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October 2013 Archive for Dairy Talk

RSS By: Jim Dickrell, Dairy Today

Jim Dickrell is the editor of Dairy Today and is based in Monticello, Minn.

Trans-Pacific Partnership Nears Completion—and That’s a Good Thing

Oct 18, 2013

This agreement could be as significant to U.S. dairy trade prospects as NAFTA was 20 years ago, cementing our presence in world markets for decades to come.

Trade negotiators are in the final stages of completing the Trans-Pacific Partnership, with final agreement expected in 2014. They’ve been at it since 2005.

That doesn’t mean the U.S. will start shipping ice cream and yogurt to grocery stores in Toronto or Tokyo any time soon, however. There is the matter of congressional approval—which in itself can take years—and a phase-in period that could take a decade or more for specific products.

Nevertheless, getting trade negotiators to sign off on the agreement is a very important step. It sets the wheels in motion for country-by-country approval. Those involved include Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the U.S. and Vietnam.

"The TPP started with no clear upside for the U.S. dairy industry," said Tom Suber, president of the U.S. Dairy Export Council (USDEC), in testimony he made to Congress last April. "However, the addition of Canada and now Japan has created a new paradigm in the TPP negotiations that, if done properly, could provide a significant boost to the prospects of an overall net positive outcome in the negotiations."

Canada, of course, would be the big prize. It’s already our No. 2 destination for U.S. dairy exports (though China has recently moved into that spot with a recent surge in its purchases). The problem is that Canada is bit of a revolving door.

Under current law, our dairy sales to Canada fall under its Import for Re-Export Program, where Canadian companies can import our milk and dairy ingredients duty-free on the condition that the final product is exported and not consumed by Canadians. Some portion of those exports end up right back here in States. "Our goal is genuine access to the Canadian consumer market," says Shawna Morris, the National Milk Producers Federation (NMPF) VP of Trade Policy.

Canadian dairy farmers, with dairy quotas that are valued at upwards of $25,000 per cow, might have something to say about unfettered U.S. access. But the voices of 12,500 Canadian farmers might be drowned out by 35 million or so Canadian consumers. We’ll see.

Japan is the second prize. Last year, it imported $284 million of U.S. dairy products, and a favorable TPP which lowers high tariffs and regulatory burdens would undoubtedly add significantly to that total, says Suber.

But the TPP would also allow stiff competition for Japanese dairy case space from New Zealand and Australia, he says. "As a result, Canada is still viewed as providing the most significant potential gains for the U.S. dairy industry," he says.

The biggest dairy challenge of the TPP negotiations, according to the National Milk Producers Federation (NMPF), is the inclusion of New Zealand. If Fonterra, New Zealand’s dominant milk company with 95% market share within the country, is allowed to remain intact, it poses a significant threat to the U.S., claims NMPF.

Not only can it compete very well in newly opened markets, it could gain access here. And with its monopoly hold of its country’s milk supply, it can dictate the prices it pays to its farmers and thus the prices it charges to customers. Open dairy trade between the U.S. and New Zealand would cost the U.S. industry $20 billion over the first decade of the agreement, NMPF estimates.

Whether that actually happens, of course, is open to debate. New Zealand is currently focused almost solely on China, and the opening of other Pacific nations (after all, this is a Pacific trade agreement first and foremost) would offer tantalizing opportunities much closer to Auckland.

The bottom line of the Trans-Pacific Partnership is that it could be as significant to U.S. dairy trade prospects as NAFTA was 20 years ago, say dairy trade analysts. NAFTA opened our eyes to world trade and dairy exports’ potential. The TPP could well cement our presence in world markets for decades to come.

You can read more on the TPP here and here and here.

A Common Sense Dairy Compromise?

Oct 07, 2013

Ohio State University dairy economists have come up with a hybridized dairy policy/farm bill alternative that protects large and small dairy farmers almost equally and costs the government less than the Dairy Freedom Act.

Ohio State University (OSU) dairy economists John Newton and Cam Thraen have come up with a hybridized dairy policy/farm bill alternative that protects large and small dairy farmers almost equally and costs the government less than the Dairy Freedom Act.

The main debate with current dairy policy proposals is the market stabilization component, aka. supply management, of the Dairy Security Act. The National Milk Producers Federation says that without market stabilization, dairy prices will plummet because the margin insurance farmers receive won’t force anyone to cut back production. But processors argue market stabilization (even if it is now voluntary only for those who sign up for insurance) will raise milk prices too high for consumers, jeopardize export sales, and could ultimately lead to mandatory quotas for everyone.

