The Milk Check https://www.jacoby.com Experienced dairy traders discuss current market trends that affect payments to dairy farmers. Fri, 10 Jul 2020 19:33:44 +0000 en-US hourly 1 https://wordpress.org/?v=5.3.4 Experienced dairy traders from T.C. Jacoby & Co. discuss issues, trends and dairy market movements that will impact the prices paid to U.S. dairy farmers for the milk they produce. Episodes are posted each month just before the previous month's final checks are paid to dairy farmers. T.C. Jacoby & Co. - Dairy Traders clean episodic T.C. Jacoby & Co. - Dairy Traders podcast@jacoby.com podcast@jacoby.com (T.C. Jacoby & Co. - Dairy Traders) Experienced dairy traders discuss current market trends that affect payments to dairy farmers. The Milk Check http://www.jacoby.com/wp-content/uploads/powerpress/TMClogo.png https://www.jacoby.com TV-G St. Louis, MO Monthly The dairy industry chases its tail https://www.jacoby.com/the-dairy-industry-chases-its-tail/ Wed, 03 Jun 2020 20:17:02 +0000 http://www.jacoby.com/?p=1763 Volatility continues to permeate the dairy industry as the world economy contemplates a return to "normal." CME spot cheddar is the most pronounced example, having rocketed up to $2.40 at the time this recording. Why? T3 explains how it's a symptom of an environment where the entire industry is guessing. Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. Ted: Maybe we ought to start the discussion by someone telling us why the cheese market is doing what it's doing. T3: Okay. Anna: Good luck. T3: I'm assuming you mean me. Ted: Yeah. T3: So, how about we use the analogy of we're on a roller coaster and we just went down the big hill and now we're going up the big hill. Ted: It's gotten much higher than I thought it would ever go. I thought the thing would be ready to crash at $1.90. T3: Yeah. I think everybody's kind of in the same boat. To me, it's a combination of factors all hitting at the same time. You still have retail sales running at 20% to 30% above normal, you now have foodservice distributors refilling the pipeline that emptied out when COVID-19 started. Well, now, restaurants are starting to open back up and they're trying to refill the pipeline in preparation for everything going back to normal. And I just talked to one of the big cheese mozzarella manufacturers here late last week who told me his foodservice orders are running at 120% of what they normally would this time of the year. In addition to that, you have the food box program, the USDA Food Box Program, which is quickly becoming a debacle because a number of the winners of the program did not properly calculate or hedge the cheese and butter portion of their purchases to put the program together to deliver to, you know, the charities. So, when they bid that price, they bid it at a fixed price. Now, there was an interview with one of the larger regional foodservice distributors about a week ago, I'm going to paraphrase here. But basically, what this owner said was that they bid on the Food Box Program and they were told their bid was too high. And what he said was he goes, he believed the winners of many of the bids did not have their head around what the true costs were to put the whole program together. And that they may have been underestimating what the cost of some of the products were, specifically cheese and butter on the dairy side of things. And his comment was U.S. Foodservice, Sysco, Performance Food Group, all bid on the program and all were told their bids were too high because there's no way that some of the winners of this program could possibly put together some of these boxes at some of the costs that they bid if they won the program and these guys didn't. So, that has to be very concerning. And that was before the cheese price raised to what is now $2.40. But you add that demand on top of foodservice distribution demand running at a 120% of normal because they're refilling the pipeline on top of retail demand, that's still running at about 120% of normal. And that's the recipe for cheese market that is raised from $1.01 to $2.40 in the span of a little more than three weeks and is likely to keep going higher before it comes back down. One of the things that I think also plays into this is the fact that production planning, distribution planning, you know, all of these big companies, whether you're a foodservice distributor or a restaurant group, restaurant chains, or cheese manufacturers, they all have planning departments. So, they can plan production, they can plan what their demand is, they can plan what their sales are, they can plan what their purchases should be. This COVID-19 experience, I mean, it's pretty safe to say that every single planning department in the country has probably taken their original plans and throw them out the window. They're chasing their tail right now trying to figure o...

Volatility continues to permeate the dairy industry as the world economy contemplates a return to “normal.”

CME spot cheddar is the most pronounced example, having rocketed up to $2.40 at the time this recording.

Why? T3 explains how it’s a symptom of an environment where the entire industry is guessing.

Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind.

Ted: Maybe we ought to start the discussion by someone telling us why the cheese market is doing what it’s doing.

T3: Okay.

Anna: Good luck.

T3: I’m assuming you mean me.

Ted: Yeah.

T3: So, how about we use the analogy of we’re on a roller coaster and we just went down the big hill and now we’re going up the big hill.

Ted: It’s gotten much higher than I thought it would ever go. I thought the thing would be ready to crash at $1.90.

T3: Yeah. I think everybody’s kind of in the same boat. To me, it’s a combination of factors all hitting at the same time. You still have retail sales running at 20% to 30% above normal, you now have foodservice distributors refilling the pipeline that emptied out when COVID-19 started. Well, now, restaurants are starting to open back up and they’re trying to refill the pipeline in preparation for everything going back to normal. And I just talked to one of the big cheese mozzarella manufacturers here late last week who told me his foodservice orders are running at 120% of what they normally would this time of the year. In addition to that, you have the food box program, the USDA Food Box Program, which is quickly becoming a debacle because a number of the winners of the program did not properly calculate or hedge the cheese and butter portion of their purchases to put the program together to deliver to, you know, the charities. So, when they bid that price, they bid it at a fixed price. Now, there was an interview with one of the larger regional foodservice distributors about a week ago, I’m going to paraphrase here.

But basically, what this owner said was that they bid on the Food Box Program and they were told their bid was too high. And what he said was he goes, he believed the winners of many of the bids did not have their head around what the true costs were to put the whole program together. And that they may have been underestimating what the cost of some of the products were, specifically cheese and butter on the dairy side of things. And his comment was U.S. Foodservice, Sysco, Performance Food Group, all bid on the program and all were told their bids were too high because there’s no way that some of the winners of this program could possibly put together some of these boxes at some of the costs that they bid if they won the program and these guys didn’t. So, that has to be very concerning. And that was before the cheese price raised to what is now $2.40. But you add that demand on top of foodservice distribution demand running at a 120% of normal because they’re refilling the pipeline on top of retail demand, that’s still running at about 120% of normal. And that’s the recipe for cheese market that is raised from $1.01 to $2.40 in the span of a little more than three weeks and is likely to keep going higher before it comes back down.

One of the things that I think also plays into this is the fact that production planning, distribution planning, you know, all of these big companies, whether you’re a foodservice distributor or a restaurant group, restaurant chains, or cheese manufacturers, they all have planning departments. So, they can plan production, they can plan what their demand is, they can plan what their sales are, they can plan what their purchases should be. This COVID-19 experience, I mean, it’s pretty safe to say that every single planning department in the country has probably taken their original plans and throw them out the window. They’re chasing their tail right now trying to figure out what they think their actual needs are. And one of the things that I think is going on is they probably over-aggressively cut back on their needs as the market was dropping and now, they’re probably overreacting and overly optimistic about what their demand will be now that we’re going back up. What I suspect is going to happen is this, foodservice demand, yes, it’s coming back, yes, the restaurants are going to start opening back up. They’re not going to open up and start doing business, you know, at 110% or 120% of what their projections were going into the year.

And so, we’ll probably see foodservice demand kind of peak out in the next week or two and then sometime around mid-June really start to fall back down. Maybe even, you know, 80%, 70% level for a while, as they’re just trying to kind of stabilize the volatility swing between what their guess in demand could be and what it is. The pipeline will be refilled, but it’s going to be a while before they really have their head around exactly how much product that they need. The cash market today is at $2.40, July futures is for a $1.90, August futures are at $1.80, September futures are at $1.75 and most people in the marketplace that I’m talking to feel that those numbers are much more realistic than the $2.40 that we’re at today. You know, the last thing that’s playing into this is milk production. Now, I’ll throw this back to you and Anna, but I think even the USDA is really having a difficult time determining what exactly has happened to milk production in the last three months. How much has it been reduced? Has all that milk production come back? Is some of the programs that some of the major co-ops put out there, are they still in place? Are they still working? If we have less milk, if we have truly reduced the milk supply and in a way that is sustainable, we can see prices stay…maybe not stay up here at $2.40, but we could see prices stay elevated for a while.

Ted: Well, let me try to field that one because it is confusing and I wouldn’t blame USDA or the Federal Milk Market Administration for being a little bit confused also. You know, if we go back to March, when all this was starting, remember, we had decided that maybe a 1% increase year-on-year of milk production was about normal and that disappearance would give us a pretty tight market in the fall at that level of increase. And then we came in, I think, at 2.4% for one month and probably it was April. And then for May, depending on whether or not we count…how we counted and whether we count dumped milk for April and so on, we’re probably looking at an increase for May, not a decrease. Now, I know that in certain areas of the country, they talk about a 10% reduction and a 5% reduction, how are they going to do that? Are they going to do it by changing the feed ration on May 1st? Are they going to do it by going from three times to two times per day milking on May 1st? My inclination is to believe we’ll probably see something down from 2.4% and 1.6%, but I doubt that we’re going to see anything below a 1% increase for May. And I think that what will probably happen is when everybody gets a load of a Class III price is probably going to be close to $20 at least for June, it’s gotta be hard to figure how anybody will think that changes in production are going to be necessary. That reductions in production are going to be necessary. So, I’m thinking that we’re going to wind up with the worst of all worlds, where the production is coming much faster than we can handle when we get into the—later in the summer.

T3: I don’t disagree with you. I mean, the old saying that “Money makes milk” has proven to be true time and time again.

Ted: Yeah. And that’s where we’re going to say, the only thing that could change that would be a precipitous drop in the cheese market. And if the box program is a debacle and the program would be canceled or something like that, well, maybe we might see that. But right now, I don’t see it. I think the coming out, if you will, or the recovery of people coming out and going back to restaurants, traveling more and so on, I think they’re going to do that, but I think it’s going to be much slower. So, projecting 110% or 120% of normal from the foodservice industry, I don’t think it will. So, again, I would say that retail sales will continue, people are used to buying milk now, maybe they’ll continue to buy it. So, they’ll probably continue strong. But to think that we’re all of a sudden going to be back above normal on sales, that’s a stretch. I think they will be above normal on production, but below normal on sales.

T3: And I agree with that. And I think everybody in the industry and in the foodservice distribution industry would agree with that. But what’s happening right now, if you’re running at 120% of normal not because of orders at the restaurant level, but because of the orders that the foodservice distributor level to make sure that they have in their pipeline, in their warehouses, in distribution, you know, enough stock so that when the restaurant do order, they can fulfill that. So, that will tail off. And I think most people expect it to tail off somewhere between the middle and the end of June. But I also think that it’s more than a little bit of, you know, the dog chasing his tail because nobody has a really good feel for exactly what demand is going to be like. I mean, sales planning is difficult enough in a normal year, in a year like this, it’s virtually impossible. And so, you have large segments of the food industry overreacting to everything because they are guessing and they’ll freely admit they’re guessing, but they’re more afraid to make the mistake of not having product than of having too much right now.

Ted: Well, I have to concede, I’m guessing too. And then we have the government fingering into it, so the normal laws of supply and demand have been skewed.

T3: Well, let’s throw this at you and bring Anna into the conversation. You know, the other thing, dairy farmers have not yet received any money from the CFAB program. Anna, do you have a feel for how that program is going to play out?

Anna: Well, actually, I have the website pulled right now and there’s payment calculators on there. It really, for the farm, I think what they get really depends obviously on volume and then on the way they identify themselves. If it’s an LLC or a partnership, then their caps are higher. But honestly, looking at it right now, it looks like a relatively easy process whether or not it plays out that way, I don’t know. But applications where you can start submitting them as of last week and you can do it through August 20 and, you know, they do have to go through their local farm service agency and everything to fill it out. But it’s, I mean, it’s a pretty cut and dry thing. There’s no components, there’s no ‘how much did you actually lose?’ It’s just based on weight.

T3: I know there was some talk about not having a cap that basically…

Anna: There is still a cap. The payments cannot exceed $250,000 and that’s for anything that you have on there. If you’re just dairy, then it’s $250,000 on dairy, but if you have crops and wool and other things, it’s kept on all of it at $250,000. If you’re a corporation or an LLC, or you have a partnership, the cap is increased to $500,000 and $750,000.

T3: But that money in addition to the high June milk prices is going to come to the dairy farmer all sometime this summer most likely, correct?

Anna: They say that the payments should start going out for some people within a week. Now, I’m assuming once they start getting a bunch of applications in at the same time, that process slows down a little bit, but it sounds like they’re ready to start putting checks out pretty quickly at least initially.

T3: That would indicate to me that at least from a simple dollars and cents standpoint, most smaller dairy farmers who are most vulnerable are probably going to end up being okay. Especially when you combine that with what’s going to happen to the June and probably July pay price.

Anna: Well, just for reference, if you had a million pounds a month, January, February, and March, you would be eligible for, according to the website, $148,000. But if you have 9 million pounds a month, you hit those caps pretty quickly. You know, as far as actual losses on premiums and freight and all those other things, you know, dumped milk and everything, you know, just judging by our producers, I would say that’s a pretty generous assistance, you know. But you have to factor in lost price as well obviously prices dropped incredibly low.

T3: A million pounds of milk a month, that’s a farm with about 500 cows?

Ted: Yeah. About 500 cows would be about right. Rule of thumb is 300 cows, it’s a load of milk every other day. So, 700 cows would be a million five.

T3: Okay. So, probably about 500 cows.

Ted: Probably about 500 depending on how good the cows are.

Anna: I wouldn’t say depending how good. I mean, if they’re 80 pounds a day, it’s a little over 400 or something. So, yeah, it’s in the neighborhood.

Ted: I think the production number is probably the key to this whole thing right now, with all this confusion, with all these panicky programs to try to bail out the industry with the disruption caused by the virus, we’re probably going to wind up with over-bailing and wind up with a glide of milk going into next year. If we see a $20 plus milk price for June, even with huge negative PPD, we’re still going to wind up with a pretty high price and that negative PPD will be reimbursed when you get back to July and August. The incentive for anyone to depart the industry, particularly with unemployment the way it is right now is got to be zero. So, my sense of it would be that everything’s turned upside down, we’re probably going to be looking at at a second half, which will be rather tepid.

Anna: Dairy markets move on an international scale. Buyers and sellers thrive when they think globally. Put T.C. Jacoby & Co.’s 70 years of experience to work for your organization. If you’re looking for someone to help you market your products, or you’re looking to source supply, get in touch with us now. Email info@jacoby.com or dial 314-822-5960.

T3: So, how do we think this is going to play out?

Ted: That was a question that I was just going to ask also. It’s hard to visualize that what we’re doing right now is going to cause any decrease in production.

Anna: I would agree.

T3: And I would agree with that too.

Ted: And if that production stays up… Remember Phil’s model?

T3: Yep.

Ted: If it stays up where Phil’s model is, or even close to it, let’s just say 2%, then we’re going to have a lot of milk out there. And I don’t think the economy is going to recover quick enough to absorb that milk.

T3: If I go back to where my mindset was before any of us had heard the phrase COVID-19, I was of the belief that the second half of this year was going to end up being longer than most of the industry anticipated because we were going to have more than enough milk production. Now, after the gymnastics of the last three months, when it came to supply and demand, most people threw all of their forecasts out the window. But we’ve gone back up high enough now, it’s fair to consider the possibility that we may go all the way back to a situation where we’re going to have more than enough milk in the second half of the year to fulfill all the needs. Now, my one concern would be, most of our customers are telling me, you know, traditionally on June 1, you know, we’ve gone through the heaviest part of the flush, but we’re still producing more cheese than we’re selling. That shift doesn’t quite take place until the middle of July where you start actually seeing demand be a little bit stronger than supply as milk production curtails and cheese demand rises going into the school year. What my customers are telling me is usually this is the point in time where they’re starting to see their inventories reach their near maximum levels for the year, where they actually are today in 2020 on June 1 is their inventory levels are low and they’re living hand to mouth and they’ve essentially used up any and all cheese that they tend to build up this time of the year.

