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September 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.

Better Dairy Days Ahead

Sep 30, 2009

By Jim Dickrell

Dairy market analysts Scott Stewart and Mark Ludtke say better times are ahead for the dairy industry, with milk prices rising to $14.50 to $16.70 in the coming months. “Maybe even $17 to $18 isn’t out of the question, if only briefly,” says Stewart.

Both serve as market advisors with Stewart-Peterson, based in West Bend, Wis. They sat down with me yesterday morning as World Dairy Expo opened its first day of its 2009 run here in Madison.

The trick, they both say, is to not rush into pricing large volumes of your milk too soon.  “The big part of our job with our clients is to convince them not to price too much milk right now,” says Ludtke.

Both Stewart and Ludtke understand producers are under tremendous pressure to reach above break-even milk prices by their lenders, their spouses or just for their own peace of mind. But locking in too much too soon now as futures prices creep to $13 or $14 might give you 50¢/cwt margins when you might give up $2 or $3/cwt by waiting.

A 50¢/cwt margin might help current cash flow. But $2 or $3 margins will go much further in replenishing cash reserves and liquidity positions.

Stewart acknowledges there is always downside price risk. But given all the fundamentals—fewer cows, a recovering economy, a stronger stock market—the odds of milk prices dropping $2/cwt are probably only 20%. The odds for adding $3/cwt to current futures prices are probably 70% to 80%.

“Milk got beat up so badly when all the markets crashed last winter, it’s almost a market leader of commodity price movement as we recover from the recession,” says Stewart.

The other good news is that feed prices are also declining rapidly. “We see corn coming down below $3, and soybeans and soybean meal could come down even more,” says Stewart.

Feed prices will likely bottom once combines start rolling across the Midwest. “Once we get to $3 on corn, I’d look for a bottom and price most of my needs,” he says. “There isn’t a lot of downside risk at that point, but you could see a later rally to $4.80/cwt—just on the dead-cat bounce.”

The other key, say both analysts, is to put together a structured marketing program to guide your decision making. Don’t structure your marketing program based on what you think the market will do, but be prepared with strategies that help you reach your goals.

The more strategic you make your marketing, the less emotional it will be, they say.

Good advice any time. Critical advice now as you try to recover ground lost over the past eight months.

 

NMPF’s Dairy Policy Changes

Sep 29, 2009

By Jim Dickrell

The National Milk Producers Federation (NMPF) Strategic Planning Task Force announcement last week is welcome news.

At least now we have some idea of the direction of the plan, though the details are skimpy at best. But the kicker is this: No revisions to U.S. dairy policy will move forward without NMPF endorsement.

It’s not that NMPF can dictate to Congress what dairy policy should be. Rather, Congress is so sick of dealing with dairy issues over the past 20 years that it will simply not act unless an overwhelming majority of dairy producers support change. NMPF, and only NMPF, can bring that cohesion.

NMPF officials will be here at World Dairy Expo this week. The Dairy Today reporting team will press them hard for details on their plan. At this point, we can only speculate as to what those details will be.

  • Revamping the safety net of Dairy Price Support and the Milk Income Loss Contract programs. When the Reagan Administration ratcheted back the support program from $13.10 down to $9.90, it essentially backed down government support from 100% of the cost of production to 75%. Now, with cost of production at roughly $16, the $9.90 represents barely 60% of cost coverage. And with feed costs responsible for the biggest portion of costs, the $9.90 wasn’t evening covering feed if dry cow and replacement feed costs are included. That suggests the new price support floor should be set at about $12, especially in light of the fact that it is government ethanol policy that has driven up feed prices.

USDA says the MILC program will pump an additional $1 billion into dairy producer pockets through the 2008/2009 this fiscal year, which ends tomorrow. Since February, the MILC payment has averaged $1.66/cwt, with an average of 14¢ of that coming from the new feed adjustor. While producers often scoff at the feed adjustor given high feed prices, and sometimes at the MILC payment itself, I have not heard of any producer who has failed to cash their MILC checks this summer.

But MILC remains controversial, partly due to the 2,985,000 lb. payment cap. MILC is geared toward the smaller producer. Large producers, those with 1,500 cows or more, got one and their done MILC payment last spring. Is this fair?

The question is: Would producers be willing to give up MILC for a higher support price that would benefit all?

  • NMPF is also proposing a new dairy producer income insurance program. Livestock gross margin-dairy insurance already exists, but few use it because of its complexity. Penn State analysis shows it is a good deal, if it is used consistently. . Simplifying it, and perhaps offering some government help on premiums, might increase use.
     