That controversy has led to the Dairy Freedom Act, a construct of milk processors, which strips out the market stabilization program. The market stabilization program was taken out of the farm bill by more than a 2:1 margin in June by the House of Representatives, and it will be difficult to re-insert in the Senate-House Conference Committee’s final farm bill.

The OSU proposal, dubbed "MILC-Insurance," combines the current Milk Income Loss Contract (MILC) program with margin insurance without any market stabilization requirement. Under the proposal, dairy farmers would have a choice. They could either take MILC coverage, with eligible annual production expanded to 4 million pounds (up from 2.985 million pounds) or purchase margin insurance on all of their production. The insurance would be capped at $6.50 income over feed cost margin (rather than an $8 margin in both the Dairy Security Act and Dairy Freedom Act).

"This new alternative would provide greater support to small farmers compared to the existing MILC program by expanding eligible pounds," write Newton and Thraen. "For larger dairy farms (and farms who purchase feed) the income over feed cost program provides the ability to mitigate both milk and feed price variability."

Because the MILC payments are relatively modest (less than $1.30 per cwt. even during catastrophic periods) and income over feed cost margin insurance is capped at $6.50, farms will still feel market effects during periods of low milk prices or high feed prices. So, farms will still likely cut back production and not experience extended milk price troughs, say the economists.

The program will also cost the government less. In catastrophic times, MILC-Insurance would be nearly 25% less costly than the Dairy Freedom Act. The savings would be even greater if the margin insurance is capped at $6 of income over feed costs.

There are some in-the-weeds inconsistencies with merging two types of programs as the MILC-Insurance proposal does. For example, MILC payments are based on one type of feed cost formula and insurance program uses another. MILC calculates its milk price based on the Boston Class I price (an artifact of the now-defunct 1996 Northeast Dairy Compact) while the insurance program uses national average prices.

But in one sense, that’s all policy minutiae. One only had to listen to the farm bill dairy debate to know Congress could care less about the details.

For the vast majority of dairy farmers, those with less than 200 cows, the MILC-insurance proposal would allow them to stay with their now-familiar MILC program. Larger farms would have to make a choice—and spend some insurance premium dollars for full coverage. But they’d have to do that anyway under either the Dairy Security or the Dairy Freedom Acts.  

Not Taking a Market Position Is Taking a Market Position

Oct 05, 2013

I’ll probably get in trouble for writing this. But one of the things that really struck me last week at World Dairy Expo was the stark contrast in attendance at the virtual farm tours and education seminars.

In nearly every case, there was standing room only at the virtual farm tours, where producers showed how they were using management, technology and genomics to achieve 100 lb./cow tank averages. Conversely, education seminars on topics such as risk management had a couple of dozen attendees—and some left midway through.

I get it. Risk management is tough stuff. It’s complicated. It requires knowing your cost of production, your basis (the difference between local prices for milk and feed and Chicago Board/ Chicago Mercantile Exchange prices), and an understanding of risk management tools.

But achieving a 100 lb. tank average means little if your income over feed costs won’t cover variable and fixed costs.

Brian Gould, a University of Wisconsin ag economist, gave a mid-level seminar on risk management last Friday, outlining eight possible risk management strategies. These ranged from fixing both milk and feed costs to more sophisticated fence and collar strategies to the use of LGM-Dairy and farm bill margin insurance.

The point of risk management is not to achieve the highest milk price, because the probability of doing that is low. The converse is not. Gould tabulated milk prices in both the Upper Midwest and California from January 1995 through May 2013. Over that time, prices were less than $15/cwt in the Midwest 55% of the time. In California, it was 70%.

Risk management strategies won’t always allow you to avoid these low prices. But if you do nothing, your milk price will fall below $15 more than half the time. "If you can get rid of the negative dips in milk prices, your average annual milk price will go up," he says. "By doing risk management, you increase the probability of achieving [desired] margin outcomes."

The important point to remember is that price volatility—both in milk and feed markets—is increasing. "With Federal Order reform in 2000 and resulting adoption of commodity-based milk pricing, milk price volatility has increased substantially," says Gould. "And following the Renewable Fuels Standards [ethanol] program implementation, corn and other feed prices have increased dramatically."

At the same time, U.S. milk prices have become increasingly reliant on export markets. This year, the U.S. is likely to export 15% of its milk solids—one out of very seven days’ production. While this has allowed U.S. milk production to expand, it adds increasing risk to price reductions if there are hiccups in world markets.