So, we’re going into the summer at low inventory levels, at least at what I would call the converter segment of the industry. And that would indicate to me that wholesale demand for cheese will be higher than normal between now and the end of the year because nobody has their inventory built up but if we have more than enough milk, that means the cheese plants are going to be able to run close to full between now and the end of the year as well and they’ll offset each other. But we’ll still probably maintain relatively high prices. We won’t wash out, you know, to a $1.40 or a $1.30 cheese price which is what I probably would have considered a possibility back in January before this all took place. So, you know, I can argue both sides of the coin. I can argue a scenario where demand is a lot weaker than expected in the second half of the year because the economy is going to be weak because we’re still recovering from everything that’s gone on in the last three months. I can make the argument that a weak economy plus extra milk production may mean lower prices. But I don’t think you can ignore the fact that people don’t have their working inventory levels at a place where they usually do this time of year. And so, that’s going to cause probably a little bit of increase in what they are willing to buy at the same time. I can argue both sides of the coin.

Ted: And I can argue both sides of it too right now. But one thing I think does have a bearing on it, you look at what’s going to recover and what’s not. The food service would include hotels and restaurants, the deli counter at the grocery store to some extent, but it doesn’t include baseball games, football games, hockey games, sports events in general. And that I think is probably what’s going to be slow to recover. So, let’s assume that assumption is correct for a moment. What are the people who are going to the football games, hockey games, baseball games, what are they going to do? Well, are they going to stay home and drink milk and barbecue and have cheeseburgers? And maybe we’re seeing a little bit of that right now at the retail level and with the pizza people and so on, there are home delivery. Where they’re not going out to the baseball game and they’re staying home and they’re eating chips and the cheese dip and so on. So, arguing that side of the thing gives me a little bit of a sense that even if the recovery doesn’t go as quickly as everybody would like it to go, it could be that the food and dairy recovery might be pretty aggressive. People going to baseball games aren’t eating cheese, but they eat more if they stay home and it could be that’s what we’re looking at. And maybe why we’re seeing now with the increase in usage is bearing that out a little bit.

T3: That’s possible. I would argue this, when I think of what are the demand segments that I would expect to continue to be well below normal in the second half of the year, the first that comes to mind is your fine dining restaurants. I think they will continue to struggle. I mean, it seems like most of the states that are just starting to open back now and are allowing restaurants to open up are saying they have to be at 25% of capacity. I wouldn’t be surprised at all if we’re still at 50% or 75% of capacity by the fourth quarter of this year. They’re not going to go all the way to 100% soon. I think that’s going to be slow and it’s going to be the fine dining restaurants and the casual dining restaurants that are going to be hurt the most by that. I think hotels…I have trouble believing that hotels are going to be running anywhere close to normal between now and the end of the year. I think there’s going to be a lot less travel. And so, I think, you know, when you think about, you know, the breakfast you have at hotels and things like that, that’s going to be suppressed. I think breakfast restaurants in general, you know, that’s more kind of fits the casual dining segment, but also when you travel, you’ll go out to eat for breakfast, if you’re not traveling, you’ll tend to eat at home. So, I think that’s going to be suppressed. I think it will continue to be suppressed through the end of the year.

So, your casual dining, your fine dining, your hotels, you know, when we talk about sporting events, you know, I guess I have trouble believing that you’re going to see stadiums as packed as they were anytime in 2020. I have to believe that even if we do have NFL football with fans, my gut tells me that, you know, those stadiums are going to be maybe 60% full or even maybe 30% or 40% full when they open back up. I struggle to believe that they’re going to be operating at 100% capacity, and the result is more people at home where I agree with you, they will consume more cheese. And one of the things, if we have enough data now that we’ve seen clearly is the consumer during this time is kind of defaulting to comfort food, which in the cheese industry means dairy cash cheeses. Like your store brand shreds and chunks and your cheddars, you know, so cheddars and crafts, Tillamook, that cheese is moving well. But your deli cheeses, both the deli cheese behind the counter and even including the deli cheese in front of the counter that’s prewrapped, they haven’t had the same bump as the dairy case has. And I think that’s going to continue as well. Is there going to be…you know, everybody’s aware that, economically, this has not been good for the economy and so, I think everybody’s kind of, you know, they’re making better choices, making less expensive choices. They’re kind of defaulting to comfort foods that they tend to consume a lot of, which is more cheddar, less things like Brie or Gruyere.

And so, there’s a dynamic there that I think is going to play out. Overall, what does that mean for dairy? Quite honestly, it becomes a capacity issue more than a fluid milk demand issue, because it’s easy to imagine that your cheddar cheese plants continue to run at full capacity because they usually went close to full capacity all year round anyway. But if so, what happens is that your specialty cheese demand continues to be suppressed, that milk has to go elsewhere, and it’s not like they’re going to be just able to just make cheddar out of it because those plants will be maxed out. And so, they’re going to have to find new forms for that milk, and ultimately, the plants that balance the milk supply tend to be your butter powder plants in which means your butter powder plants in the second half of the year may run in a higher percentage than normal in the fall.

Ted: It’ll certainly will if we have a burst in production without a corresponding increase in usage and disappearance. I think that’s about as far as we can go, I think. Stay tuned.

Anna: We welcome your participation in The Milk Check. If you have comments to share or questions you want answered, send an email to podcast@jacoby.com. Our theme music is composed and performed by Phil Keaggy. The Milk Check is a production of T.C. Jacoby & Co.

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Volatility continues to permeate the dairy industry as the world economy contemplates a return to "normal." CME spot cheddar is the most pronounced example, having rocketed up to $2.40 at the time this recording. Why? Volatility continues to permeate the dairy industry as the world economy contemplates a return to "normal." <br /> <br /> <br /> <br /> CME spot cheddar is the most pronounced example, having rocketed up to $2.40 at the time this recording.<br /> <br /> <br /> <br /> Why? T3 explains how it's a symptom of an environment where the entire industry is guessing.<br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind.<br /> <br /> <br /> <br /> Ted: Maybe we ought to start the discussion by someone telling us why the cheese market is doing what it's doing.<br /> <br /> <br /> <br /> T3: Okay.<br /> <br /> <br /> <br /> Anna: Good luck.<br /> <br /> <br /> <br /> T3: I'm assuming you mean me.<br /> <br /> <br /> <br /> Ted: Yeah.<br /> <br /> <br /> <br /> T3: So, how about we use the analogy of we're on a roller coaster and we just went down the big hill and now we're going up the big hill.<br /> <br /> <br /> <br /> Ted: It's gotten much higher than I thought it would ever go. I thought the thing would be ready to crash at $1.90.<br /> <br /> <br /> <br /> T3: Yeah. I think everybody's kind of in the same boat. To me, it's a combination of factors all hitting at the same time. You still have retail sales running at 20% to 30% above normal, you now have foodservice distributors refilling the pipeline that emptied out when COVID-19 started. Well, now, restaurants are starting to open back up and they're trying to refill the pipeline in preparation for everything going back to normal. And I just talked to one of the big cheese mozzarella manufacturers here late last week who told me his foodservice orders are running at 120% of what they normally would this time of the year. In addition to that, you have the food box program, the USDA Food Box Program, which is quickly becoming a debacle because a number of the winners of the program did not properly calculate or hedge the cheese and butter portion of their purchases to put the program together to deliver to, you know, the charities. So, when they bid that price, they bid it at a fixed price. Now, there was an interview with one of the larger regional foodservice distributors about a week ago, I'm going to paraphrase here.<br /> <br /> <br /> <br /> But basically, what this owner said was that they bid on the Food Box Program and they were told their bid was too high. And what he said was he goes, he believed the winners of many of the bids did not have their head around what the true costs were to put the whole program together. And that they may have been underestimating what the cost of some of the products were, specifically cheese and butter on the dairy side of things. And his comment was U.S. Foodservice, Sysco, Performance Food Group, all bid on the program and all were told their bids were too high because there's no way that some of the winners of this program could possibly put together some of these boxes at some of the costs that they bid if they won the program and these guys didn't. So, that has to be very concerning. And that was before the cheese price raised to what is now $2.40. But you add that demand on top of foodservice distribution demand running at a 120% of normal because they're refilling the pipeline on top of retail demand, that's still running at about 120% of normal. And that's the recipe for cheese market that is raised from $1.01 to $2.40 in the span of a little more than three weeks and is likely to keep going higher before it comes back down.<br /> <br /> <br /> <br /> One of the things that I think also plays into this is the fact that production planning, distribution planning, you know, all of these big companies, whether you're a foodservice distributor or a restaurant group, restaurant chains, or cheese manufacturers, they all have planning departments. So, T.C. Jacoby & Co. - Dairy Traders clean 28:00
Is USDA’s proposed COVID-19 dairy assistance enough? https://www.jacoby.com/is-usda-covid-assistance-enough/ Tue, 12 May 2020 13:04:57 +0000 http://www.jacoby.com/?p=1745 Help is on the way for dairy farmers who were forced to dump milk as COVID-19 continues to jostle the industry. But does the USDA's proposed assistance go far enough? And, is Washington relying on outdated methods to solve a uniquely 21st century problem? Ted, T3 and Anna discuss the proposal and offer predictions on the timetable for a return to "normal." Ted's dogs Henry and Ralphie offer their analysis. Anna: Welcome to "The Milk Check," a podcast from T. C. Jacoby & Company, where we share market insights and analysis with dairy farmers in mind. T3: So last week the USDA finally announced their plans to help the dairy industry and they came out with a package to help dairy farmers and then they also came out with a package to, what they called the food box package that included some food service distributors to get money to food banks and also some bid programs to buy some cheese and butter and other dairy products. The program to help dairy farmers I think I'd start by saying was probably underwhelming for most people in the industry. It probably helped smaller producers more than larger producers because it capped the compensation at $125,000 for the one program, and if it included some of the help they put on grains and others, I think it was capped at $250,000. For large farmers, that is really a drop in the bucket, and some of the numbers I've heard out there probably doesn't help some of those larger farmers by more than, 15, 16, 17 cents a hundredweight. Now for the smaller producers, that can potentially be very valuable. And if they're covering 85% of the losses and 85% of the drop in price from where they were in January to where they were by the middle of April, it probably is gonna end up being very helpful. But for the industry as a whole, these days over 70%, 75% of the milk comes from larger producers. And so you ended up with a program that probably did not help the majority of producers, at least from a milk perspective in the industry. The other thing it did not include, it didn't include anything that would incentivize reducing the milk supply because it was a direct payment program. And so the USDA will pay farmers directly, which means that it can't be used to incentivize producing less milk so that we can avoid dumping milk. But that also is, the third issue is there was nothing in the announcement at all to help with paying for the milk that was dumped, because so many processors had lost enough food service sales that they simply were not in a position to take milk and so they had to push back on their contracts and simply not take the milk. And in many cases, there were force majeure declarations, or in some cases, they didn't even take it that far. They just said, "We can't take it." And the Co-ops had no choice but to dump the milk because they had nowhere else to go with it. So that USDA program I would say has been underwhelming. And I don't know, Dad, do you have any other thoughts as to what you're hearing about how farmers are reacting to the program? Ted: Well, I haven't really heard how they're reacting. I don't think we're far enough into it. At this point all these programs are simply discussion. Nothing at this point has been written in stone. The problem would be with regard to the $125,000 you're right, it is a drop in the bucket and it addresses 20% or 25% of the milk supply and leaves the other 70% or so out, so they don't participate in that program at all. It strikes me, and then they're talking about purchasing programs and then the Secretary actually vocalized an aversion to any remuneration for dumped milk with the theory that ,"Oh no, we're not gonna do that. We're gonna buy products and we're gonna distribute it to the poor. Or we're gonna buy it through CCC," which, CCC's program was antiquated 30 years ago. The problem with the CCC program is they buy powder and the butter and cheese and they put it in storage.

Help is on the way for dairy farmers who were forced to dump milk as COVID-19 continues to jostle the industry.

But does the USDA’s proposed assistance go far enough? And, is Washington relying on outdated methods to solve a uniquely 21st century problem?

Ted, T3 and Anna discuss the proposal and offer predictions on the timetable for a return to “normal.” Ted’s dogs Henry and Ralphie offer their analysis.

Anna: Welcome to “The Milk Check,” a podcast from T. C. Jacoby & Company, where we share market insights and analysis with dairy farmers in mind.

T3: So last week the USDA finally announced their plans to help the dairy industry and they came out with a package to help dairy farmers and then they also came out with a package to, what they called the food box package that included some food service distributors to get money to food banks and also some bid programs to buy some cheese and butter and other dairy products. The program to help dairy farmers I think I’d start by saying was probably underwhelming for most people in the industry. It probably helped smaller producers more than larger producers because it capped the compensation at $125,000 for the one program, and if it included some of the help they put on grains and others, I think it was capped at $250,000. For large farmers, that is really a drop in the bucket, and some of the numbers I’ve heard out there probably doesn’t help some of those larger farmers by more than, 15, 16, 17 cents a hundredweight. Now for the smaller producers, that can potentially be very valuable. And if they’re covering 85% of the losses and 85% of the drop in price from where they were in January to where they were by the middle of April, it probably is gonna end up being very helpful. But for the industry as a whole, these days over 70%, 75% of the milk comes from larger producers. And so you ended up with a program that probably did not help the majority of producers, at least from a milk perspective in the industry.

The other thing it did not include, it didn’t include anything that would incentivize reducing the milk supply because it was a direct payment program. And so the USDA will pay farmers directly, which means that it can’t be used to incentivize producing less milk so that we can avoid dumping milk. But that also is, the third issue is there was nothing in the announcement at all to help with paying for the milk that was dumped, because so many processors had lost enough food service sales that they simply were not in a position to take milk and so they had to push back on their contracts and simply not take the milk. And in many cases, there were force majeure declarations, or in some cases, they didn’t even take it that far. They just said, “We can’t take it.” And the Co-ops had no choice but to dump the milk because they had nowhere else to go with it. So that USDA program I would say has been underwhelming. And I don’t know, Dad, do you have any other thoughts as to what you’re hearing about how farmers are reacting to the program?

Ted: Well, I haven’t really heard how they’re reacting. I don’t think we’re far enough into it. At this point all these programs are simply discussion. Nothing at this point has been written in stone. The problem would be with regard to the $125,000 you’re right, it is a drop in the bucket and it addresses 20% or 25% of the milk supply and leaves the other 70% or so out, so they don’t participate in that program at all. It strikes me, and then they’re talking about purchasing programs and then the Secretary actually vocalized an aversion to any remuneration for dumped milk with the theory that ,”Oh no, we’re not gonna do that. We’re gonna buy products and we’re gonna distribute it to the poor. Or we’re gonna buy it through CCC,” which, CCC’s program was antiquated 30 years ago. The problem with the CCC program is they buy powder and the butter and cheese and they put it in storage. And then that product hangs over the market for, in some cases, years until ultimately it’s wound up selling back to the trader at a discount. So it distorts the price discovery of the dairy industry until such time as the inventories are exhausted. Feeding the poor, of course, all of us, in small, large, all dairy farmers, virtually all Americans wanna take care of the poor, with regard to food and so on. However, in a lot of cases, the dairy products that wind-up being produced and packaged to go to the poor, wound up being substituted for sales off the grocery store shelf, and that further distorts the reaction. So my observation on the Secretary’s views of it is that he’s looking at things from 30 years ago, that he’s not looking at the problem today with the international markets that we have and the way products are produced, that who produces them and that the way the industry has developed with regard to the factors of production and the efficiencies of production over the last 30 or 40 years. So I think that he’s outdated to that extent. And I think he needs to wake up a little bit.

