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October 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.

Dairy Prices on Knifeā€™s Edge

Oct 25, 2010

As U.S. producers continue to push more milk out the milk house door to maximize cash flow and recover equity, they’ll need every bit of their domestic and export markets to move product and floor prices.

 

The news the last few weeks hasn’t been great for milk prices, and cheese markets have been reflective of that skittishness.

Last week’s September milk production report didn’t help matters. September milk production was up a whopping 3.3% nationally (3.6% in the 23 major dairy states). And despite all the Cooperatives Working Together (CWT) efforts to send 34,000 cows to their maker years ahead of their time in August and September, U.S. cow numbers trail year-earlier levels by just 4,000 head and month-earlier numbers by just 2,000.
 
As troubling as all that is, the welcomed (and needed) higher milk prices this summer have also pushed retail prices up as well. Even though the Great Recession is over, Federal Reserve Chairman Ben Bernanke forgot to memo consumers: August fluid milk sales declined 2.3% with year-to-date fluid sales down 1.5%. Although fluid milk sales represent just 27.6% of total milk production, a decline of 1.5% means a loss of market for 800 million pounds of milk. That’s employment for 40,000 cows—or roughly 18% more cows than were taken out in the latest CWT round.
 
Then, if we needed more bad news, USDA estimates U.S. corn yields will decline 6.7 bu./acre this year, a 4% total yield reduction from previous estimates. This is still the third largest corn crop ever. But EPA’s recent announcement to allow 15% ethanol in gasoline for 2007 and later model cars sent Chicago corn trades limit up two days in a row. The end result: Corn prices are in the high $5 range, and toying with $6.
 
Yes, eventually, high feed prices will make higher milk prices. But as Robin Schmahl pointed out in his column last week, the correlation isn’t 1:1 nor is it immediate. The only reason higher corn prices mean higher milk prices is that higher feed costs will drive some cows into early unemployment. But as we learned in the debacle that was 2009, that can take a while.
 
So is there any reason to hope 2011 will be better? Actually, there is. Alan Levitt, our Market Watch Diary editor, says U.S. dairy exports have rebounded incredibly from 2009. He’ll lay out the numbers more completely in his November column, which mails Nov. 3. But here’s the CliffsNotes’ version:
 
In 2008, U.S. exports were roughly 11% of total milk production on a solids’ basis. In early 2009, exports crashed to almost half their volume, but still finished the year at 9.3% of total production. This year, through August, our exports are up about 40% and now account for an astounding 12.2% of total production.
 
“In other words, we’ve found a home for about 3% of our milk supply that we didn’t have last year. That’s critical in a year when milk production has been up 2.8% since June,” writes Levitt.
“Three percent of our milk supply is 5 to 6 billion pounds of new or renewed market that won’t be hanging over the domestic market.”
 
Yes, the dollar is weaker, off 9% compared to the euro since Labor Day. But the U.S. Dairy Export Council reports solid demand for dairy products in developing nations. The Kiwis are focused on exporting whole milk powder to China, which means they don’t have a whole bunch of other products to sell to other buyers. Since January, their skim milk powder production is off 14%, butterfat -17%, cheese -4%, and whey down a whopping 48%. That means more opportunity for us.
 
U.S. marketers are also getting more export savvy. One large U.S. cheese processor tells me it is finding sustainable, on-going demand for its barrel cheese. Not low-value powder but cheese, and in a barrel. It had to do some re-tooling to get it done, but now that it has, it has a steady Asian buyer.
 
(Note: Conventional U.S. barrels don’t pack neatly into ocean-going containers. As a result, there is wasted head room in the containers, making it more expensive to ship. By re-sizing the barrels, the containers can now be fully loaded. The Asian buyer was also used to buying block cheese. But that’s more expensive and more difficult to handle. So the American manufacturer worked with the buyer to retool his factory to handle the new barrels. It was a win-win for everyone.)
 
The message here is the U.S. is becoming dairy export competitive. As U.S. producers continue to push more milk out the milk house door to maximize cash flow and recover equity, they’ll need every bit of these markets to move product and floor prices. Without them, it’s 2009all over again.

Lame-Duck Immigration Reform

Oct 11, 2010

If immigration reform isn't addressed now, dairy farms will live under threat for years to come. The dairy sector needs to remind the politicians it has supported this year how crucial AgJobs is to its stability.