Gould likens risk management to worker’s compensation insurance. If you purchase worker’s compensation insurance for your employees, do you hope you use it? Of course not. The insurance is there to protect your farm assets should an accident occur.

Eisk management for feed and milk is much the same. The question is: How much unprotected risk can your balance sheet withstand?

You can view Gould’s presentation here

The University of Wisconsin’s Understanding Dairy Markets website can be found here

U.S. Dairy Exports: Up, Up and Away

Oct 03, 2013

The continual, almost unbroken stream of increases in U.S. dairy export volume and value is like the broken record one never tires of hearing.

U.S. dairy export volumes have been increasing at an average annual rate of 12% over the past decade. And barring any fourth quarter 2013 hiccups, volumes this year will be up another 14 to 18% in 2013. The value of those exports is even sweeter music, up an average of 20% over the past decade and up 25 to 30% this year.

Yesterday, I had the opportunity to sit down with Alan Levitt, vice president of communications and market analysis for the U.S. Dairy Export Council.

The bottom line on exports, he says, is that "world demand for dairy products is up, and the world is willing to pay for them."

Levitt is cautiously optimistic as the calendar flips toward 2014. Yes, world milk production—driven by the European Union, the United States and New Zealand--is again back in growth mode. He expects global milk supplies to grow 2 – 2 ½% next year—or 10 to 13 billion pounds.

"This will put some downward pressure on world prices," he acknowledges. But it will likely be more of a soft landing than a hard crash. Some importers have been out of the market because of high 2013 prices. Lower prices will mean they’ll back, sopping up some of the increased supply.

"And most of the buying is underpinned by China. It is already the world’s biggest buyer of dairy products, and it needs to import even more," Levitt says. "The Chinese are willing to pay what it takes to get dairy products into the country."

In fact, China has now over taken Canada as the Number 2 destination for U.S. dairy exports. By value, China increased its purchase of U.S. products 41% in the first seven months of 2013 over the same period a year ago. And that’s despite the fact our sales to Canada increased 20% over 2012.

Another very good piece of news is that Dairy Farmers of America’s whole milk powder plant being built in Fallon, Nev., will start operation next year. This plant is the first in the U.S. wholly dedicated to the export market, and designed specifically to meet Chinese product needs. Once fully operational, Levitt calculates the Fallon plant, plus WMP capacity added earlier this year by Darigold and Michigan Milk Producers Association, could export the equivalent of two billion pounds of milk annually, or 1% of U.S. production.

"This is clear, tangible evidence that a U.S. farmer cooperative is committed to the global market," says Levitt. "It’s really a milestone point that we’ve taken saying we’re all in."

Undoubtedly, there will be bumps in the road as the U.S. sells more and more of its milk overseas. That is inevitable, and dairy farmers, co-ops and processors must be prepared for that eventuality. In other words, risk management will become increasingly important. For now, however, the future looks bright. The only way forward is to keep driving forward. There’s no turning back.

More information on U.S. dairy trade data can be found here

National Milk’s Mulhern a Farm Bill Optimist

Oct 02, 2013

Jim Mulhern, who takes over the reins as the National Milk Producers Federation (NMPF) chief operating officer Jan. 1, spent an hour with me yesterday discussing the farm bill and sundry other dairy issues. You can find a two-minute summary of that conversation here

Mulhern, ever the optimist, thinks Congress will get its act together and pass a farm bill before the end of the year.

Much depends on who the House of Representatives appoints to the House/Senate Conference Committee, which will hammer out differences between the two versions of the bill. The biggest hurdle, of course, is funding the Supplemental Nutrition Assistance Program (SNAP), aka food stamps. The Senate voted to cut $4 billion; the House, $40 million.

But dairy policy is no minor issue. The Senate version contains NMPF’s Dairy Security Act, which includes both margin insurance and a market stabilization program. It would require participants to cut production two to six percent, depending on the level of milk:feed margin deterioration. The House version contains the margin insurance program at slightly higher premium rates but with no market stabilization program.

Mulhern calls the House version a "Trojan Horse" because he believes it could cost taxpayers billions. He likens it to the dairy price support program of the 1980s, which was linked to parity with semi-annual price support increases and no supply controls. That $13.10/cwt support price, adjusted for inflation, would equate to something like a $30/cwt milk price today.

Back in the ‘80s, that level of support resulted in huge surpluses, cost taxpayers up to $2 billion per year in government dairy purchases, and led to a string of dairy policy changes whose legacy we’re still dealing with.