T3: So I’ll have a little bit of a counter argument on the CCC. I agree with you. It is for the most part an outdated program. But I think one of the issues that the USDA had was working with what they already know versus inventing something new on the fly. And the CCC program was one that there was already an apparatus in place, already a process for awarding those bids that they could use and leverage and I think that’s why they did it. The other program, which was the food box program, where they’re allocating 100 million dollars a month, as long as we’re in a federal state of emergency, to have food distributors buy cheese and distribute it to food banks and faith-based charitable groups to help feed people who’ve lost their jobs. You know, that program was something that they created very quickly to try and get food in the hands of those who need it as fast as possible. Now, having said that, in that particular program, you have the kind of the other extreme. They put it together so quickly that there’s a lot of details that were left out, a lot of things that maybe weren’t completely thought through. And so there’s a lot of skepticism in the industry right now. And when I say… In this case, I’m referring to cheese manufacturer processors and distributors, there’s a lot of skepticism that program will have the kind of impact that it needs to have on demand and the kind of impact needed in order to get that food in the hands of those who need it. The bids are due frankly, this is Friday. April 29th, I believe today, and I believe the bids are due today for this program. And I’ve talked to a number of people in the industry and was on a couple of the USDA calls. You know, after they gathered the details of the program, they didn’t think it was a program that they could properly take advantage of.

I do think some of the food-service distributors are gonna do their best to take advantage of it. But that kind of leads me to the next little bit of irony, which is, by the time they have this program in place, the other thing we’re starting to see is a little bit of demand come back on the food service side of the sector. It’s basically the end of the month of April and most people have been cooped up for six to eight weeks. There is starting to be protests in places about some of these stay at home orders, there are people who are starting to basically defy the orders and say, “We’re gonna open up our restaurants. We’re gonna go back to normal. We really don’t have a choice.” And while that can be pretty dangerous from a health perspective, and I think we all can have a lot of discussion about whether or not that’s a smart thing to do, what we are seeing is that we’re starting to see some increased demand out there for cheese and butter, and other dairy products as distributors are starting to see an increase in their needs and in their orders moving forward. So it looks like we’re starting to see the beginnings of demand coming back into the marketplace, which is the best solution to what we’re dealing with. I think we still got to take a wait and see attitude.

Ted: I would observe that the increase in demand might have a lot to do with the fact that the price of milk to the, at least as far as the federal order prices are concerned is about… What is it Anna? $2 to $3 a hundredweight lower in May than it was in April. So producer, or handlers, processors, Co-ops that are sitting there paying their producers are gonna be financially better off to handle milk in May than they are in April. And I think a lot of the demand might be due primarily to that reason. Now that said, I think April is gonna be, as far as pay prices is concerned, and maybe it’ll work out about the same. But just the same, there is this difference and I think everybody is aware of that and I’m sure that demand will be there. Another thing that I would point out when it comes time to talk about what kind of program we ought to be having, and we’ve been having these meetings internally with regard to milk production, and supply and demand, and how much milk is being generated. Simplistically, the consensus is a 1% increase… This was before the pandemic issue began to be an issue. A 1% increase in milk supply on an annual basis, on a year-by-year basis, was acceptable and anything over 1% was unacceptable, and would tend to depress milk pricing. And we were going into the flush and all of us were becoming rather skeptical as to whether pricing was gonna hold up during the flush or not. Now, of course, it’s moot now, but this was two or three months ago when we were worried about having excess production. And then it turned out that if you count the dump milk that’s involved in this whole fiasco, that production was up 2.7%. We would have been in a mess even if we didn’t have a pandemic with the production that we have. You know, people evidently aren’t really looking at the bigger picture. They’re looking at giving the help the dairy farmers obviously need, but at the same time we’ve got too much milk and we’ve got to cut back on that milk. Now some, one area, I think it’s the Texas area, they came out with a program that said, “We’re only gonna pay for 90% of the milk produced in such and such a month,” I think April. And that I think is taking the bull by the horns and putting it where it is. USDA winding up, put it buying milk through the CCC programs and then buying milk at prevailing prices and selling it, giving it away to the poor doesn’t do a hell of a lot to reduce milk supply and to increase prices for milk and to the dairymen as we go forward through the rest of the year. So a little broader perspective with these programs, I think would be very much in order

Anna: I think to go a little bit further with your statement too. One of the things that I have been really curious about with how they’re going to do any kind of aid to producers is how they would calculate what the loss is. If you have, we’re over-supplied and prices would have been lower anyways, how do you evaluate what you would give them when that’s the part of the equation? And honestly, more and more and maybe I’m totally wrong, I almost hope that I am. I just feel like the only way they’re gonna do this is look at the drop in prices from January to, I guess, April 15th was the first portion of the year and just say, “It was this much of a drop, either 85% of that on your volume.” Because, there’s no way to evaluate any of the other losses, the dumped milk, the premiums, the distress premiums that we’ve seen, and to compensate for all of those things. I don’t think farmers are going to get any of that.

Ted: Unfortunately, I think most dairymen have trouble—particularly the smaller dairymen—have trouble with the perspectives of how pricing is determined. Basically price is determined by the value of cheese and butter and powder. And everything is built on that. You know, supporting the price of cheese and butter and powder beyond the actual market value doesn’t get it done. It doesn’t send the right messages. and then to buy the products on the market, put them in inventory and pay the storage cost and bring them back either a few months or a year later depresses the price to the dairyman. All it does is level all situations out and does nothing to decrease production. These are issues that have to be grappled with. And it’s easier to for us to talk about it than it is for these people to get things done. But somehow we have to come up with a fair system that addresses the marketplace in a way that levels this peak and valley arrangement that you go from total debacle to $25 a hundredweight and then back again. It doesn’t get it done for the industry and it hurts sales. It hurts our customers. But there has to be some way that we can get this done properly.

T3: Well, let me play devil’s advocate. Considering that we’re traders and we’re salesmen and for the most part we strongly believe in free markets. But that the sense has been, I think, in our office, and other people in the industry I’ve talked to that this particular situation may be the exception to the rule, that figuring out a way to help the dairy farmers in support prices and do supply basically a supply management system for a short period of time is probably something that should happen given the uniqueness of this situation. Having said that, as we experienced with most government programs, once you’ve done something, it’s hard to undo it. And so once you introduce supply management into the system, it’s really difficult to make it go away again. And I think that that’s one of the reasons that the USDA has been very reluctant to support the industry in that kind of a way. But my question for you is this. Is it possibly healthy to go through something like this and reduce the milk supply through the natural means of survival of the fittest, which means unfortunately, some dairy farmers will exit the business? But in the long run, could that be healthy because it gives us as an industry the ability to get back to $25 a hundredweight milk? Do you think that’s healthy in the long run or is what’s going on right now just too traumatic to really consider that to be healthy for the industry as a whole?

Ted: What we have now with the volatility of let’s call it almost 50% of the value is not healthy from the standpoint of relationships with customers, it’s not healthy from the standpoint of relationships with the dairyman and people in between the supply chain. If you wanna talk about chaotic market positions, and I really don’t like that term, but if you wanna talk about it, I don’t mind a little bit of chaos. But the chaos that we have right now it’s a little bit of the exception to the rule. But again, if you go back and look at March production numbers, correct me if I’m wrong, but we were at 2.7%. We would have been in a mess this Spring anyway, it just did with the pandemic and the loss of the food service sales our mess has increased exponentially and we wind up with a lot of milk being dumped. So something I think needs to be done that levels this volatility out. You know, we’ve had a lot of conversations over the years as an industry about base excess programs. You know, we use to have base excess programs built into the federal order. And I think it was the Quad Cities order that had in Memphis order years ago, 40 years ago or more, and had a base plan and you had base and if you produced over you got nothing. But I think it was Class IV for your or whatever reduced value you had for your milk and in those days and people didn’t like it. They voted the order out. And the reason they voted it out is because the dairy industry was started to gravitate technologically to handle bigger and bigger dairies . The efficiencies over the years were increasing and those that were in a position to take advantage of it wanted to expand and they didn’t want these sorts of restraints on their expansion. And then even today, you go to a really good dairyman and talk about some sort of a base excess program and their eyebrows will go up and they won’t exactly embrace it even with the chaos that we have at the moment. So there’s a lot of opposition to those kinds of programs. The fact that you can get a group together and do it on their own is probably a lot more effective. You just say, “Hey, we’ve got enough. Anything over 90% we’re not paying for it.” And I think we’re going to observe that it’s a miracle of how the milk production is decreased with that kind of an edict from the customer for the dairyman’s milk. ACo-op could do that, a proprietary cannot. So that’s something that might need to be sorted out somewhat. That sort of methodology i think is probably a heck of a lot more effective than some of these other brainstorms that some of these people have that stifle the incorporation of technology into the supply chain.

T3: But isn’t that something that’s better served by the free market than by government intervention?

Ted: Yeah, I guess that’s my point. The free market is what did this in the face of this fiasco, the pandemic, in retrospect, and it’s not over yet, but that looks to me like the kind of approach that’s necessary. There’s another reality here that I think we need to put on the table that is disagreeable to almost everybody, but probably is better in the long run. And that is that milk that goes into the manure pit doesn’t come back to bite you six months or a year down the road. If a system could be worked out where we’ve got too much milk, where the appropriate amount of pain is applied to milk that’s discarded at some level of surplus, you still probably would be able to have food programs for the poor and you’d be able for the CCC maybe to buy a little bit of milk and so on. But at the same time, perhaps something like that would go a long way towards let’s just say flattening the curve and the volatility that we’ve had in the industry here. I don’t think that we need to eliminate all the volatility, but having 25 instead of 50 it’d probably be much more desirable than where we are now.

Anna: On “The Milk Check” podcast, we tackle questions and share ideas that move dairy forward. Now we’re making it easier for you to get answers to your lingering questions. Do it with one click. Submit your questions online at jacobycom/askted.

T3: How long is it gonna take us to get out of this? Is it a hockey stick recovery? Is it a V-shaped recovery? Is it a W-shaped recovery? And I know we’re all guessing here, but how long do you think it’s gonna be before our economy gets back to humming along at some semblance of the way it was just two and a half months ago?

Ted: Well, I’ll defer to Anna on that.

Anna: I think it depends on what you mean by some semblance. I mean, are you talking about pretty close to the way things were?

T3: Yeah, I guess I’m talking about one where, let’s say we have an unemployment rate closer to 5% than 10%, where we’re not seeing 3.6 million people apply for unemployment a week, it gets more to the regular 600,000 or so. Where we’re seeing demand that is back to what it used to be. And I’m not talking about what it used to be in terms of, hey, the economy’s humming along great, we’ve got 3.9% unemployment, everybody’s doing well. But at least something that’s more of a modicum of what we expect in the dairy industry, where we don’t have a situation where certain companies and certain farmers are getting absolutely slaughtered because those dairy processors are too food service focused and not retail focused enough. And unfortunately, those certain dairy farmers are supplying those processors rather than retail processors. At what point are we gonna be back to everybody going into the office to work, schools, everybody going into school? How quickly are gonna come out of this?

Anna: I honestly can’t imagine it being super quick. Now part of that is, I’ve always felt like, my job is easier if I’m the most pessimistic person in the room, because then I’m preparing for the worst. And a really hard time imagining people just going out to restaurants, the way they used to in that food service has a big impact on us. You know, even if you have the money to do so, I think people are gonna be a little reluctant to do it the same way we used to whether or not they’ll have the money. It’s the other question. And unemployment is, to me a big piece of this. You know, we’re starting to hear farmers talk about how it’s hard for them to have labor on their farms right now when unemployment is paying as well as it does. And I think that’s true for a lot of companies. You know, that It i think is one of the things that I’m most curious about how it impacts everything in the coming months.

Ted: I think Anna’s right. I think that the unemployment issue and subsidy to be unemployed is poison from that standpoint. However, I think most people would like to have a good job and move forward. I’m not gonna say we’re gonna go for a hockey stick. The issue really resides on whether or not we can manage this properly without having lockdown. Or if we have to have lockdowns, we only have them in select situations where people are piled on top of each other in like a big city or some place where they have trouble controlling that, to the extent that it overwhelms their medical and hospital system. If we can keep it below that I’m inclined to think that going to a restaurant with a mask and everybody’s wearing a mask, I’m inclined to think people are so anxious to get out that they’re gonna storm the restaurant and the restaurants are gonna spread the tables out and probably not be able to serve as many people as they did previously, but they’ll spread it out. And you’ll be drinking your cocktail, you lift up your mask, drink your cocktail, and then pull it back down again. I think that’s what you’re looking at. And as far as schools are concerned, fortunately, the virus doesn’t seem to affect the younger kids and the younger people as much as it does geriatrics, like myself. So we have to be a heck of a lot more careful than others, but we make up…

Anna: You have to remember that you’re still sending schoolchildren home to families with compromised individuals, and elderly people. So that’s still a concern. I find it really hard to imagine not having the kids back in schools next year. But I knew though, I have a couple of friends who do planning at college levels and they’ve been told to plan for online learning for the entire year for next year just in case.

Ted: And I, just in case is the key word. I think you’re guessing here. But if it comes out and we don’t see a spike, we go back to social distancing, but no more lockdown, and we don’t see a spike in, an unmanageable spike in the cases, that this thing will take off and probably a U is what we’re looking at. In other words, by the time we get to either Memorial Day is too soon, but by the time we get to Labor Day, after the summer is behind us, and if we don’t have any sort of major spike that’s uncontrollable, it’ll be back to the races. And another thing is how do you measure this? Do you measure it by the unemployment rate? I think that’s one barometer. Do you measure it by the stock-market? I think that’s a better barometer. If you measure this by the S&P on March 1st, or February 1st, versus wherever it will be on September 30th that’ll be a good barometer as to where you are I believe. So there’s a lot of variables incorporated into that. Labor is big. Can you get it? Immigration is part of the issue, work permits and so on are part of the issue and it’s gonna take a lot of work for people to get back to business as usual. And I think there’ll be business there, but I don’t think it’ll be as usual.

T3: And I tend to agree with you. And I would say maybe the way we should measure it is by the milk price. Is the milk price gonna get back in September to maybe where it was in February?

Ted: I don’t think in September but I think by November, December it would.

T3: Okay.

Ted: And my argument is that when the smoke clears, what is the production gonna be on an annual basis? And there’s another issue here too Teddy. The food services virtually cleaned out their supply chain. You know, you hear stories about them giving food away and package programs and so on to food for the poor, charitable organizations and so on and write it off. When they get back in business and when the pizza joints start cranking up again, they’re gonna have to stock up on cheese. If that’s not gonna cause a lot of dislocation come August, September?

T3: Well, and that to me that’s….

Ted: I think that that supply line is gonna be a big issue.