 

What a way to run a country. Last week’s Immigration and Customs Enforcement (ICE) raid of a progressive, 2,500-cow Michigan Dairy farm puts an exclamation point on the need that immigration reform must be done now. If it isn’t, dairy farms will live under threat for years to come.

If Republicans gain control of Congress in 2011, comprehensive immigration reform is dead. Cong. Lamar Smith, R-Texas, will then chair the House Judiciary Committee, and all immigration legislation will have to pass under his gavel. “Smith and their ilk leave no room for compromise,” says Craig Regelbrugge, co-chairman of the Ag Coalition for Immigration Reform. “Their stance is simple: ‘Raise wages, hire Americans, mechanize, or go out of business.’”
 
That formula doesn’t work. Example: A dairy in South Dakota, just a few miles east of one of the state’s larger cities, advertised for a machinery maintenance worker last month. No milking involved. Regular hours. Wages well above minimum. Benefits included. The ad ran for several weeks, but not a single call. In a recession. In South Dakota.
 
Time and again, immigrant labor is the only willing labor available to dairy producers. The good news is that there’s a chance, ever so slight, that a lame-duck Congress could enact some positive immigration reform. It won’t be comprehensive reform, but AgJobs does have tiny window of opportunity to sneak through the political morass.
 
If the Republicans gain control of the House of Representatives with the Nov. 2 election, “retiring” Democrats—both those who decided not to run and those who lost their seats—might just decide to do the right thing. There are a number of out-going Democrats who have supported AgJobs in the past, and they know this is their last—and only—chance. Incoming Republicans, particularly those from rural areas who will replace the retirees, also would like to do something for their constituents but still don’t want to deal with comprehensive immigration reform. So they might signal to their leadership to go ahead and pass it. 
 
Experienced lobbyists say lame-duck congressional sessions rarely gush as much new legislation as you might expect. The conventional wisdom is that out-going legislators want to pass as many bills as they can while they still have the majority. The contrary usually prevails. “Ousted politicians are usually in no mood to support leadership who led them over a cliff,” one lobbyist told me.
 
Some argue that Sen. Leahy’s, D-Vt., H2A proposal might be politically more palatable. It’s more of a “technical fix,” allowing dairy milkers to be included under the seasonal worker provision of the H2A regulation. Technical fixes to regulations are usually far easier to pass than broader changes. There’s only one problem with Leahy’s proposal: It deals with future workers and does nothing for immigrant workers currently here. 
 
Sen. Saxby Chambliss, R-Ga., has also introduced his own H2A bill, which would give dairy workers access to protection. But it apparently is so employer friendly, it is being vilified by labor groups and stands little chance of passage.
 
So that brings us back to AgJobs and our lame-duck Congress. Regelbrugge acknowledges AgJobs won’t be easy to push through. Dairy groups and individual dairy producers need to remind the politicians they have supported this year—both Democrat and Republican—how crucial AgJobs is to the stability of the dairy sector.
 
In this election cycle, dairy co-ops and processors have contributed nearly $3 million (so far) to Congressional campaigns, with about half going to each party. It is fair to remind both Republicans and Democrats of that fact, and to make one last request to support AgJobs prior to the seating of the new Congress.
 
On immigration reform, producers and processors will agree: Jailing dairy farm owners and deporting willing workers is a stupid way to run a country.

Supply Management Programs Leave Sour Taste

Oct 04, 2010

“Supply management schemes are very sweet at the beginning, but taste more and more bitter with each passing year and end up as poison when they are dissolved.”

That provocative statement comes not from a free-market Kiwi, but from Torsten Hemme, an economist and chairman of the International Farm Comparison Network (IFCN) based in Kiel, Germany. He made the comment—and an hour’s worth more—last Friday at one of World Dairy Expo’s Education Seminars.

IFCN is a dairy analysis group covering 86 countries, 95% of the world’s milk production and funded by some 70 companies, including milk processors, dairy equipment manufacturers, feed suppliers, animal health companies and other dairy related businesses.

Hemme’s point is simply this: Quota systems are very easy to establish but very difficult to abolish. And once in place, the higher milk prices they offer are quickly capitalized into quota value or other dairy assets, be they cattle, facilities or land. For example, in Germany, the value of quota is 1.5 times the milk price. In the Netherlands, it is three to four times. And in Canada, it is seven times.