Mulhern also says the allegation that a market stabilization program would lead to substantially higher milk prices for consumers is "a big lie." Those making that argument "were pulling out numbers selectively" to make their case, he says. But the strategy was effective in the House vote as representative after representative chided the bill for increasing retail milk prices.

New dairy policy, and the farm bill itself, will hinge on who gets appointed to the House/Senate Conference committee. If the conference is primarily House and Senate agriculture committee members, Mulhern is confident market stabilization would be in the final bill because it passed both of the those committees. But if Speaker of the House John Boehner appoints House conferees from Republican leadership, the dynamic could change.

Boehner himself vowed that the market stabilization program would not be part of the House version. And he likely is as adamant it not be in the final conferenced bill. Remember, too, that market stabilization failed by more than a 2:1 version in the House vote.

In earlier conversations I’ve had with milk processor lobbyists, they are confident that because of Boehner’s opposition and the overwhelmingly vote in the House, market stabilization is on its last hours of life support. Though not dead, it would take heroic efforts to bring it back to consciousness.

It’s going to be interesting to see who is right. 

Get Energy Smart with FarmSmart

Oct 01, 2013

An easy-to-use internet tool will allow you to quickly get an estimate of your dairy farm’s carbon footprint by answering eight relatively questions and committing half hour of your time.

Osbourne   Rice 10 1 13
Roberta Osborne, Innovation Center for U.S. Dairy, and Dan Price, Prairieland Dairy, demonstrate the type of carbon footprint assessment food retailers could demand if the dairy industry is not proactive in developing its own.

By doing so, you’ll be able to benchmark your farm’s carbon footprint against the national average, and get a gauge on whether you might benefit from an energy audit of your farm. That, in turn, could lead to thousands of dollars in annual energy and fuel savings.

The tool, FarmSmart, was developed by the Innovation Center for U.S. Dairy, and is available here. FarmSmart is a proactive approach to the carbon footprint issue, says Roberta Osborne, manager of the FarmSmart project for Dairy Management, Inc. and its Innovation Center.

Grocery brands are already demanding carbon footprint information from farms. Unilever, for example, has developed a 78-page questionnaire, a 65’-long document when the pages are stapled together end-to-end. The detailed survey would take hours to complete. And it’s just one of many such surveys being developed by all the major food brands to get carbon footprint data from farms and food suppliers.

The FarmSmart checklist asks easy-to-answer questions on your farm’s location, herd size, production, farming and feeding practices, manure storage and energy use. Algorithms built into the tool then estimate your farm’s carbon footprint score. The data and score are password protected, and can only be shared if the farmer so chooses.

The driving force behind FarmSmart is to develop an easy-to-use tool that gives an accurate estimate of a farm’s carbon footprint that doesn’t take hours to complete, is comparable farm-to-farm, and establishes a benchmark for the dairy industry. Then, as farms improve their energy efficiency over time, the industry can demonstrate it is making progress.

Dan Rice, who partners with three neighbors, completed the FarmSmart checklist in about 30 minutes. Prairieland Dairy, near Firth, Neb., milks 1,500 cows, processes its own fluid milk and has a composting operation that sells soil amendments to consumers and landscapers.

"We market our own milk, and we have thousands of customers tour our farm and processing plant each year," he says. "We get sustainability questions every day from these folks, so it’s really important that we start this conversation.

"If we don’t define what sustainability in the dairy industry is, the retailer will. At the same time, retailers don’t care what score I get, but they want to see improvement over time," he says.

By using the FarmSmart tool, he was able to establish a baseline carbon footprint for the Prairieland Dairy operation. He also completed an energy audit, which identified areas of low-hanging fruit where energy savings could be grabbed quickly.

For example, by switching to low-temperature detergent for his milk equipment wash, he was able to eliminate the need for one water heater. The energy auditors also noticed that one of his electric meters was still on a higher rate than his other four. He also replaced a diesel engine on his manure irrigation pump with an electric motor. And he’s replacing lights with higher efficiency bulbs as the old bulbs burn out.

All told, he realized $18,700 per year in annual energy costs savings, decreased electrical use by nearly 100,000 kWh and reduced his carbon footprint by 75 tons of greenhouse gas emissions. That’s the equivalent of taking 14 cars off the road or enough energy to power nine homes.

While those saving might not be huge in the grand scheme of things, the effort demonstrates to customers that Prairieland Dairy is committed to local sustainability.

FarmSmart was presented at a World Dairy Expo Education Seminar Tuesday, which was sponsored by Nutrition Physiology Co., LLC.

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