T3: And I agree, but that’s also why I tend to think we’re gonna have a W-shaped recovery because I think you’re gonna try and refill the supply line. And I actually think that’ll happen in July. I think June and July, we could get pretty busy. As everybody kind of starts to go back to normal. You refill the food-service supply line, you get the restaurants starting to open back up. But then once it;s opened up, I think that there’s gonna be this moment where we all kind of realize demand isn’t as good as it used to be. There’s the unemployment rate is still high. People are still reluctant to get out. The sporting events are still not really happening yet because there’s too many people in one building. And as a result, you start to see your cheese price and therefore your milk price come back down, not all the way down to where a $1 a pound for cheese, but maybe back down to where we are right now at around $1.20. Because you still have an overhang of inventories, you still have almost as much milk as you did initially, and demand just isn’t quite as good as it had been before this all started. And so I’m inclined to think that our recovery is gonna be W-shaped and you’re gonna have to work through the system a bit. And it may not be till next spring. If we go through next…if this fall, we don’t have a second wave of infections, and we get into next spring and next spring is a normal spring versus the spring we’ve just had then you’re gonna start seeing everything kind of stabilize and go back to normal. And so my gut would be that, it’s gonna be next summer, the summer of 2021 before we see let’s say $18 milk again.

Ted: No, I think you’re too bearish. The issue will come down to whether or not the virus is controllable. So we don’t really know. But let’s assume that it will be, it’s beginning to look like it will be like at least to me at least. And I think we’ll know that by Memorial Day, by the end of May, that we’ll probably have a pretty good idea as to whether it’s manageable or whether or not we’re gonna have a spike. But if we have a spike, given the pattern of flu, which evidently this seems to follow. The spike will not be in the summer. The spike will be next winter. The question is, is it manageable? And I don’t think anybody will wanna shut down if they don’t have to. We’ve had seasons where everybody’s got the sniffles coughing and so on from flu. And it may be that that’s the kind of thing we’re looking at. We don’t really know. This thing is much more contagious. But the way things are looking, we’re all probably gonna get it at one point or another. If it’s gonna spread itself out all over the whole summer, and then the spike is gonna come when the weather cools down, by that time it’s over. We’ll have a higher participation at the hospital and so on, but it won’t cause a major economic debacle.

T3: Yeah, that was I think the term they’re using his herd immunity.

Ted: Yeah, that’s what I’m looking at. But we’re not anywhere close to that right now. We’ve gotten I think from what I’ve been reading 4% or 5%. People have had it or passed it. And we don’t even know whether or not there’s gonna be a second wave or not, whether you’re immunity is actually developed.

T3: Yep. Okay, well we’ll see.

Ted: Toby, can you get the dog barks out of it?

Anna: I say go ahead leave them in.

T3: I do too.

Ted: They’re really normally pretty well mannered but I’m sitting here talking of course and they’re feeling ignored. And then that’s when the barking comes from.

Anna: We welcome your participation in “The Milk Check.” If you have comments to share or questions you want answered, send an email to podcast@jacoby.com. Our theme music is composed and performed by Phil Keaggy. “The Milk Check” is a production of T. C. Jacoby & Company.

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Help is on the way for dairy farmers who were forced to dump milk as COVID-19 continues to jostle the industry. But does the USDA's proposed assistance go far enough? And, is Washington relying on outdated methods to solve a uniquely 21st century pr... Help is on the way for dairy farmers who were forced to dump milk as COVID-19 continues to jostle the industry.<br /> <br /> <br /> <br /> But does the USDA's proposed assistance go far enough? And, is Washington relying on outdated methods to solve a uniquely 21st century problem?<br /> <br /> <br /> <br /> Ted, T3 and Anna discuss the proposal and offer predictions on the timetable for a return to "normal." Ted's dogs Henry and Ralphie offer their analysis.<br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to "The Milk Check," a podcast from T. C. Jacoby & Company, where we share market insights and analysis with dairy farmers in mind.<br /> <br /> <br /> <br /> T3: So last week the USDA finally announced their plans to help the dairy industry and they came out with a package to help dairy farmers and then they also came out with a package to, what they called the food box package that included some food service distributors to get money to food banks and also some bid programs to buy some cheese and butter and other dairy products. The program to help dairy farmers I think I'd start by saying was probably underwhelming for most people in the industry. It probably helped smaller producers more than larger producers because it capped the compensation at $125,000 for the one program, and if it included some of the help they put on grains and others, I think it was capped at $250,000. For large farmers, that is really a drop in the bucket, and some of the numbers I've heard out there probably doesn't help some of those larger farmers by more than, 15, 16, 17 cents a hundredweight. Now for the smaller producers, that can potentially be very valuable. And if they're covering 85% of the losses and 85% of the drop in price from where they were in January to where they were by the middle of April, it probably is gonna end up being very helpful. But for the industry as a whole, these days over 70%, 75% of the milk comes from larger producers. And so you ended up with a program that probably did not help the majority of producers, at least from a milk perspective in the industry.<br /> <br /> <br /> <br /> The other thing it did not include, it didn't include anything that would incentivize reducing the milk supply because it was a direct payment program. And so the USDA will pay farmers directly, which means that it can't be used to incentivize producing less milk so that we can avoid dumping milk. But that also is, the third issue is there was nothing in the announcement at all to help with paying for the milk that was dumped, because so many processors had lost enough food service sales that they simply were not in a position to take milk and so they had to push back on their contracts and simply not take the milk. And in many cases, there were force majeure declarations, or in some cases, they didn't even take it that far. They just said, "We can't take it." And the Co-ops had no choice but to dump the milk because they had nowhere else to go with it. So that USDA program I would say has been underwhelming. And I don't know, Dad, do you have any other thoughts as to what you're hearing about how farmers are reacting to the program?<br /> <br /> <br /> <br /> Ted: Well, I haven't really heard how they're reacting. I don't think we're far enough into it. At this point all these programs are simply discussion. Nothing at this point has been written in stone. The problem would be with regard to the $125,000 you're right, it is a drop in the bucket and it addresses 20% or 25% of the milk supply and leaves the other 70% or so out, so they don't participate in that program at all. It strikes me, and then they're talking about purchasing programs and then the Secretary actually vocalized an aversion to any remuneration for dumped milk with the theory that ,"Oh no, we're not gonna do that. We're gonna buy products and we're gonna distribute it to the poor. T.C. Jacoby & Co. - Dairy Traders clean 34:37
COVID-19 could cause “an unbelievable shock” for dairy https://www.jacoby.com/covid-19-an-unbelievable-shock/ Fri, 03 Apr 2020 12:47:36 +0000 http://www.jacoby.com/?p=1722 As the COVID-19 crisis wears on, its effects on the dairy industry have become more acute. Will producers be forced to dump milk for a lack of buyers? Should the government step in to prop them up? And even if it did, would that be enough to prevent farmers from going out of business? Ted, T3 and Anna foresee a tough few weeks ahead. Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. T3: The last time we had the podcast...we did a podcast which was about two and a half weeks ago, there was a general feeling at the time that cheese and specifically cheddar might hold up okay in this because retail sales were good. What was really interesting what happened, you had the initial push into the supermarkets and everybody went into the supermarkets to buy and they bought up the whole store, you know, so that they could go home and stay at home for an extended period of time. And that drove retail sales way up and everybody expected those sales to come back down as we got into the middle of this crisis. Today is April 2. So this was about a week ago today, I would say a little over a week ago, Wednesday of last week. The best analogy that I've been able to come up with is around the interstate. You're driving at full speed, you know, little over the speed limit like we always do. And you will arrive in traffic, and you go from driving 60 miles an hour, you know, to almost a dead stop as fast as you can, because everything's backed up. And the reality is, it's traffic, you're gonna start moving again but once you're in traffic you're gonna be moving at 30 miles an hour. And that was almost exactly what we felt with this market in the middle of last week, everything was running at full speed. The restaurant chains and that distribution pipeline was really pulling hard and eager for every piece of cheese, especially cheddar that they could get their hands on. And then they just got to the point where they were caught up. And so there are all of those extra orders, which were extra orders so that you could take the displaced foodservice demand and put it into retail, all of a sudden those extra orders really slowed down. And the whole market just backed up and it's backed up almost immediately. And so it was within a 24- to 48-hour period you went from you know, moving a lot of cheese all over the place to try and reallocate the cheese towards retail sales to, "Okay, now where do we go with this cheese because nobody's buying?" It happened very quickly and all of a sudden the market really had no choice but to come down and that's why you suddenly saw this cheese market, you know, drop over the matter of three or four trading days from you know, something almost at $1.80 down to something at $1.30. Now, what will happen from here, I think it's harder to predict. I think the reality is hit that even cheddar which is I think the cheese that's gonna hold up best in this environment, the sales into retail are probably not gonna be enough to overcome the loss of sales on the food service side, especially when you consider that there's a lot of milk being moved away from non-cheddar plants into cheddar plants. So every cheddar plant in the country is running full. Where do we go from here? You know, one of the great reality of a market economy is uncertainty really tends to get people to stop buying not just at the consumer level, but also at the business level. And nobody was gonna buy any extra cheese at $1.70, now that we're at $1.30, my belief is we're in a place where companies are gonna say, "This crisis is temporary, eventually we'll come out of it. And I'm willing to build inventory here." So we're gonna start seeing cheese clearing against somewhere around these prices. My hope is that maybe we bounce out of the $1.30s, I'm gonna guess into the $1.40s but it's really hard to tell. You know,

As the COVID-19 crisis wears on, its effects on the dairy industry have become more acute.

Will producers be forced to dump milk for a lack of buyers? Should the government step in to prop them up? And even if it did, would that be enough to prevent farmers from going out of business?

Ted, T3 and Anna foresee a tough few weeks ahead.

Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind.

T3: The last time we had the podcast…we did a podcast which was about two and a half weeks ago, there was a general feeling at the time that cheese and specifically cheddar might hold up okay in this because retail sales were good. What was really interesting what happened, you had the initial push into the supermarkets and everybody went into the supermarkets to buy and they bought up the whole store, you know, so that they could go home and stay at home for an extended period of time. And that drove retail sales way up and everybody expected those sales to come back down as we got into the middle of this crisis. Today is April 2. So this was about a week ago today, I would say a little over a week ago, Wednesday of last week. The best analogy that I’ve been able to come up with is around the interstate. You’re driving at full speed, you know, little over the speed limit like we always do. And you will arrive in traffic, and you go from driving 60 miles an hour, you know, to almost a dead stop as fast as you can, because everything’s backed up. And the reality is, it’s traffic, you’re gonna start moving again but once you’re in traffic you’re gonna be moving at 30 miles an hour.

And that was almost exactly what we felt with this market in the middle of last week, everything was running at full speed. The restaurant chains and that distribution pipeline was really pulling hard and eager for every piece of cheese, especially cheddar that they could get their hands on. And then they just got to the point where they were caught up. And so there are all of those extra orders, which were extra orders so that you could take the displaced foodservice demand and put it into retail, all of a sudden those extra orders really slowed down. And the whole market just backed up and it’s backed up almost immediately. And so it was within a 24- to 48-hour period you went from you know, moving a lot of cheese all over the place to try and reallocate the cheese towards retail sales to, “Okay, now where do we go with this cheese because nobody’s buying?” It happened very quickly and all of a sudden the market really had no choice but to come down and that’s why you suddenly saw this cheese market, you know, drop over the matter of three or four trading days from you know, something almost at $1.80 down to something at $1.30.

Now, what will happen from here, I think it’s harder to predict. I think the reality is hit that even cheddar which is I think the cheese that’s gonna hold up best in this environment, the sales into retail are probably not gonna be enough to overcome the loss of sales on the food service side, especially when you consider that there’s a lot of milk being moved away from non-cheddar plants into cheddar plants. So every cheddar plant in the country is running full. Where do we go from here? You know, one of the great reality of a market economy is uncertainty really tends to get people to stop buying not just at the consumer level, but also at the business level. And nobody was gonna buy any extra cheese at $1.70, now that we’re at $1.30, my belief is we’re in a place where companies are gonna say, “This crisis is temporary, eventually we’ll come out of it. And I’m willing to build inventory here.” So we’re gonna start seeing cheese clearing against somewhere around these prices. My hope is that maybe we bounce out of the $1.30s, I’m gonna guess into the $1.40s but it’s really hard to tell. You know, but the prices now are probably gonna stabilize around these levels, which is maybe in the $1.30s for butter, or $1.30s for cheese you know, and maybe in the…I think powder is even harder to call right now. Let’s just say powder, in the $0.80 to $0.90 level. These are a lot lower prices than we had two months ago. I think, for the time being, they’re the new reality to where we’re gonna be. That means something like $10 to $11 Class IV prices, that means something like $12 to $13, $13.50 Class III prices. I know for many dairy farmers that is well below breakeven, but for the time being, that’s where we’re probably going to be.

Hopefully, we come out of this crisis relatively quickly. And one of the things that we can look forward to, we basically emptied out the foodservice distribution pipeline. So the first thing that’s gonna happen when we start emerging from this crisis is we have to fill the pipeline. So foodservice orders are actually going to be heavier than usual when we come out of this crisis, so I think we can expect prices to pop. But as we come out of the crisis, the question is, how much inventory have we built up, and how long is it gonna take to get that inventory back in line to how the world normal operates? And we just don’t know the answer to that. And we won’t know until all of this is over.

Anna: It sounds to me like one of the assumptions that you’re making in all of that, though, is that all of these companies will survive. And will they all survive to that point?

T3: That’s a good question. And I don’t think we know the answer right now. I will say this. A lot of the companies that are being hurt, are well run, well-capitalized companies that have focused on servicing an industry that has been growing steadily over the last 50 years and that’s the restaurant industry and the foodservice industry. They all, for the most part, not everybody, but for the most part, they’re in a position to survive this crisis, at least to some extent. And I’m hopeful, knock on wood, that most of them will. That doesn’t mean there will probably be some casualties. But it remains to see how big it is.

Ted: I don’t think anyone is aware of what’s coming down the road. Some of these customers, particularly in the northeast, they have to close down because one or two employees have come down with the plague. And that means that milk is gonna back up to the dairymen and milk is gonna wind up in the manure pit in quantities that we’ve never seen before.

T3: Well, and I don’t think it’s just gonna happen in the northeast. It’s gonna happen in Wisconsin, too. Let’s do the…

Anna: I think it’s very close to happening in Wisconsin now. If it isn’t already.

T3: I think it is already.

Anna: It’s interesting. I’ve been talking to producers. We’re hearing rumors, nothing confirmed, but we’re hearing rumors of just about everybody out there having to dump so.

T3: When you say everybody, do you mean all the co-ops?

Anna: All the different co-ops.

T3: All the different co-oops.

Anna: Yeah.

T3: You know, the dynamic that’s going on is fascinating if it wasn’t for the fact that it’s a little bit scary from a demand perspective. And that’s that what’s happening is you’ve got Class I sales are better than usual because of what’s going on. Class II sales on the milk side, I think they’re slightly better than usual. On the butterfat side, are worse than usual. And then you’ve got every Class IV plant in the country running full now. My career in the dairy industry is now you know, on its 26th or 27th year, I’ve never seen a situation where the problem is Class III focused from a demand perspective. But right now it is because what’s happening is where the milk is getting pushed away from are your cheese companies that primarily service the foodservice industry. And if you think about it, cheeses like feta, blue cheese, Swiss cheese, mozzarella for pizzas, those are the companies that are making those cheeses that are seeing significant drops in demand for the product. Cheddar, for the most part, is holding up fine. And it is also kind of the cheese that is storable. And people aren’t…they’re not pushing milk away from cheddar plants because they know they can put it in a warehouse.

