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July 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 Doldrums Likely To Continue

Jul 29, 2010

When the Great Recession steamrolled over dairy country in January 2009, everyone braced for ugly times. With milk prices not even covering feed costs, you knew it was going to be bloody.

 

But the conventional wisdom, and I include myself as a conventional thinker, was that the blood bath was going to be so severe that it would be short-lived. The hope was that prices would start rebounding by early summer, autumn at the latest.

 

Economist Mark Stephenson, then with Cornell, now in Wisconsin, told me recovery would be much longer in coming. If lenders were going to foreclose, it would take a year or more for them to document non-performing loans and process foreclosure proceedings. He was right. In fact, there have been very few forced sales with the industry now entering the 20th month of dairy recession.

 

Last week, I had the opportunity to sit down with Jim Kielkopf, chief economist with AgriBank, based in St. Paul, Minn. He also was not the bearer of good news.

 

While the U.S. economy is in recovery, it’s been a slow, U-shaped recovery. Yes, gross domestic product, industrial production and personal income have all rebounded from the depths of the Great Recession in 2009. But unemployment figures continue to lag, which puts a drag on consumer spending. According to Global Insight, a global financial forecasting firm, rates of unemployment will remain high (above 6%) for another two or three years, perhaps even longer.

 

“High unemployment, nationally and internationally, means lower incomes and lower demand for meat, dairy, corn and soybeans,” says Kielkopf. “So producers can expect low margins for the next two or three years, and at least through 2011.

 

“Dairy herd reductions over the last year and a half did not affect milk production,” Kielkopf adds. “So there’s not a very positive outlook for growth, and dairy will still be the one sector with problems.”

 

Also last week, the July consumer confidence index (CCI) was released—showing the lowest level since February at 51.0. A CCI of 90 or above indicates a healthy economy, and we haven’t seen that since December 2007 when the Great Recession officially began.

 

For dairy to recover more quickly, highly leveraged, poorly capitalized large dairies will have to liquidate, says Kielkopf. But he also acknowledges lenders have been reluctant to pull the plug on problem loans because many of these are underwater—they owe more than they’re worth. Plus, if a facility sells for a low price, it can devalue the lender’s entire dairy portfolio.

 

There are, however, a few bright spots in all of this gloom. First, inflation remains in check. Global Insight projects inflation will hover around 2% out through 2015. That suggests interest rates will also remain fairly reasonable—at least short term.

 

Also, imports of dairy have plummeted. Alan Levitt, our Market Watch Diary editor, says import volumes were down 20% from 2005 through 2009. They dropped another 20% this year.

 

Through the first five months of 2010, cheese imports are almost half of what they were in 2004. (Milk protein concentrate imports dropped 18% last year, and were at their lowest level since 2004.) In fact, net cheese exports averaged 2.8 million lb. per week in April and May of this year. That’s in contrast to the 4.5 million lb. per week of net cheese imports the previous six years.

 

And little of this change reflects Cooperatives Working Together export assistance, which went back into action in March. With bids OK’d thus far, CWT will export 38 million pounds of cheese—or another 1.5 million pounds per week—through year end.

 

In addition, commercial disappearance of dairy products is regaining its footing. It was up 3.3% March through May, driven in part by rebounding exports. Butterfat exports surged three-fold; non-fat dry milk and skim milk powder exports were up 72%.

 

So there is hope on the horizon. But when exactly the bright new dawn will emerge is anyone’s guess. In the meantime, risk management for both inputs and milk price is absolutely key. “Farms who do that can still be profitable,” Kielkopf says.

Contact Jim Dickrell at jdickrell@farmjournal.com.

The EU’s Fuzzy Somatic Cell Count Deadline

Jul 19, 2010

By Jim Dickrell. Dairy Today editor

 

Last week, the European Union (EU) issued an Export Certificate requiring dairy products entering EU countries be made from milk with less than 400,000 cells/ml from individual dairy farms. The “effective” date on the certificate is Dec. 1, 2010.