Another way of looking at it: The total asset value on a Canadian farm is about $170 per pound of milk produced. But quota value makes up $113 of that, or two thirds of the value. Still another way of looking at it is milk price net quota value. In Canada, that figure is about $11/cwt. In the U.S., which currently doesn’t have quota, the figure is $18.

Once you abolish quotas, the remaining assets in a dairy farm also lose value and often are not large enough to cover the equity embedded in the quota. Unless the farm is completely debt free, lenders become nervous that the remaining equity is not large enough to support the farm’s debt. “When I came here, I was really surprised by your discussions in the United States of going to supply management,” says Hemme.

Analysis done by IFCN shows that U.S. cost of production falls in the mid range of countries world wide. Canada and the Nordic have the highest costs; Argentina, Belarus and the Ukraine the lowest.

While U.S. cost of production hovers at about $16/cwt, the next tier of competitors such as Australia, New Zealand and Venezuela average about 20% less. But these countries have less ability to expand production without increasing their costs of production.

In addition, the U.S. milk-feed ratio, which traditionally hovers around 3.2 and collapsed to 1.5 in 2009 and 2010, is still higher than New Zealand’s 1.2 ratio. That suggests the U.S. is still in a competitive position to expand production if world demand calls for it. Note: Between 1996 and 2009, the average growth in annual milk consumption and production was 12 million metric tons, more than the average milk production volume of Australia.

Hemme also notes that volatility is not only a U.S. or European problem. It affects every country. “We do not live life on an island any longer. We are all connected. When something happens in Russia or China, it affects us all,” says Hemme.

He suggests a global dairy stock buffer program (where not only governments but perhaps dairy companies contribute to support it) needs to be considered. After all, one in eight people on the globe live on dairy farms. That’s a huge number of dairy families depending on an increasingly volatile market. It is something to think about.

 

 

Dairy Exports Rebound

Oct 01, 2010

With relentless growth in milk production this year and lackluster consumer spending, dairy producers should be thankful for robustly rebounding export markets.

In 2009, it was the loss of those markets that was much to blame for the price collapse. This year, the rebound in foreign sales is responsible for tightening the U.S. market and powering prices upward. U.S. dairy exports were at record volumes in the second quarter of 2010, up 58% by volume over year earlier. And year-to-date, the U.S. has exported 12% of its milk solids, which is up by a third over 2009 and about 8% over 2008. That’s according to data collated by Alan Levitt, an analyst who works with the U.S. Dairy Export Council and authors Dairy Today’s Market Watch Diary column.

The increased exports mean that powder sales to the government are down 162 million lb. January through June. And that’s a good thing, because USDA’s Commodity Credit Corporation pays only 80¢/lb for powder. In contrast, the world market is averaged of $1.17 /lb during the first half of 2010, a 38¢ swing. When pushed through the Class IV formula, every penny increase in powder prices represents about an 8.6¢ increase in the Class 11/IV price. And since the Class IV is now higher than Class III, it becomes the driver for not only powder and butter but fluid milk prices as well.

The news is much the same for other dairy commodities for the first half of 2010:

• Cheese imports are down 51 million pounds while exports are up 81 million pounds.
• Butter imports are down 8 million pounds while exports are up 48 million pounds.
• Whey imports are down 9 million pounds while exports are up 79 million pounds.

The good news is that the trend lines are all positive. But there are also two warnings to be heeded as well: 1) U.S. dairy producers are no longer insulated from global market realities. 2) We can’t assume that what we’re currently doing will automatically guarantee increasing market share moving forward.

To that end, the Innovation Center for U.S. Dairy Globalization Operating Committee has developed individual work teams to address seven key areas to maintain and accelerate U.S. export potential. These range from pricing reform (eliminating U.S. dairy price supports) to pursuing trade agreements to managing price volatility throughout the supply chain.

The European Union and New Zealand also have not been idle. The Europeans have finalized a free trade agreement with Korea (though it likely won’t be implemented until 2011); the Kiwis with China. These deals can put U.S. exporters at a disadvantage. “By not being active in pursuing trade agreements, we’re actually losing ground,” says Jaime Castaneda, National Milk Producer Federation Senior VP of Strategic Initiatives and Trade Policy.

Whether U.S. dairy producers like it or not or believe it or not, their future is tied to global markets. What policies we enact and pursue in the next 12 to 24 months will be critical. Doing nothing is no longer an option; creating obstacles to trade is even worse.

 

 

 

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