You can only put so much mozzarella in a warehouse and freeze it, the demand for frozen mozzarella is limited. And then you really can’t store feta and blue cheese, and even Swiss cheese much at all. The result is those plants have no choice but to push the milk away from those plants. My back of the envelope math tells me that Class III utilization is gonna be down at least 10% you know, as long as we’re in this crisis. That is a big number because more milk is in Class III than any other classification in our country. And that’s what the milk is getting pushed away from and they can’t take the milk because they have absolutely no sales for their cheese. And so you’re either dumping the cheese or you’re dumping the milk, either way, it’s getting dumped. And that’s a scary proposition, especially in the…

Ted: But Ted, let me take it a little bit different angle. What if the plant, the Class III plant for specialty cheese servicing food service has to close down entirely?

T3: Mm-hmm.

Ted: You know, you figure, you know, and you could do all sorts of rough math here, but roughly 50% of the Class III is cheddar and the other 50% is a combination of specialty cheeses mozzarella and so on. And maybe you could say that mozzarella is half and the specialty cheeses are another 10% or so. But if the specialty cheeses have no place to go and it’s almost entirely food service, and if you have a situation where these plants are shut down, you know, these are little plants with guys working elbow-to-elbow packaging, cut and wrap and that kind of stuff. They have to shut down and they can’t run entirely. You know, you’re looking at 25% of the milk supply not having a home. Twenty-five percent. Now, you can take that math and do it a lot of different ways and so on. But that’s the potential of the problem that I see. And I don’t think anybody fully has got their head around it yet. I think they see that the foodservice industry is gonna shift back to the grocery store and retail. But I don’t think they really see the impact of the pandemic and not only the United States but worldwide.

T3: We’ve talked to a number of cheese plants and other plants in the dairy industry about this possibility. Start by saying this, I think the bigger the plant, the more they’ve thought this through. Those big plants have taken very significant steps to minimize both the possibility of their employees contaminating other employees and the possibility of if one gets a positive test, shutting down the whole plant. But I think you’re absolutely right with the smaller plants that don’t have the luxury of being able to do that kind of expensive planning or don’t have the setup inside the plant to be able to segregate. You know, for example, smaller plants tend to have almost all of their equipment in one big room, whereas bigger plants tend to go from room to room to room. So it’s easier for them to kind of segregate out the workforce and make sure they don’t cross-contaminate. It’s certainly a possibility. I think that certainly is going to be a problem and yes, if you have a plant or two on the smaller side, I think we have to expect eventuality that a couple of plants are gonna have no choice but to shut down. I don’t expect the major plants to put themselves in that position. I think they’ve just planned for it well enough to get past it.

Ted: I agree with you that the big plants are all highly automated and you don’t have people working side-by-side. In fact, there’s a butter powder plant, you could walk through a plant and not see anybody because it’s completely automated.

T3: Right.

Ted: The only person there would be in the control booth but pushing buttons and he would be one guy sitting behind the desk reading the newspaper. Unless something goes wrong, you’re not gonna really see much and I would imagine that a state-of-the-art cheddar type plant would be pretty much the same. But the little plants and the older plants, which make up a very significant portion of the milk supply, have a lot of people working side by side, particularly when they’re packaging and cryo-vaccing and so on, getting ready for sending the cheese out to foodservice or wherever it’s going. And if these guys shut down because one person at the plant comes down with the virus, imagine what that does. You could talk all day long about contracts. But if he has to shut down, it backs up to his co-op, which backs up to the dairy farmer and the milk winds up in the manure pit. I don’t think that we really fully understand at this point the magnitude of what’s heading our way and I don’t think any dairy farmer understands right now the potential for what might happen. He may not even get a check one month because of the situation, depending on how his co-op is configured or how its customer’s configured, so.

T3: Well and let me kind of…you bring up a good point and I’d like to take it a step further. You know, the industry as we’re getting to the middle of this crisis, you know, there’s…you’re starting to have industries conversations about what we can do. And for example, there’s been talk, and I’m not saying there’s talk at the government level, I’m saying there’s talk between industry participants about what’s the possibility of having a…you know, opening up the dairy support program where the CCC (USDA’s Commodity Credit Corporation) buys products like they used to where they bought powder and they bought butter and they bought cheddar cheese. So those are all possibilities. But you know, that support price is still at, you know, $10, I think it’s $10.10 a hundredweight, which is so far below today’s breakeven price for the dairy farmer, I don’t think it helps at all. It also doesn’t necessarily solve the problem because the problem isn’t the ability to make storable products. The problem is that there are a lot of specialty cheese plants, cheese plants that make a product that is not storable in that is not a commodity. They’re the ones who have lost their business. And so this milk doesn’t have a place to go. And because the plants that make the commodity product and storable commodity, they’re all already full. Those plants aren’t the ones that are creating this problem. And the reason we’re dumping milk, it’s your value-added specialty dairy plants that are having the problem that are focused on foodservice. So if the government wants to help out the dairy farmer, I think the way to do it is to figure out a way to compensate, you know, those co-ops in the industry for the milk that they’re dumped, that’s being dumped and that’s a…

Ted: You know, that’s exactly where I wound up. I had a conversation yesterday with congresswoman on the House Ag Committee. Now, she’s been there about eight years so she’s been around a while, but we haven’t been interactive with the CCC program for what? Twenty years? So…

T3: Fifteen, yeah, 15.

Ted: Something like that. So she didn’t even know how the CCC program worked and I had to explain it to her and it took me quite a while to do that and eventually she understood. And then I when I finished explaining I said, “You know, that doesn’t solve the problem.” And I suggested that what they consider is reinforcing a minimum price for milk dumped of one or two dollars under the Class III or IV price. Now, you talk about a grab bag boondoggle, that would be one but I…and I don’t know how the hell you’d ever enforce it, or audit it or whatever. But that would be a lifesaver in terms of what else you would get if you had to shift the milk let’s say from Syracuse, New York, to Wisconsin or Michigan or Kentucky. I mean, you’re looking at $6 and $7 hauls. So something like that. And then if you do that, even though the milk is lost, but you’re not having to haul it around, not sitting in a warehouse, you know, driving down the price a year or two down the road. From my perspective, that while it sounds on the front end like it might be pretty expensive, it may not be as expensive as you think. Conceptually, I think it probably is a better way to go than putting 10 million, 20, 30, 40, 50 million pounds of powder in the warehouse, which is gonna be hanging over the market for the next two or three years. You could just come up with a flat price. If you want ten bucks, ten bucks is a hell of a lot better than the other options.

T3: I think you’re making a good point. The best way to do it may be you wanna take the minimum price, you know, the minimum support price from 15 years ago which was about $10 a hundredweight, and say, “Okay, that’s what we’ll, you know, pay for all milk dumped.” Now, it’s a lot better than the zero revenue you get when you dump it right now. So and it would probably be enough to kind of help prop things up. So I have to admit that I agree with you on that.

Ted: It…you wouldn’t have to haul it, you wouldn’t have to store it. And it wouldn’t be hanging over the market for the next two or three years. And you’re still gonna…it’s still gonna be a shot in the head for dairy farmers who are not prepared to deal with that kind of a loss. And you may save a few dairy farmers.

Ted: You know, it was interesting, the House Ag Committee has not had any discussions with regard to this problem. They had no idea.

Interviewee: Well, it’s you know, this whole environment is evolving so rapidly you know, that I think everybody’s playing catch up. You know, the initial reaction of just getting some kind of a stimulus package out there, you know, for the economy as a whole. And obviously the focus correctly so, in the beginning, was, “Oh, my gosh we’re gonna have all these restaurants shutting down.” It takes a while for any of us to really think through all the different industries that are being affected by this. You know, it wasn’t until maybe a week ago that I realized the haircut industry is, you know, completely shut down. You know, there’s so many even non-food industries that are being just as greatly affected by this as food. And then thinking all the way up the food chain, you know, the initial reaction is, you know, dairy may hurt a little bit, but it’s gonna be fine because you still buy cheese in the supermarket, even if you don’t buy it in the restaurant, but the displacement of how it’s all playing out is drastic. And that’s the part that I think if you’re not in the industry, you know, trying to deal with these issues day in and day out, you know, it just doesn’t quite hit your radar until you’ve had a chance to really see how the whole world is being affected by this.

Ted: Yeah, you don’t, and I don’t think anyone has really thought about where this thing is going or what the consequences are gonna be or might be. So, and maybe we haven’t either. But I’m beginning to get an idea that this thing is gonna be catastrophic for the dairy industry. And it’s gonna be about a week from now that it’s gonna dawn on everybody where it is. When they get their check for April milk that’s when it’s really gonna hit home. There’s three or four or five dollars deduction…

Anna: I think it’s starting to hit already. I think people are aware, I mean, I would say in the last 24 hours, the phone calls have really started, it’s sinking in. As soon as people heard possibility of dumped milk, their brains went down the same steps that we did and I think that this is…I mean, the reality is sinking in right now. Now, it’s a different reality when your check comes in for sure. But I think people are aware, they see where this is heading.

Ted: Well, they got to feed these cows.

Anna: Yeah.

Ted: Okay, that’s money. So they got overhead that they got to cover. I’m sure they got inventories of corn silage and so on and that’s probably paid for. But they got to feed these cows, they got to feed them supplements and so on and then it comes back and then maybe for April, instead of getting $15 a hundredweight, they wind up getting $8 or $9. It’s gonna be an unbelievable shock even though they may be thinking about what’s coming. You know, we’ve never had to dump any milk on any of the co-ops that we’ve supported. I can’t visualize that this bullet is one that we’re gonna be able to dodge.

T3: Let me take this a step further, this issue is not isolated to milk. On the butter side of the coin, you know, there has been a number of major cream buyers that have declared force majeure on their cream contracts. And you know, I’m pretty sure I know what’s going on. You know, these are our large users of butterfat, butter companies but not just solely butter companies that have a significant amount of their sales into the foodservice industry, you know, contracts with restaurant chains, etc. You know, those restaurant chains have declared force majeure you know, and cancel their butter contracts or their contracts for cream or whatever they use with butterfat in it. And they’ve had no choice but to say, “We can’t take the cream because we have no place to sell the output of the product.” And there’s cream being dumped too for the same reason that there’s milk being dumped. And so this is a very serious issue that needs to be addressed. And you’re right, I don’t think anybody…there’s so much going on in this economy as a result of this, you know, that I think at the federal level, you know, it’s hard for a lot of the politicians to get to the point where they understand that how the dairy industry is being affected.

Ted: Yeah. You know, I hate to be the harbinger of bad news, but you know, they need to get their head around what’s coming down the road.

T3: Absolutely. But there’s people who out there, you know, the congressmen and women may not understand the issue, there are people in the U.S. Department of Agriculture that hopefully, you know, are listening to people in the dairy industry and in some of the trade associations in Washington, you know, that are starting to realize that this is an issue that needs to be addressed, that needs to be addressed quickly. And how do they get this up the chain as fast as possible so that this doesn’t result in a major catastrophe for the industry.

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As the COVID-19 crisis wears on, its effects on the dairy industry have become more acute. Will producers be forced to dump milk for a lack of buyers? Should the government step in to prop them up? And even if it did, As the COVID-19 crisis wears on, its effects on the dairy industry have become more acute.<br /> <br /> <br /> <br /> Will producers be forced to dump milk for a lack of buyers? Should the government step in to prop them up? And even if it did, would that be enough to prevent farmers from going out of business?<br /> <br /> <br /> <br /> Ted, T3 and Anna foresee a tough few weeks ahead.<br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind.<br /> <br /> <br /> <br /> T3: The last time we had the podcast...we did a podcast which was about two and a half weeks ago, there was a general feeling at the time that cheese and specifically cheddar might hold up okay in this because retail sales were good. What was really interesting what happened, you had the initial push into the supermarkets and everybody went into the supermarkets to buy and they bought up the whole store, you know, so that they could go home and stay at home for an extended period of time. And that drove retail sales way up and everybody expected those sales to come back down as we got into the middle of this crisis. Today is April 2. So this was about a week ago today, I would say a little over a week ago, Wednesday of last week. The best analogy that I've been able to come up with is around the interstate. You're driving at full speed, you know, little over the speed limit like we always do. And you will arrive in traffic, and you go from driving 60 miles an hour, you know, to almost a dead stop as fast as you can, because everything's backed up. And the reality is, it's traffic, you're gonna start moving again but once you're in traffic you're gonna be moving at 30 miles an hour.<br /> <br /> <br /> <br /> And that was almost exactly what we felt with this market in the middle of last week, everything was running at full speed. The restaurant chains and that distribution pipeline was really pulling hard and eager for every piece of cheese, especially cheddar that they could get their hands on. And then they just got to the point where they were caught up. And so there are all of those extra orders, which were extra orders so that you could take the displaced foodservice demand and put it into retail, all of a sudden those extra orders really slowed down. And the whole market just backed up and it's backed up almost immediately. And so it was within a 24- to 48-hour period you went from you know, moving a lot of cheese all over the place to try and reallocate the cheese towards retail sales to, "Okay, now where do we go with this cheese because nobody's buying?" It happened very quickly and all of a sudden the market really had no choice but to come down and that's why you suddenly saw this cheese market, you know, drop over the matter of three or four trading days from you know, something almost at $1.80 down to something at $1.30.<br /> <br /> <br /> <br /> Now, what will happen from here, I think it's harder to predict. I think the reality is hit that even cheddar which is I think the cheese that's gonna hold up best in this environment, the sales into retail are probably not gonna be enough to overcome the loss of sales on the food service side, especially when you consider that there's a lot of milk being moved away from non-cheddar plants into cheddar plants. So every cheddar plant in the country is running full. Where do we go from here? You know, one of the great reality of a market economy is uncertainty really tends to get people to stop buying not just at the consumer level, but also at the business level. And nobody was gonna buy any extra cheese at $1.70, now that we're at $1.30, my belief is we're in a place where companies are gonna say, "This crisis is temporary, eventually we'll come out of it. And I'm willing to build inventory here. T.C. Jacoby & Co. - Dairy Traders clean 25:35
COVID-19: A lot left to learn https://www.jacoby.com/covid-19-a-lot-left-to-learn/ Fri, 20 Mar 2020 22:02:22 +0000 http://www.jacoby.com/?p=1690 As the global COVID-19 outbreak continues to disrupt life as we know it, the dairy industry knows only one thing for sure: There's a lot left to learn about the impact the pandemic will have on global markets. Ted, T3 and Anna phone in for a discussion on dairy markets buffeted by confusion. But as Ted reminds us, uncertainty is no stranger to dairy. He says the industry is equipped to handle what's thrown at it. Anna: Welcome to the ''Milk Check,'' a podcast from TC Jacoby & Company where we share market insights and analysis with dairy farmers in mind. Ted: Leading into this by now I think everybody's interested in knowing what effect the coronavirus will have on the dairy industry. And of course, at this point in time, the effect is mostly confusion in that consumers are going into the grocery stores and cleaning out the milk section, buying long-life products including cheese and shying away from going into restaurants and food service establishments. And so we have a migration of milk away from cheese plants serving food service and special kinds of group facilities, restaurants and so on, hotels, towards retail, cut wrap and retail-type packages. In addition to that, we have a shortage of milk at the bottling plant because people are going in and cleaning out the dairy case similar to what they traditionally do just before a hurricane hits down in Florida. The normal effect of this is to have this surge in production and change, and then a week to ten days later, everybody has a lot of inventory in their refrigerator and sales start to back up and surplus begins to exist. Whether that's gonna happen this time or not remains to be seen. It could not in that everybody seems to be heading for their home and then planning on staying there for a while. And I think most people are expecting to be there at least a month. So that's gonna mean that they're gonna keep an inventory of milk, long shelf life products and so on, and they're gonna be eating those kinds of products at home as opposed to going out to restaurants. School lunch business is another issue. I understand that in some areas, the school milk is being delivered by school buses. I'm not quite sure how that works. But most of the milk being consumed now will be consumed at the kitchen table. So that also bodes well for retail milk sales. Does not bode well for people who are looking at school lunch business, school milk. So there is confusion, and how long it will play out remains to be seen. It could go on for a week or two and it could go on for a month or two, maybe longer. So we'll have to see. The dairy industry in general can handle whatever is thrown at them. Production was just announced for last month and it's up some big numbers, roughly one and a half percent depending on who you're reading. One source says 2%. That's a very bearish number with regard to milk and milk pricing under the longer term and would indicate that milk pricing, a Class III price somewhere in the $17.00, $17.50 range, pretty attractive to dairyman for them being increased production that much. Our general view of it is that anything over 1% is bearish as far as milk is concerned. And I think the markets right now in addition to the negative effects of the corona issue, I think production is also weighing heavily on the markets. Even though the cheese market went down a little bit today, the futures market went up because I believe basically that the pressure down is overdone and so it's rebounding somewhat. Ted, would you wanna weigh in on the cheese market? T3: Sure. Obviously what's happening in cheese, just like all the rest of the, not just dairy, but the food industry, is you're seeing everything skewed towards retail demand at the moment. There's a lot of retail supermarket chains or club stores that are reporting, you know, demand for cheese and other dairy products up as much as two times to three times normal demand.