 

However, U.S. exporters will not be held to that Dec. 1 deadline, says Jaime Castaneda, VP of Strategic Initiatives and Trade Policy for the National Milk Producers Federation. What is firm is the 400,000 cells/ml standard, which EU farmers are asked to meet. But exactly how those cell count averages are determined remains unknown and needs to be worked out, he says.

 

FDA and the EU will exchange letters on how FDA plans to respond to the requirement. Castaneda also expects the FDA program to go through an expedited federal rulemaking process, which will require publication in the Federal Register and a public comment period. Such a process could easily push the deadline into 2011.

 

Processors are taking deep sighs of relief, knowing they won’t have to start enforcing the rule in heat of summer. But like all extended deadlines—and this one is fuzzier than most—the danger now comes from a sense of let’s-deal-with-this-later complacency.

 

What boggles the mind is that getting cell counts below 400,000 is in the interest of the cow, the producer, the industry and the paying consumer.

 

One angry, unsigned letter-writer told me to shove the 400,000 SCC limit where the sun doesn’t shine because his milk “goes into the bottle”  and is not exported. But why would you put this crappy milk in the bottle with its lousy taste and poor shelf life? And unless this guy is producing milk with little or no butterfat, some of the cream is being skimmed off and used in other products—which very well could end up in export. That’s why everyone will be required to meet the new standard.

 

NMC (formerly known as the National Mastitis Council) published a paper on abnormal milk back in 2001: “Bulk tank milk with 400,000 cells/ml indicates that 12.5% of the quarters in the herd are infected and producing abnormal milk. At 750,000 cells/ml, approximately 25% of the mammary quarters are infected and producing abnormal milk.”

 

Then there’s milk loss. Research clearly shows that at 400,000 SCC, a heifer loses 2 lb./day, or 400 lb. per lactation. A mature cow loses 4 lb./day, or 800 lb. per lactation. Even at $12.50/cwt., that’s a $50 to $100/animal annual revenue loss. 

 

Earl Aalseth, a veterinarian from Lake Stevens, Wash., says the losses from high cell counts are far greater when you account for lost milk production, milk loss from treated cows, treatment costs, quality bonus losses and lower pregnancy rates. (Click on the spreadsheet in the left column of Earl’s story to estimate your losses.)

 

Culling high cell count cows, even those producing more than 100 lb./day, sometimes makes sense. Ed Kreykes, a Sanborn, Iowa veterinarian and a team of nutritionists evaluated a 1,500-cow Midwest herd that was averaging more than 90 lb. of milk/cow/day. There were several older cows in the herd producing well over 100 lb./cow/day but which also had extremely high cell counts. In fact, two of these cows were each contributing 3% of the herd’s total bulk tank SCC.

 

Culling the top six SCC cows from the herd would mean a loss of 600+ lb. of milk/day from the bulk tank. But by doing so, the dairy’s quality premium would jump 16¢/cwt. on all milk shipped. Based on the herd’s annual milk shipments, the impact could net more than $30,000 annually. Culling these cows would also save some 60 tons of dry matter feed annually. At today’s feed prices, that could save another $8,000 annually.

 

So the bottom line message is this: Eventually, whether it’s Dec. 1 or sometime in 2011, the defacto U.S. SCC limit will become 400,000. If your herd is over 400,000 SCC today, why wait?

 

Dairy Consolidation and Monopoly Money

Jul 02, 2010

By Jim Dickrell, Dairy Today editor

 

The USDA/Department of Justice hearing on market concentration and consolidation June 25 attracted Wisconsin politicians to the University of Wisconsin’s Union Theater stage like moths to a porch light. Unlike so many such politics-for-the-six-o’clock-news events, however, Wisconsin’s Senators (both Democrats) were asking the pertinent questions.

 

Sen. Russ Feingold: “When dairy farmers were losing $100 per cow per month in 2009, when there was no change in retail prices and when processors were posting record profits, you have to ask: ‘Where is the money going?’”

