Dairy Doldrums Likely To Continue

Published on: 16:21PM 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 [email protected]