As the global COVID-19 outbreak continues to disrupt life as we know it, the dairy industry knows only one thing for sure: There’s a lot left to learn about the impact the pandemic will have on global markets.

Ted, T3 and Anna phone in for a discussion on dairy markets buffeted by confusion.

But as Ted reminds us, uncertainty is no stranger to dairy. He says the industry is equipped to handle what’s thrown at it.

Anna: Welcome to the ”Milk Check,” a podcast from TC Jacoby & Company where we share market insights and analysis with dairy farmers in mind.

Ted: Leading into this by now I think everybody’s interested in knowing what effect the coronavirus will have on the dairy industry. And of course, at this point in time, the effect is mostly confusion in that consumers are going into the grocery stores and cleaning out the milk section, buying long-life products including cheese and shying away from going into restaurants and food service establishments. And so we have a migration of milk away from cheese plants serving food service and special kinds of group facilities, restaurants and so on, hotels, towards retail, cut wrap and retail-type packages. In addition to that, we have a shortage of milk at the bottling plant because people are going in and cleaning out the dairy case similar to what they traditionally do just before a hurricane hits down in Florida.

The normal effect of this is to have this surge in production and change, and then a week to ten days later, everybody has a lot of inventory in their refrigerator and sales start to back up and surplus begins to exist. Whether that’s gonna happen this time or not remains to be seen. It could not in that everybody seems to be heading for their home and then planning on staying there for a while. And I think most people are expecting to be there at least a month. So that’s gonna mean that they’re gonna keep an inventory of milk, long shelf life products and so on, and they’re gonna be eating those kinds of products at home as opposed to going out to restaurants.

School lunch business is another issue. I understand that in some areas, the school milk is being delivered by school buses. I’m not quite sure how that works. But most of the milk being consumed now will be consumed at the kitchen table. So that also bodes well for retail milk sales. Does not bode well for people who are looking at school lunch business, school milk. So there is confusion, and how long it will play out remains to be seen. It could go on for a week or two and it could go on for a month or two, maybe longer. So we’ll have to see.

The dairy industry in general can handle whatever is thrown at them. Production was just announced for last month and it’s up some big numbers, roughly one and a half percent depending on who you’re reading. One source says 2%. That’s a very bearish number with regard to milk and milk pricing under the longer term and would indicate that milk pricing, a Class III price somewhere in the $17.00, $17.50 range, pretty attractive to dairyman for them being increased production that much. Our general view of it is that anything over 1% is bearish as far as milk is concerned. And I think the markets right now in addition to the negative effects of the corona issue, I think production is also weighing heavily on the markets. Even though the cheese market went down a little bit today, the futures market went up because I believe basically that the pressure down is overdone and so it’s rebounding somewhat. Ted, would you wanna weigh in on the cheese market?

T3: Sure. Obviously what’s happening in cheese, just like all the rest of the, not just dairy, but the food industry, is you’re seeing everything skewed towards retail demand at the moment. There’s a lot of retail supermarket chains or club stores that are reporting, you know, demand for cheese and other dairy products up as much as two times to three times normal demand. We’ve probably all seen pictures floating around the internet of empty milk cases, empty cheese cases and things like that as people have cleared out stores.

So what does that mean for cheese as a whole because there’s a lot of different kinds of cheeses. For the most part, I would say it is probably bullish cheddar and specifically cheddar blocks and it is bearish mozzarella and certain specialty cheeses. On the mozzarella side of the equation, you know, those mozzarella companies selling to the delivery pizza guys, you know, the Dominoes, the Pizza Hut, the Papa John’s of the world, their sales are going to hold up just fine. My expectation, and I think most people we talk to, their expectation is that the pizza delivery companies are going to, their orders are gonna be the same, if not even a little bit better than usual as people hunker down at home.

On the flip side, if you’re a mozzarella company and your customers are the mom and pop pizzerias where you dine in, their sales are being hurt and being hurt, you know, quite severely by what’s going on. You know, some of the pizzeria companies service both markets, so they’re seeing maybe a little bit of a shift from one to another. But I know there’s also certain mozzarella companies that tend to focus on one kind of customer versus the other.

The other kinds of cheeses that are being affected negatively are specialty cheeses like feta, blue cheese and Swiss cheese which have a pretty disproportional amount of their sales skewed towards dine-in restaurants. You know, think of the, whether it’s the high end gourmet restaurants or steak houses or even the middle tier dine-in restaurants. You know, that’s tends to be where you get your salads with feta cheese on them or blue cheese on them and things like that. And so those specialty cheese companies are also being hurt.

Processed cheese sales right now are up mostly because IWS slices at the retail store are up quite a bit. Well, that demand will probably be above normal as long as the crisis is happening, I think that the initial surge is happening right now and most everything will kind of calm down a little bit in the coming weeks. They’ll continue to stay a little bit above normal. What’s gonna happen in the next couple of weeks is you’re gonna have to refill the pipeline. The amount of demand at the supermarket level was so strong. Not only did they empty the shelves, but they emptied the distribution pipeline too. So you’ll probably see cheese prices stay up for some time as that pipeline refilling continues.

Eventually though, and my guess is you’re talking about three weeks from now, though the time is anybody’s guess. And I should also mention that today is Thursday, March 18th, just so everybody understands kind of where we are in the calendar as we’re talking. It’s gonna be three weeks, maybe four weeks from now, sometime around Easter when my guess is that the declines in food service demand start to catch up to the overall market and then you’ll start to see things flip back the other way and maybe see some pressure on cheese prices to the downside.

What’s interesting is I suspect that the one cheese that is probably gonna benefit in a positive way by all of this is cheddar. Cheddar sales at the retail level, especially if you include processed cheese, which is made from cheddar barrels, tends to be a lot higher than cheddar cheese at the supermarket, or excuse me, at the restaurant level. And so if there’s one cheese that may be benefiting by what’s going on, it’s probably cheddar. Whereas I think as a whole mozzarella and the specialty cheeses for the most part are probably being hurt. That’s gonna cause this market to kind of hang up here for a little while as cheddar demand continues to be strong. And cheddar demand is it’s cheddar that we trade on the CME and that’s what tends to price all cheeses.

And so you’re probably gonna have a very interesting market going on for a while where you may see milk being pushed away from some specialty cheese and mozzarella plants. You’re gonna see those cheeses maybe be discounted a bit while cheddar demand continues to be strong and that will hold the cheese price up and also the milk price up. But it’ll make the bases suffer a little bit.

On the flip side, when we talk about Class IV, that would be butter and non-fat dry milk and powder, I think you’re gonna have to be a little bit less optimistic. For the last five weeks or so, non-fat dry milk sales have really struggled and we have not seen it pick back up yet. I think one important comment to make about non-fat dry milk sales is we knew that a lot of the international markets, a lot of the international buyers of non-fat had already started building up their inventories before this crisis hit. And so they had inventories to work off of while this was all going on.

International shipments really dropped off. A lot of international sales were canceled as containers became difficult to find because things were not shipping back out of China. And the result was that we just couldn’t get the product into a container and to a customer internationally. But keep in mind that this crisis is hitting Europe even worse than it is the United States, or at least so far it has. That means that the demand destruction going on in Europe is just as bad, if not worse than the demand destruction going on in the U.S. Kind of even more to the point, Italy, which has been a major flare up center for COVID-19, the region of Italy that crisis is happening happens to be the dairy region of Italy.

So you’re seeing some pretty serious dislocation from a dairy perspective in Europe too. So when the international market… and where I’m going with this is when the international market starts buying again, I don’t think we can count on exports to be a huge savior for us because Europe’s gonna be trying to figure out where to move product just as much as we are. You’ve got inventories being built in Europe as well as in the U.S. and both in the skim milk powder, non-fat dry milk, part a of the dairy industry. I think you’re gonna continue to see major issues with pricing well into the summer and into the fall as both major global milk sheds are gonna have surplus product that they’re gonna try to move.

Ted: Let me weigh in a little bit on the Class IV issue. If you look at the synthetic pricing with the EU versus the U.S. and also if you wanna put New Zealand in there and Australia, the U.S. pricing over the last several months has adjusted to where it now is lower than the other options in the international markets. It doesn’t mean necessarily that we’re gonna just arbitrarily unload a lot of products because of all the disruption right now is certainly gonna put a little bit of a lid on demand, but our pricing is lower. And I think…

T3: Dad, I’m not sure that’s still true. So for example, Global Dairy Trade…

Ted: It was true as of last Friday.

T3: Well, Global Dairy Trade on Tuesday of this week, New Zealand skim milk powder prices are now at a $1.15. So yes, that’s a few cents above where we are in the U.S. today. Well…

Ted: We’re actually under a dollar.

T3: We’re at $0.9650 on the CME market. Keep in mind that most of the powder that is sold on the CME market right now tends to be older product because it can be up to six months old and it also tends to come from a manufacturer or two that are not necessarily the most desirable manufacturers. And basically, what I’m saying is this, if you’re one of the powder producers that everybody wants, you’re gonna get a premium for your product over what the CME price is. And so you rarely sell your powder on the CME.

And so right now the U.S. price and let’s call it $1.00 and yes, you’re $1.15 coming out of Fontera. $0.15, yes, we’re lower. Usually there’s about a $0.10 difference. It can vary quite a bit, but $0.10 is usually the normal difference. And a lot of that is logistics. So yes, we are a tad lower right now. I don’t think Europe…

Ted: Our butter also, our butter pricing is lower. And of course, we’re importing quite a bit of Kerrygold butter at the moment, and we have for a while. But our butter price is lower, which would indicate that if someone wants AMF or something, they’re gonna get it in the United States as opposed to going to New Zealand for it. The point I’m trying to make is that when we look at the futures market and we see that the Class III markets for the next several months are down in the $15.00s, in some cases the low $15.00s, and the Class IV markets are down in the high $13.00s, you know, a lot of that effect is due to the confusion of the corona issue, coronavirus issue, and not necessarily due to actual pricing disparities.

So my tendency to believe is that as people get used to this whole conundrum, that these prices are gonna come into some equivalency and that will mean that our futures prices will probably tend up not down. Because right now they’re lower than they need to be. In order for our prices to go lower, we’re gonna need an actual decline in cheese and powder prices. And we may get one. But frankly under the current situation, I doubt if there’s a lot of downside exposure over where we are right now. If everybody’s eating at home, I think our cheese sales and milk sales are actually gonna go up not down.

T3: I think it’s very product-specific. You’re gonna see some go up and you’re gonna see some go down. Fluid milk sales, I think it’s very likely the Class I sales benefit from what’s going on and that’s a good thing. We’ve needed that. Likewise, I think yogurt sales will benefit from what’s going on because yogurt demand is very skewed to the retail side. Any dairy product that is skewed towards retail is gonna benefit. But not all dairy is skewed towards retail. You know, we talked about with cheese, there are certain cheeses that are gonna be hurt.

I think butter and non-fat their demand is gonna be hurt and it’s gonna be hurt on a global basis. And so you’re gonna have a bit of, you know, if you will have and have nots across the spectrum of dairy products . And it’s gonna be very interesting to see how that all plays out because it’s gonna be, I don’t know if you can call it demand destruction as much as demand dislocation. But often what happens is demand dislocation ultimately leads to lower levels of demand simply because people can’t get what they want. And I think that will play a role. I’m also very concerned just in terms of the economy as a whole if we’re gonna have a strong enough economy, let’s say Q2, Q3 and into Q4, you know, to see demand really start to come back, especially at the food service level.

Ted: Well, we don’t know. And a lot depends on how this whole scenario plays out. If the coronavirus goes for four months, five months, if that issue isn’t under control by then where people are out moving around, yeah, the economy’s gonna take a major hit and that’s obviously gonna affect our markets. If it’s under control within 30 to 60 days, I think our markets have a chance to rebound tremendously because that’ll be right about the summertime when they normally start to rebound anyway. So we should see a doubling effect. I guess we’re gonna find out whether eating at home causes more dairy products to be consumed or not. And that’ll be an interesting discussion to have a few months from now.

T3: It will be, it—yeah, I think it will be a good learning experience. You were talking about whether we’re gonna have a V-shaped recovery as they’re starting to refer to it or a more prolonged recession. I’m hopeful that we have a V-shaped recovery. And if the COVID-19 cases in the U.S. follow the same pattern as it has in China, I think we will have a V-shaped recovery where we hit bottom and bounce off that bottom very hard and the economy, comes roaring right back.

I’m pessimistic that that’s what we’re gonna get. The reason I’m pessimistic is as a democracy suppressing freedom, in this case, the freedom of the ability to move around you know, to different locations or even different cities, it’s a very undemocratic thing to do. And I think it’s unlikely that the U.S. will shut down travel to the extent that they did in China, or even more importantly, impose the level of draconian quarantines that they did in the Wuhan region of China to make sure that those people who were infected were not infecting others. And so my gut is, knock on wood, I really hope I’m wrong, but my gut is that we’re not gonna see the same plateauing of infected cases that you saw in China over the last few weeks.

Ted: Well, we’re gonna find that out. Frankly, I think we’re buttoned down pretty good right now. No one’s flying anywhere and no one is taking vacations. A lot of people are staying and working from home. I don’t think it will totally eliminate new cases, but it certainly should help flatten out the curve. You know, they talk about April 6, April 10 something like that is everybody getting back to work. I don’t think that’s gonna happen. I think we’re looking at 60 days minimum, but who knows. I don’t think we have any treatments or vaccines out there that are gonna make a big difference. So it’s everybody, the only way to get over this problem is for everybody to stay home until the disease runs its course. And that I think will be quite a bit of time.

T3: Well, you’re probably talking to a different set of people than I am because I have teenagers that are in college and high school and they have friends who are still on spring break right now in Florida, in Cancun, in places like that. And they’re still traveling. And I think that’s one of the issues we’re gonna have is that there are still people who are and it’s a lot of it is going to be our 20 somethings and our teenagers who you just aren’t going to take this quite as seriously as, you know, my generation and your generation is. And that’s what I’m concerned about because they’re the ones who yes, they can still get sick. But more than likely, they’re carriers who will transfer the disease to others and that can become a serious problem.

Ted: Well, I agree. I’ve seen the TV pictures too. But hopefully they are small enough segment of the population where they don’t do a great deal of damage.

Anna: At least our experience has been, our kids have, you know, friends that were actually originally left for breaks and then came home, you know, canceled things before they got to their final destination, turned around and came back. But a lot of movement’s still happening. I think one of the things that I’m most curious about, well, we haven’t been doing a lot of testing and I think it’ll be curious to see what the impact is if that changes and the numbers are drastically changing, what that does to everyone psychologically in terms of buying patterns and, you know, hunkering down and everything else.