 

Sen. Herb Kohl: “I’m worried about consolidation in agriculture. Is competition healthy enough to protect farmers, and if not, what do we do about it?”

 

Fluid markets are of particular concern—primarily in the Northeast and Mid-South—where just a handful of co-ops and processors often compete for milk. But the recent purchase of two bottling plants by Dean Foods in Wisconsin also was front and center at the Madison hearing.

 

Economists use the Herfindahl-Hirschman Index (HHI) to measure market concentration. An HHI below 1,000 is viewed as very low concentration; anything above 1,800 is very concentrated.  In 1987, the HHI index for national fluid milk was 195. In 2002, it had climbed to 1,060.

 

“It went from being extremely low to moderately concentrated in just six years,” says Brian Gould, a University of Wisconsin dairy economist.

 

What really matters, though, is competitiveness in local markets. In Wisconsin, Foremost Farms USA recently sold two fluid bottling plants to Dean Foods. Here, in the already highly concentrated Green Bay market, the HHI went from 3,049 prior to the sale to 4,777 after. In the Upper Peninsula of Michigan, HHI went off the charts, exceeding 7,500.

 

So why aren’t co-ops doing a better job of protecting farmer interests? The quick answer is that even though the likes of Dairy Farmers of America and Land O’Lakes are now national, mega-cooperatives, they’re still bait fish in a pond teaming with 60” muskies. The total revenue of all dairy co-ops is less than $40 billion.

 

“Any co-op alone doesn’t have the market power to affect prices,” says Bob Cropp, an ag economist with the University of Wisconsin.

 

Compare that to Wal-Mart with 2009 sales topping $400 billion, half of which comes from grocery sales. The market power and retail demands of the big-box retailers are driving consolidation lower down the food chain. Not only do firms want a dairy supplier to fill all their fluid needs for all of their stores, they want that supplier to provide every product in the dairy case—cheese, butter, blends, yogurt, you-name-it, they want it. Smaller, regional co-ops simply don’t have the scale and range of product mix to meet that need.

 

The Capper-Volstead Act allows co-ops to come together to bargain for higher prices. These marketing-agencies-in-common were alive, if not totally well, in 2009. Mailbox prices averaged 38¢/cwt. higher than Federal Order minimums prices last year. In the Midwest, those premiums brought $1.25/cwt.; in New England, 60¢/cwt. more. Florida and West Texas were the only areas where mailbox prices were actually lower than federal minimums.

 

So the next argument is that Federal Order minimums, which are based on formulas largely driven by prices on the Chicago Mercantile Exchange (CME), are too low. And the reason they’re too low, the argument goes, is that there is collusion at the CME to keep them low.

 

There is no question that the CME is thinly traded. Between Jan. 1, 1999 and Feb. 2, 2007, the two largest buyers of block cheddar made 74% of the purchases on the CME.

 

“This is a thinly traded market and this concerns me,” says Stephen Obie, acting director of the Division of Enforcement for the U.S. Commodity Futures Trading Commission. “It only takes a little bit of nefarious conduct for manipulation to occur.” 

 

But even though there were 44 reports of possible collusion and nine special reviews done in response to specific complaints in recent years, no civil or criminal charges were ever made.

 

There are efforts to come up with a new price discovery system that is both more timely and reflective of market conditions. The first is the National Milk Producer Federation’s Foundation for the Future idea to survey cheese prices paid by proprietary firms. The second is a revamped and vastly expanded version of the old Minnesota-Wisconsin price series, this time surveying prices paid on about 50% of U.S. milk production. Whether either approach results in higher milk prices remains to be seen.

 

“What’s creating the real challenge is the pie isn’t getting any bigger,” says Calvin Covington, former CEO of Southeast Milk. “We’re basically selling the same amount of fluid milk as we were in the 1970s.”

 

So that brings me full circle to Sen. Kohl’s question: “Is competition healthy enough to protect farmers, and if not, what do we do about it?”

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