  • Cooperatives Working Together has been a fairly popular program among participating producers, but NMPF recognizes the 30% free-rider program. And while CWT has removed 231,000 cows and bred heifers in 2009, total slaughter is up just 217,000 head. That suggests that herds that weren’t culled through CWT have actually reduced their voluntary culling. Hmmm.
     
  • NMPF’s final target of reform is the Federal Milk Marketing Order system. Of all the NMPF reform targets, this will be the toughest nut to crack. There has never been agreement, even within cooperative ranks, as to what changes are acceptable. Perhaps the dire economic crisis of the past seven months has sharpened thinking.

Specifically, NMPF proposes eliminating make allowances. While guaranteed make allowances are unpopular with some producers, dairy manufacturers will still need them to stay in business whether they’re implicitly calculated in the formulas or not.

The coming days will be interesting as NMPF releases details of its plan. As soon as we know, you’ll know.  
 

Why Dairy Needs to Export

Sep 28, 2009

By Jim Dickrell

There are those who want to close the borders to imports, forget exports and shut off immigration.

In last week’s September 2009 Outlook, Penn State economist Jim Dunn published a very simple chart, which can be found on page seven when you follow this link. If there was ever a more simple response to these arguments, I haven’t seen it.

Over the past 20 years, Dunn plotted U.S. population, U.S. cow numbers and milk per cow. The U.S. population has been has been growing about 1% per year over that time frame. Cow numbers have dropped from nearly 10 million cows in 1990 to about 9.2 million today. By sometime next year, we’ll dip below 9 million. But milk per cow has shot up from 14,800 lb. in 1990 to more than 20,000 lb. today, or roughly a 2% per year increase. That’s an astounding productivity gain, compounded year after year after year.

Per capita consumption, the amount of dairy products the average U.S. consumer consumes, bounces around. In the first part of the period beginning in 1990, it actually fell. More recently, it has increased slightly. But over the entire period, it has been essentially flat.

So the bottom line is this: “It is apparent that production per cow is growing faster than the population. As a result, …each year fewer cows would be needed to provide the milk than the domestic market would require,” writes Dunn. “It is the major reason that if the industry is going to maintain or grow, it must export milk.”

Others want to restrict imports, saying they’re unneeded, given the U.S. dairy producer’s capacity to make milk. But such restrictions will inevitably lead to other countries placing restrictions on importing from us.

Still others want the U.S. to institute a supply management program. But even here, annual productivity gains of 2% will mean fewer and fewer cows will be needed to fill the quotas each year. A study several years ago showed Canadian dairy farm numbers, even with quotas, declining at the same rate as U.S. dairy farm numbers. Go figure.

And some folks want to send all the illegal aliens back across our southern border. They blame this access to cheap labor to the rapid rise of large scale dairy farms. But ask any dairy producer who employs Hispanic labor, and he or she will tell you they are no cheaper than the home-grown variety—plus they have the uncanny ability to show up for work every day and complete their shifts. The problem with locally-grown labor, the Great Recession not withstanding, is that few want to spend eight hours standing in a milking parlor or riding on a skid steer pushing manure.

As the industry works its way through the current price crisis (and if you read the first part of Dunn’s report, things are improving), we need to keep the above points in mind:
Per cow productivity will continue to improve. Restricting imports creates more problems than it solves. And participation in the global economy is essential to the future vitality of the industry.
 

—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.

 

Lower Cell Counts to 400,000

Sep 15, 2009

By Jim Dickrell

It’s amazing what economic pressure can do. The Wisconsin Farm Bureau recently proposed that the Federal limit for somatic cell counts be lowered to 400,000 cells/ml.

Its reasoning: Increasing the milk quality standard would immediately remove unneeded and unwanted milk from the market.

There are, of course, numerous other benefits. Uninfected cows would be less likely to become infected when high cell count cows are culled, usually those with Staph. aureus or Strep. ag. Fluid milk on store shelves and in consumers’ refrigerators would last longer. Cheese makers would see higher yields in their cheese vats.

In fact, everybody wins. All of these benefits make sense any time. They always have. But maybe this time, economics will be the driving force.

The National Mastitis Council (NMC) has been trying for years to bring the U.S. somatic cell count standard up to global standards. In fact, it was 10 years ago when NMC proposed lowering the SCC maximum to 400,000. The group tried again in 2001, and again in 2003. It failed each time, blocked by the National Milk Producers Federation. NMPF argued that lowering the current standard was a quality issue, not a safety issue.