T3: Anna, I think you’re making a really good point. We’ve been reading a lot lately that you’re gonna start seeing an exponential growth in cases over the next week as much because we’re finally getting testing to the right places as because, you know, the infected people, the number of people infected is continuing to grow. So it’s gonna almost feel like it’s worse than it is probably for the next week or so.

Anna: I think it’s going to feel as worse as it actually already is. Right now, I don’t think it feels as bad as reality because we just can’t see it.

T3: Mm-hmm. We’ll see.

Anna: On the ”Milk Check” podcast, we tackle questions and share ideas that move dairy forward. Now, we’re making it easier for you to get answers to your lingering questions. Do it with one click, submit your questions online at jacoby.com/askted.

T3: One thing I will comment on is, when I talk to our customers on the west coast in California, Oregon, Washington, I feel like they’re ten days to two weeks ahead of us in terms of how they’re reacting. Like they’ve already been bunkered down for a couple of weeks and here in the Midwest, we’re just starting to bunker down this week. And we’re starting to see—two weeks ago we were seeing surges in demand for cheese on the west coast. And that is starting to tail off now out west. And currently in the Midwest, we’re seeing some surges in demand and I have to believe in a couple of weeks we’re gonna start seeing that tail off as well.

And so I think we’re really gonna start to feel the effects of, we’re gonna start getting to know where we really are on demand for dairy as a whole in about two weeks. But right around the first week in April, I think is where we’re really gonna have a feel for what this is gonna be like. And then it’s just gonna be a matter of how long are we going to be practicing social distancing?

Anna: How long does it take? You know, you said we empty out stores and we’ve seen that around here. They’ve emptied out warehousing and everything else. That pipeline has been disrupted. How long does it take to get that back in stores? And even if we get it, if people are more concerned, especially if we see higher numbers, will they leave to go shopping even if they need to? I mean, you know, I was looking around our house and going, “well, we probably could eat Ramen for a while if we really have to, although I don’t want to.” I mean, will people leave to go buy more cheese, buy more milk, even if we can get the stores stocked back up again.

Ted: I think they will. I think they’re going to have to eat. Now, they could also have it delivered if they want to.

Anna: I think that’s pretty difficult right now. Most delivery services or pickup services are canceling all their orders right now.

Ted: I guess we’re gonna find out. We’re really in uncharted waters here and it’s hard to speculate. But if people start, if their refrigerators start to run bare, they’re gonna go out and load up again until they see the end in sight. That’s the way I would look at it.

T3: Mm-hmm. In terms of the timeline, Anna, that you were talking about, kind of back of the envelope math would be if this week the supermarkets—there’s a run on the supermarkets and they run out of cheese, then end of this weekend and the next week they’ll reorder at much higher levels than they usually do. The week after that is when the converters need to reorder or the distributors and the converters need to reorder. And then the week after that is when the manufacturers of the cheese receive the higher levels. So there’s about a three to four-week timeline. That’s about the length of the pipeline between when the cheese hits the supermarket and when the cheese plant takes the milk and makes cheese.

And so you’re probably in week two, at least in the upper Midwest, in week two of that four-week period of kind of restocking the pipeline where first things sell out and then they need to be restocked. So this week and next week are probably gonna be two weeks of high demand that you’ll feel at the wholesale level and at the manufacturer level and then probably the week after next is when you start to see things tailback off and… I’m not gonna say they’re going back to normal, it may be a little while before that happens, but they’ll be a little bit less bubbly than they are right now.

Toby: What are the farmers doing in all of this? Or are they just staying focused on, “my cows are still giving milk so I still need to milk the cows, and come what may I have a job to do?”

Anna: My perspective is I think that they have a job to do and they’re just going about it and getting it done. But especially for large farms, a lot of them are concerned about what’s gonna happen to their workforce if somebody comes in sick. So that’s, I think it’s a worry, but I don’t think it’s changing how they’re going about their daily business in terms of, you know, just expecting that of course the cows have to get milk, they need to be fed and everything needs to kind of happen as business as usual. I think there’s more cleaning, there’s more safety, you know, concern and greater attention paid although at least all the farms we deal with, I feel like they’re all really good about that to begin with. So I don’t know that it’s changed a ton about their daily operations. They’re worried, I’m sure too though.

Ted: And I agree with Anna that they’re worried. However, most of these dairies… first of all, it’s large commercial dairies that produce 70% of the milk. That means they are not located in downtown New York or Chicago or San Francisco or Seattle. They’re located out in the desert or in a corn and bean farm country, 50 or 100 miles away from an urban development. They’re not as prone to have incidences occur. Sure, they can occur, but the incidence is much more rare around a large dairy than it would be say in an urban area.

T3: Just to add to that conversation, I’ve had a number of conversations this week with a lot of our cheese manufacturers and cheese converters about what steps they are taking and how they would react if someone on their workforce became infected with COVID-19. I’ve actually been really impressed with a lot of these operations and how they’ve already prepared and thought it through. A lot of cheese manufacturers, a lot of cheese converters are already having people take their temperature as they arrive at the facility. And anybody who’s running even a slight fever has to immediately go home. They already have procedures in place in case somebody does get infected, how they would react to it so they wouldn’t need to shut down, for example.

The concern would be those facilities where there’s a lot of people working in the same place and in the same room. And I tend to think of cheese converters as the most likely place for there to be a pretty big problem because it’s much more labor-intensive than let’s say a cheese plant or a butter powder plant, a lot more hands on and a lot more people in one place.

I’ve heard of plants who are staggering their workforce. So in other words, where it used to be the next shift would come in maybe 15 minutes to a half an hour before the previous shift leaves, they’re now staggering it. So there’s a half an hour gap between the two so that the different shifts don’t actually come into contact with each other so that they’ll minimize that kind of contamination if it happens. They’re also, you know, obviously taking much more stringent procedures in place to wipe down surfaces and to make sure everybody is, you know, practicing the same thing they’re telling us with hand sanitizer and things like that.

So there’s a lot of these plants have done a good job of thinking through what the contingency plans are, thinking through of what their preventative measures are to make sure that they don’t end up in a situation where you shut down because someone on their workforce has become infected. I mean, could you just imagine how bad it would be for dairy if one of our largest cheese plants had to shut down for a week or two, because someone was infected by COVID-19? You wouldn’t be able to move the milk fast enough to keep from dumping it. So these operators know this and they’re taking the steps necessary to make sure that it doesn’t happen. And I gotta say I’m thankful for that and impressed.

Anna: I’m impressed with how quickly people have moved. I’m concerned about the preventative that we have when our main screening tool is temperature. And, you know, what they’re starting to see, especially out of like Singapore and some of the other places where they’ve been, you know, watching community transmission, the average is about 50% of community transmission is from people who are showing no symptoms. So I do find that still a little intimidating in terms of whether or not you can have where, you know, even with that process in place, you may still have someone who comes in who is ill and has no idea.

T3: Absolutely. And they can only do, they can only control what they know and they can only take the steps that, you know, they’re able to take. But at least from what I can tell, most people are being as proactive as they can.

Anna: And I think they are. And I think people have acted very quickly, which has been impressive to see. I mean, there’s really not a whole lot more you can do, right? I mean, you know, tell people to stay home when they’re sick. Check and make sure that any symptoms that you can identify, you send them home if needed.

Ted: I think in general, one of the lessons from this whole thing, you know people are going into the stores and they’re cleaning out certain items, food, toilet paper, paper towels, you name it. I’m not sure what they’re thinking. I don’t think our food supply is threatened by this at all. You know, for the reasons that you have described and the fact that the industry has already thought it through. Even if an employee of a large dairy turns out to be infected, say he’s a milker or he’s running a feed wagon or something, is that gonna have any effect on the milk? No.

First of all, it’s raw milk, it’s gotta be pasteurized, but even if it was raw, you’re drunk raw, which it’s not, he doesn’t touch it and he’s not even close to it. I don’t see any threat to the food supply at all. And I particularly don’t see any threats for the milk supply. I think as far as milk is concerned, our threat is the other side too much. Too much production. And this change in the dichotomy of consumption is gonna be something that we will need to watch and learn from.

Anna: Do you know if anyone is tracking the retail behavior? It was funny because someone had a post up about, you know, Trader Joe’s should be doing their homework, watching what gets cleared out and what no one touches, what stays on the shelves. And I knew when we made our last trip to the grocery store, all the whole milk gone, Class— 2 percent, I think that was all wiped out. Skim was still there, a little bit of 1% and that was it. I mean everything else was cleaned out. Is anyone actually kind of watching what people are taking out of the stores first?

Ted: I’m sure the stores know. That’s their business and I’m sure they’d track it rather closely.

Anna: I would think but…

Ted: But I was talking to someone at noon and he went to Costco last weekend and it was shoulder to shoulder in there. And they were doing exactly what you’re describing. They were cleaning out everything as much as they could jam in those oversized golf carts that they use. He went in again yesterday and he says it was almost empty.

Anna: Yeah. I don’t know that people were panic buying so much that they thought, you know, “I won’t be able to get to this later.” I think they were just trying to get it so they could go home and not have to leave again.

T3: Which means we’re gonna have three or four weeks of suppressed demand because everybody bought four weeks..

Anna: Now, everybody is home. Mm-hmm.

T3: Right.

T3: Pretty hard to last three or four weeks, maybe a week, maybe two weeks at the outside.

T3: I think it depends on the product, Dad. Toilet paper can last a few years, so toilet paper use. That’s probably why there was a run on toilet paper. Cheese can…

Anna: I think most people are pretty well-stocked on toilet paper.

T3: Well, but think about it. Let’s just stick to dairy for a second. You know, cheese has a much longer shelf life and lasts longer than, let’s say, fresh milk. So you can see people stack up on cheese and cheese demand may take a bigger hit than milk because, you know, they could buy two months worth of cheese and not have to go back to the store and get cheese, but they’re not gonna be able to have, you know, depending on the milk, some of the UHT milks may have 60, 90 day shelf life. But you see where I’m going with that. You’re just not, you’re gonna have to go back to the store and buy milk way before you’re gonna have to go to the store and buy cheese if you stocked up on cheese.

Anna: Yeah. I can tell you what the expiration on my milk is without looking because I already know when I would have to go back to the store.

Ted: Yeah, that’s a good point.

T3: So it’s gonna be interesting. I think the next four to six weeks I think we’re going to learn a lot of new things about demand, about how people react in an environment like this. And it’ll probably help us understand some different patterns in terms of dairy that maybe we weren’t able to recognize before because an event like this will help us, you know, understand what people stock up on. And, you know, if they’re gonna bunker down for a month, you know, what are the at least from a dairy industry perspective for this conversation, you know, what are the things that people wanna make sure that they have in the refrigerator if they’re gonna bunker down for a month versus what are those things that don’t really matter?

Anna: Well, that’s why I thought it was interesting that you talked about butter demand being lower because I mean we definitely made sure we had plenty of butter in the house.

T3: So butter demand right now is up at the retail level, but so, but here’s the, you know, one of the comments that I heard the other day was Easter has been canceled and it was being referenced in respect to butter demand. If you’re not gonna get together in a, you know, extended family group for Easter, the reality is, you know, the groups are gonna be smaller. Maybe you’re not baking as much as you used to bake. And so butter demand over Easter is gonna be down.

Anna: Very true.

T3: Combine that with the fact that your people going to steak houses where there’s bread and butter on the table and nice restaurants and things like that. Butter demand’s gonna be down there too. And butter like cheese, it has a pretty good shelf life on it. You can put butter in your, and I don’t know about you guys but I tend to buy butter and put it in my refrigerator and it’s usually there for three months before I get to it a lot of times. So butter is easily one of those where I think, you know, you may have a surge in demand right now, but, you know, let’s say from April 1st until June 1st, you’re probably gonna see demand be much, much, much lower.

Anna: I could see that.

T3: All right. I think we’ve at least talked about as much as we know today. But stay tuned, we’ll probably have another podcast in the next few weeks as this very interesting time we live in, continues to evolve.

Anna: We welcome your participation in the Milk Check. If you have comments to share or questions you want answered, send an email to podcast@jacobi.com. Our theme music is composed and performed by Phil Kagy. The ”Milk Check” is a production of T.C Jacoby & Company.

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As the global COVID-19 outbreak continues to disrupt life as we know it, the dairy industry knows only one thing for sure: There's a lot left to learn about the impact the pandemic will have on global markets. Ted, As the global COVID-19 outbreak continues to disrupt life as we know it, the dairy industry knows only one thing for sure: There's a lot left to learn about the impact the pandemic will have on global markets.<br /> <br /> <br /> <br /> Ted, T3 and Anna phone in for a discussion on dairy markets buffeted by confusion.<br /> <br /> <br /> <br /> But as Ted reminds us, uncertainty is no stranger to dairy. He says the industry is equipped to handle what's thrown at it.<br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to the ''Milk Check,'' a podcast from TC Jacoby & Company where we share market insights and analysis with dairy farmers in mind.<br /> <br /> <br /> <br /> Ted: Leading into this by now I think everybody's interested in knowing what effect the coronavirus will have on the dairy industry. And of course, at this point in time, the effect is mostly confusion in that consumers are going into the grocery stores and cleaning out the milk section, buying long-life products including cheese and shying away from going into restaurants and food service establishments. And so we have a migration of milk away from cheese plants serving food service and special kinds of group facilities, restaurants and so on, hotels, towards retail, cut wrap and retail-type packages. In addition to that, we have a shortage of milk at the bottling plant because people are going in and cleaning out the dairy case similar to what they traditionally do just before a hurricane hits down in Florida.<br /> <br /> <br /> <br /> The normal effect of this is to have this surge in production and change, and then a week to ten days later, everybody has a lot of inventory in their refrigerator and sales start to back up and surplus begins to exist. Whether that's gonna happen this time or not remains to be seen. It could not in that everybody seems to be heading for their home and then planning on staying there for a while. And I think most people are expecting to be there at least a month. So that's gonna mean that they're gonna keep an inventory of milk, long shelf life products and so on, and they're gonna be eating those kinds of products at home as opposed to going out to restaurants.<br /> <br /> <br /> <br /> School lunch business is another issue. I understand that in some areas, the school milk is being delivered by school buses. I'm not quite sure how that works. But most of the milk being consumed now will be consumed at the kitchen table. So that also bodes well for retail milk sales. Does not bode well for people who are looking at school lunch business, school milk. So there is confusion, and how long it will play out remains to be seen. It could go on for a week or two and it could go on for a month or two, maybe longer. So we'll have to see.<br /> <br /> <br /> <br /> The dairy industry in general can handle whatever is thrown at them. Production was just announced for last month and it's up some big numbers, roughly one and a half percent depending on who you're reading. One source says 2%. That's a very bearish number with regard to milk and milk pricing under the longer term and would indicate that milk pricing, a Class III price somewhere in the $17.00, $17.50 range, pretty attractive to dairyman for them being increased production that much. Our general view of it is that anything over 1% is bearish as far as milk is concerned. And I think the markets right now in addition to the negative effects of the corona issue, I think production is also weighing heavily on the markets. Even though the cheese market went down a little bit today, the futures market went up because I believe basically that the pressure down is overdone and so it's rebounding somewhat. Ted, would you wanna weigh in on the cheese market?<br /> <br /> <br /> <br /> T3: Sure. Obviously what's happening in cheese, just like all the rest of the, not just dairy, but the food industry, T.C. Jacoby & Co. - Dairy Traders clean 38:05
Is USDA’s Dairy Revenue Protection program a good deal for farmers? https://www.jacoby.com/is-dairy-revenue-protection-program-good-for-farmers/ Fri, 03 Jan 2020 14:47:40 +0000 http://www.jacoby.com/?p=1622 It's less than a year and a half old, but the USDA's new Dairy Revenue Protection program has already led farmers across the U.S. to hedge an estimated 12% of the national milk supply. Blimling and Associates' Phil Plourd, Tiffany LaMendola and Katie Burgess join Ted and T3 to explain how this price risk management tool works and discuss why quick adoption of the program bodes well for the industry. Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Company, where we share market insights and analysis with dairy farmers in mind. T3: Hello everybody, this month on The Milk Check we have another guest on our panel, Phil Plourd is President of Blimling and Associates. And he and his team are here to help us learn about DRP or the Dairy Revenue Protection program recently created by the USDA to help dairy farmers protect downside milk price risk. Well, we're excited today to be here with Phil Plourd, Phil's got two other members of your team that have joined us. Phil: Yes. So we have on the line today Tiffany LaMendola, who's the Vice President of our risk management practice and she is based in the Modesto, California area. And also Katie Burgess, who is one of our Risk Management Leads. And the two of them have spent a lot of time over the past year working on the DRP insurance program. So been out in the field, working with dairy farmers and getting them enrolled and getting them going in the program. T3: So what I thought today would be a great topic to discuss with Phil in town was the dairy revenue protection program, which is a great program that's been set up for dairy farmers, but a program also that I have to admit I don't know a lot about. Ted: And I have to concede, I don't know anything about it either. T3: So I thought we'd go ahead and have Tiffany, and Katie, and Phil, kind of give us their view of what the program is all about, how it works. And Dad, you and I can just ask questions, and it's gonna be an educational experience for us as well as for the farmers that listen. Ted: It can't help but be educational for me. T3: Phil, Katie, Tiffany, what is it? Tiffany: It's a relatively new program for dairy producers to manage milk price risk. It was first rolled out in October of 2018. There was a slight delay while the government was shut down. And so it really is quite new. So don't feel bad if you don't know much about it. We're finding actually a lot of producers are still learning about it themselves. At its simplest terms, it is the ability to buy a milk price floor at subsidized levels, it's very customizable by... So, you know, obviously different producers in different regions have different milk price risk, you know, based on how their milk prices are determined. And this allows a producer to go in and sort of do their best to mimic how their milk is determined with some combination of Class III and Class IV. And look out into the future and set milk price floors kind of based on where the markets are at, at a quarter-by-quarter. And really kind of dial in as close as we can to, again, how their milk price is determined. It is offered through the Risk Management Agency of USDA as a crop insurance program. So you do have to buy essentially the program through a crop insurance agent, so producers kind of across the U.S. will be working with crop insurance agents to access this program. Ted: So where are these agents located, in the local extension service? Tiffany: They're kind of all over. So we have agents on our team. You know, we'd like to think we have the dairy expertise piece of it that's been quite important. So when we first got involved, we found a lot of crop insurance agents are, you know, tremendous at what they do, have long histories in insuring row crops and so forth, but maybe not as much dairy expertise. As you know, our markets are unique and so we got involved, we talked to a lot of dairy producers and can really help them kind of o...

