global conference call hosted by the U.S. Dairy Export Council (USDEC) and Dairy Foods magazine, it was that world dairy markets are beginning to rebound.

And world dairy markets—and prices—are increasingly important to U.S. dairy farmers. Exports sales of U.S. production accounted for some 11% of U.S. milk production on a solids basis in 2008. When high world prices and the global recession hit at the end of last year, U.S. dairy exports fell 30% to 50%, depending on product. And that extra 7 billion lb. of unused milk then started backing up in U.S. warehouses with nowhere to go. The result: $10 milk—or worse—in states and regions dependant on manufactured dairy products.

The very good news is that world dairy prices have shot up from 50% to 100% since July 1: cheddar cheese prices are up 50%; powder prices are up 70%; whey proteins are up 90% and butter prices have doubled.

“We’ve seen a strong recovery in prices the last two months,” says Mark Voorbergen with Rabobank International. Asia has been buying and the European Union has intervened to prop up prices. And the weakness of the dollar has actually--helped. “Countries can afford to pay more for dairy products because they’re priced in dollars,” he says.

China has been a big driver, increasing its imports from 400,000 metric tons of dairy products in 2008 to roughly 775,000 metric tons this year. While most of those increased sales have gone to New Zealand, they have sopped up a good share of New Zealand’s drought rebounding production over last year. One can only image what would have happened to world markets if China was not in a buying mood.

The weak farm gate prices this year are also starting to be reflected in lower milk production world wide. Europe’s milk production will likely be flat going into 2010, with France, Germany and the United Kingdom cutting back on the heels of 25% lower milk prices. The United States is projected to be down another 2% in cow numbers next year and at least one percent in milk production. Australia is projected to dip another 4% in production. Only New Zealand will be up—and that increase will be eclipsed by the shortfalls in Australia, Europe and the United States, says Barry Wilson, editor and publisher of Europe’s Dairy Industry Newsletter.

Global demand for dairy products is still a bit of a wild card in 2010. Europe is sitting on some 800,000 metric tons of dairy products it removed from the market this past summer to bolster prices. U.S. Commodity Credit Corporation stocks removed through the dairy price support program—some 100,000 metric tons—will go to feeding program and therefore will be (somewhat) isolated from the market. But those European stocks could be drag next spring—if they’re released just as the European spring milk flush hits.

Much will also depend on how rapidly economies around the world recover from the global recession. The strength—or weakness—of the dollar will also play a role. The weaker the dollar, the more affordable dairy products become globally.

And a weaker dollar, for better or worse, will also mean higher oil prices which will mean higher revenues going to oil producers in the Middle East and Mexico. More oil money in their pockets typically means more dairy products in their refrigerators—whether it comes from New Zealand, Europe or the United States.

Longer term, Wilson and Voorbergen agree that the United States could become not only a residual supplier, but a key player, in world markets.

“While the U.S. is keen to get into world markets, the European Union is keen to get out,” says Wilson. European dairy farmers will be content to supply their 600 million consumers within the European Union where they know the markets, have products developed for those markets and don’t have to deal with currency fluctuations because most EU countries use the Euro.

The only one left to pick up the slack is the United States. “The U.S. is an area of growth in milk supply, and has been for the past 30 years,” he says. “I’m just amazed that U.S. farmers have been able to keep producing milk at current prices.”

That can-do resiliency—in good times and bad—should prove a strength as global economies recover and demand for dairy products outstrips supply. “This is a great opportunity for the U.S. to play a more structured role in exports,” says Voorbergen.   

—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.

 

Organic Dairy’s Dilemma

Nov 12, 2009

By Jim Dickrell

A study of organic dairies, released last week by USDA’s Economic Research Service, shows that organic dairy producers face some of the very same dilemmas as conventional producers.

If they wish to remain small, organic producers must rely on unpaid family labor to keep the operation cash flowing. But if they want to capture economies of scale and reach any reasonable level of profitability, they have to invest heavily in capital and paid labor to milk and house hundreds of cows. Sound familiar?

And they have further burdens. After years of growing markets, organic milk sales stopped dead in their tracks last winter when the full brunt of the nastiest recession since the Great Depression gripped the nation.

According to USDA estimates of whole and reduced-fat organic milk volume, sales fell 27% in January and 12% in February compared to year-earlier sales. April was down 6%, May -8%. Through August, organic sales for these two categories are down some 70 million lb., or -6.4% compared to last year. 

Sales of all categories of conventional fluid milk, however, are up 475 million lb, or 1.4%. Not only has conventional milk grabbed back market share, it has expanded sales as cheaper fluid prices have enticed shoppers back to the dairy case.

And then there’s the cost of organic production. The ERS study is based on data collected in 2005 from 352 organic dairy farms in 14 states. Even then, operating costs for organic dairies with fewer than 50 cows was $17.65/cwt and $18.25 for organic herds with 50 to 99 cows. But total economic costs for these herds were $38.50 and $33.36, reflecting huge inputs of unpaid family labor.

Large organic dairies, those with more than 200 cows, had operating costs of $19.66/cwt and total costs of $24.84. Their operating costs were higher than the small herds because they were too large to rely solely on family labor and actually had to pay for hired labor. But economies of scale brought their total costs down to levels that were nearly competitive with conventional dairies.

Organic producers enjoyed substantially higher prices in 2005 than the U.S. all-milk price of $15.15/cwt. USDA calculated the gross value of organic milk that year to be about $25/cwt for herds with fewer than 100 cows and about $23.50 for herds with more than 200. The reason for the disparity is that most of the small herds are located in the Northeast and Midwest, where milk prices—even organic milk prices—tend to be higher. The larger herds in the USDA study were in the West—where prices are lower. Sound familiar?

The kicker to all of this is that the very smallest herds still had losses of nearly $13/cwt when all costs were included. Herds with 50 to 99 cows were losing $8.50/cwt, and the larger herds, because of their lower milk prices, were losing $1.25/cwt.

As we recover from the Great Recession, it will be interesting to see what happens to organic milk sales. The huge jumps in growth that were common over the past few years might be a thing of the past. Already, some organic processors have notified their farmers they would not be renewing contacts for 2010.

And that leaves the organic industry in a quandary. To be profitable, herds must grow. To be the most profitable, they must grow a lot. But if sales and market growth aren’t forth coming to support that expansion, organic farms will have to start cannibalizing their organic neighbors as they claw their way to black ink. Sound familiar?

—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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