And since the Pasteurized Milk Ordinance is all about food safety (and whether milk house screen doors swing in or out), the 750,000 level was just fine, thank you very much.

Other opponents argued dairy producers needed time to adjust. So the 2003 NMC  proposal did just that. It proposed ratcheting down the 750,000 limit in increments until the 400,000 level was reached in 2011. Had the proposal passed, we’d be well on our way to the 400,000 limit. But no dice.

The unspoken argument, once you got by the food safety smoke screen, has always been that some producers, notably those in the Southeast, simply can’t meet the 400,000 standard. But even that’s been disproven. In fact, several dairy farmer groups in Virginia, North Carolina and Florida have been formed on the premise that they will not market milk above 300,000 SCC (See my story on Cobblestone Milk back in April).

The good news is that somatic cell counts are coming down across the country, according to Federal Milk Market Order data. The latest DHI numbers also show a national average of 262,000 for 2008. The problem, of course, is that 22% of DHI test days still exceed 400,000. And it’s this milk that the Wisconsin Farm Bureau policy would target.

Lowering the somatic cell count limit reduces risk of new infections in herds because it reduces the number of infected cows in the herd. It improves fluid milk acceptability and cheese yields. And doing so now would eliminate milk that is not needed and is certainly not wanted. Why has it taken so long?
 

—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.

 

Will MILC Payments Go to Zero?

Sep 01, 2009

By Jim Dickrell

Oct. 1 marks the beginning of the 2009/2010 fiscal year for USDA programs, including the Milk Income Loss Contract (MILC) program.

So if you want to continue to receive MILC payments in October (or if you milk more than 150 cows and want to start whittling away at your 2009/2010 production cap), you need to visit your friendly Farm Service Agency office by Sept. 14. That’s the deadline to re-qualify for October payments.  

How much is at stake is an open question. Projections by Cornell University economists, based on current futures prices for milk, corn and soybeans, show MILC payments plummeting from $1.24/cwt in September to 32¢/cwt in October and to virtually nothing by January.

If true, that’s actually very good news because it means cheese and powder prices, and therefore Class I prices in Boston, will rise above the magic $16.94 threshold (plus minor adjustments for feed prices) that trigger MILC payments.

USDA projects it will have pumped more than $1 billion in MILC payments into the U.S. dairy economy since February. During that time, MILC payments added about 15% to the all-milk price between February and July for producers with less than 150 cows.  

One of the questions I have is how much USDA’s temporary increase in support prices in August, September and October will have on cheese and powder prices, and in turn, on MILC payments. At first glance, you’d think it would be significant.

Jim Dunn, an ag economist with Penn State, says the change in support prices was equivalent to raising Class III prices from $9.40/cwt to $11.14, and Class IV prices from $9.35/cwt to $10.38. Since Class I prices are driven by the “higher of” Class III or IV, you would think Class I prices should shoot up significantly based on those higher Class III prices. 

But based on Cornell’s projections off futures prices, the MILC payment takes a major hit in October, down to 32¢/cwt, or 92¢ less than its projection for September MILC.

So are higher, temporary support prices to “blame” for the lower MILC payments? And why do the projections have them continue to decline into January, when the support prices will revert to July levels November 1. 

Bob Cropp, dairy economist emeritus with the University of Wisconsin, says support prices have little to do with this fall’s falling MILC payments. “Market forces have increased cheese prices more than support prices,” he says. “Any effect support prices have had on MILC payments is rather small, maybe a dime, but certainly not 50¢.

“And with all the financial stress on dairy farms and cow numbers coming down, I really don’t see the Class I mover coming back down below $11.50,” he says. 

Post-harvest feed price projections are also much lower, says Cornell economist Mark Stephenson. So the feed price adjustor used in the MILC calculation drops to nearly zero, and the only hurdle the Boston Class I price must clear is $16.94 later this year. With a $3.25/cwt location adjustment in Boston, the Class I mover only needs to reach $13.69 for MILC payments to zero out.     

So should you visit your friendly Farm Service Agency clerk in the next 10 working days and sign up for MILC? If you produce less than 3 million lb. of milk annually, the answer is a definitive “yes” since you’ll qualify for all 12 months of next year’s program, regardless of payment rate.

If you milk more than 150 cows, the odds are pretty good that your highest payments will come in October, November and December, according to the Cornell projections. Get your government payments while you can. 

—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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