It’s less than a year and a half old, but the USDA’s new Dairy Revenue Protection program has already led farmers across the U.S. to hedge an estimated 12% of the national milk supply.

Blimling and Associates‘ Phil Plourd, Tiffany LaMendola and Katie Burgess join Ted and T3 to explain how this price risk management tool works and discuss why quick adoption of the program bodes well for the industry.

Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Company, where we share market insights and analysis with dairy farmers in mind.

T3: Hello everybody, this month on The Milk Check we have another guest on our panel, Phil Plourd is President of Blimling and Associates. And he and his team are here to help us learn about DRP or the Dairy Revenue Protection program recently created by the USDA to help dairy farmers protect downside milk price risk. Well, we’re excited today to be here with Phil Plourd, Phil’s got two other members of your team that have joined us.

Phil: Yes. So we have on the line today Tiffany LaMendola, who’s the Vice President of our risk management practice and she is based in the Modesto, California area. And also Katie Burgess, who is one of our Risk Management Leads. And the two of them have spent a lot of time over the past year working on the DRP insurance program. So been out in the field, working with dairy farmers and getting them enrolled and getting them going in the program.

T3: So what I thought today would be a great topic to discuss with Phil in town was the dairy revenue protection program, which is a great program that’s been set up for dairy farmers, but a program also that I have to admit I don’t know a lot about.

Ted: And I have to concede, I don’t know anything about it either.

T3: So I thought we’d go ahead and have Tiffany, and Katie, and Phil, kind of give us their view of what the program is all about, how it works. And Dad, you and I can just ask questions, and it’s gonna be an educational experience for us as well as for the farmers that listen.

Ted: It can’t help but be educational for me.

T3: Phil, Katie, Tiffany, what is it?

Tiffany: It’s a relatively new program for dairy producers to manage milk price risk. It was first rolled out in October of 2018. There was a slight delay while the government was shut down. And so it really is quite new. So don’t feel bad if you don’t know much about it. We’re finding actually a lot of producers are still learning about it themselves. At its simplest terms, it is the ability to buy a milk price floor at subsidized levels, it’s very customizable by… So, you know, obviously different producers in different regions have different milk price risk, you know, based on how their milk prices are determined. And this allows a producer to go in and sort of do their best to mimic how their milk is determined with some combination of Class III and Class IV. And look out into the future and set milk price floors kind of based on where the markets are at, at a quarter-by-quarter. And really kind of dial in as close as we can to, again, how their milk price is determined. It is offered through the Risk Management Agency of USDA as a crop insurance program. So you do have to buy essentially the program through a crop insurance agent, so producers kind of across the U.S. will be working with crop insurance agents to access this program.

Ted: So where are these agents located, in the local extension service?

Tiffany: They’re kind of all over. So we have agents on our team. You know, we’d like to think we have the dairy expertise piece of it that’s been quite important. So when we first got involved, we found a lot of crop insurance agents are, you know, tremendous at what they do, have long histories in insuring row crops and so forth, but maybe not as much dairy expertise. As you know, our markets are unique and so we got involved, we talked to a lot of dairy producers and can really help them kind of on the dairy piece of it understanding exactly how their milk prices are determined and help them put that strategy together. So there’s agents everywhere, no doubt some with more dairy expertise, some with none.

Phil: The program is insurance is a heavily regulated industry. And so, you know, you have to be chartered in different states. Actually, Tiffany, if it all goes south, Tiffany and Katie are eligible to sell property and casualty insurance as well, because to become a licensed crop insurance agent, you have to go get an insurance license. And so while it’s open to all it is a process to be able to become a licensed crop insurance agent.

T3: So Phil, we’re not dairy farmers. So there’s certain parts of the agriculture industry we’re not familiar with. Crop insurance is pretty common for those farmers who are growing corn and grain and things like that.

Phil: I can’t cite the specific history of, “Oh, it started in 19-whatever.” But for many, many years USDA through the risk management agency has partnered with insurance carriers to offer subsidized insurance and some of that insurance is revenue insurance for grains. Some of it is disaster insurance for grains. So this year, we saw a lot of…there was something called Prevent Plant Insurance, for example. So if for some reason you can’t get your crop in the ground, there’s insurance that you can buy from crop insurance agents that will compensate you for your lost planting. And so we saw a lot of those policies actually used I mean, cashed in, if you will, this year, so.

And there’s stuff on grapes, there’s all kinds of different crop insurance products out there. Tiffany and Katie, I forget how many licensed carriers, there are about eight or ten big insurance companies that have crop insurance practices. And through a lot of rules, regulations through USDA, RMA, but subsidies on premiums, it’s sort of a public-private partnership in terms of crop insurance generally. So dairy was tacked on, if you will, to the crop insurance universe. And the program was largely dreamed up by Marin Bozic at the University of Minnesota and John Newton who works for Farm Bureau Federation. I think it came out of their thinking and became part of the USDA, RMA program, or package.

T3: And so how does it protect dairy farmers? What exactly does it do?

Phil: Katie, why don’t you tackle that one?

Katie: Yeah, so the way the program works is that the producers can insure a price floor or a trigger price. So how it works is when the market’s trading you take 95% of the current price and that’s the level that the farmer can protect. So for instance, today, the January through March Class III Futures average is $17.63 a hundredweight. We take 95% of that number which is $16.75, and essentially for the first quarter of 2020, producers can protect the floor of $16.75 per hundredweight. That’s the program in its simplest terms, there are definitely some other things that go into it like yield per cow in your state. But for each quarter all the way through the first quarter of 2021, as of today, producers can lock in these milk price floors.

T3: And the premium is on that first quarter 2020 premium, you said $16.75 coverage, and what’s the premium for that just generically speaking?

Katie: So the premium on a $16.75 price floor for Q1 is somewhere between $0.04 to $0.07 a hundredweight dependent upon where you’re located. So pretty cheap, it’s cheaper than you can go out and buy $16.75 Class III productions in the futures market today.

T3: And what’s the second quarter just for illustration purposes.

Katie: So right now as we look out through 2020, for the second quarter of 2020 April through June, the price floor is $16.17 for about $0.10 a hundredweight. And if we just keep going further out, the third quarter the floor you can lock in at $16.59 for about $0.15. And for the fourth quarter of 2020, it’s $16.57 for about $0.20 a hundredweight. So basically for all of 2020 today, you can go out and insure a milk price floor of something above $16.00 per hundredweight, all for less than $0.20 a hundredweight. So it’s a pretty good deal. That’s I think one of the reasons it’s been so popular as of late, is because given the low prices we have seen in the market over the past three or four years, having a price floor at $16.00 seems like a pretty comfortable place for a lot of dairy producers to be.

And one of the reasons the program is so popular is that when you’re buying insurance, it’s just a price floor. So the same way that when you buy car insurance, you hope that you don’t get into an accident and need to collect on it. It’s the same thing with this dairy revenue insurance. Using the program, you’ve got yourself a price floor of around $16.00 a hundredweight or higher, and you hope that you never collect. So if the market is at $18.00, or $19.00 per hundredweight, you get that milk price, pay your premium. And that’s it. But if something bad happens the same way as if you get into an accident, you’re going to collect on your car insurance. If the market takes a turn south in 2020, you’re going to get a payout because you have a price floor in place.

Ted: You know, it seems from what you say that the mechanics of this are based on the Class III price. Is that correct?

Katie: Yeah, so there are actually a couple different ways for producers to think about it. So the more common route that we see is using the Class III and the Class IV prices. So people tend to start there because it’s pretty simple. The prices mimic exactly what we see at the CME every day. But the one interesting piece that has brought some other folks into the mix, is you can actually match the program to your own farm milk component. So if we think of a standard Class III contract, it assumes 3.5% butterfat. But if you’re milking jersey cows, there’s a good chance your milk fat’s running a lot higher than that. And so producers actually have the opportunity through this DRP insurance to customize to their exact component levels. So they can go up to 5% butterfat or 4% protein to better mimic what’s actually happening on their dairy. And this is the first program we’ve seen in the dairy industry that allows producers to customize because we know every herd is different. And so this allows farmers to mimic that.

Ted: Well, there’s a lot more to milk pricing than just Class III and component pricing. We have PPDs and we have different regional advantages, we have premiums in various regions and so on that vary. So how do we account for these various regional differences?

Phil: Much like any dairy producer who’s accessing a futures market product or a Forward contract through their co-op, I mean, you’re operating on a national base. So it’s not a 100% forward contract like, you know, if you sold corn to the elevator today, you’re guaranteed $3.725 per bushel. So it operates under the same base price premise that most other dairy risk management products imitate. So sure, if you’re in Wisconsin, and you’re getting paid $1.00 over as a matter of plant premiums, that doesn’t change, I mean, this is just basically an insurance product underneath your base price.

Ted: But you’ve got your price. In this case, the example says $16.75 including freight or not?

Phil: It’s just…

Ted: Is that a delivered somewhere price?

Phil: It just mimics…it’s measured against the actual Class III price. So it’s just the Class III price base. So if you typically get paid $1.50 over, you know, you would say, “Oh, I’m buying a $16.50 product,” you’re likely locking in $18.00 assuming premiums, you know, persist. So it is not an actual contract price for your milk. It’s a revenue protection insurance product.

T3: So you’re not gonna be able to lock in your freight costs and you’re not gonna be able to lock in whatever the mailbox overages or the PPD or the blend price is. But what you are able to do if I understand it’s not just Class III, there’s a Class IV component too…

Phil: Correct.

T3: …if you’re in an area which has a heavy Class IV component.

Phil: And you can insure your actual, you know, theoretical component level. So you’re going beyond your base three, five price up to, you know, to mimic your own herd. But in that regard, it’s no different than most risk management products that are out there. The advantage of this is that it’s very convenient. And it’s pretty heavily subsidized by the federal crop insurance program.

Tiffany: Your questions definitely identify where a lot of our time and our discussions have been with dairy producers because they need to kind of understand how this relates to their actual pay price and what this means. So we’ve spent a good deal of time going through all these things you just identified. And I guess that’s why I would stress definitely speaking with somebody with some dairy expertise can help answer just those questions. “Okay, well, what’s this PPD and how do I protect against that? And how do I, you know, deal to the fact that I ship to a processor that actually depooled and my pay price is different?” You know, all of those scenarios we’ve seen, and this program is flexible enough, that it allows us to just kind of mix and match the different avenues to best mimic their pay price as we can, it’s not gonna be perfect, but it’s gonna get pretty close. So that’s been a very appealing part of this program as well, the flexibility.

Ted: Well, maybe the right question to ask for me the novice is how do you establish what you would have got? I don’t understand that, okay.

Phil: Well, but it’s no different today. So let’s just say you were a dairy farmer today shipping to co-op XYZ. Or let’s say you were a dairy farmer today, and you had your own individual futures account someplace. And you said, “Hey, I wanna manage my own price risk. And I’m gonna sell Class III milk futures to protect myself in case of falling prices.” Well, if you were acting on your own in the marketplace, all you could do is protect that Class III base, right? If the Class III price goes down, $1.00, you get $1.00. If it goes up $1.00, you get $1.00.

Ted: So you’re not protecting your own costs, you’re protecting the futures value?

Phil: More or less, sure.

Ted: Okay.

T3: But think of it this way…

Phil: And you’re not protecting cost, you’re protecting income.

Ted: Well, that’s okay. That’s another way of saying the same thing. In other words, what you’re hedging is the $16.75 futures closing price for that quarter?

Phil: Yes, more or less, yes.

Ted: Yes.

T3: But think about it this way. Let’s say you’re in Federal Order 33 in Michigan, which is…and in Federal Order 33, your utilization typically is between Class III and Class IV. In Class I and II, off the top of my head, I’m gonna say it’s what, about 35% Class III, maybe 30% Class IV.

Phil: It’s probably 40/60 Class III, IV.

T3: Right.

Phil: I mean, Class III, 60%, 40% Class IV.

T3: Exactly, your Class II is almost very highly correlated with Class IV. So you think about that as a Class IV type of hedge. Your Class I is now 50/50 between Class III and Class IV, and so you can devise a balance between Class III and Class IV let’s say it’s 60/40. And then they use a 60/40 balance on their DRP hedge. And that’s what they lock in. And then, you know, they should know what their hauling is gonna be. And that’s gonna be static, it’s not gonna change with the market. And yes, your overage could change over the course of the year. But there’s really no way, you know, to hedge that.

Phil: Anywhere else.

T3: Right.

Phil: Yeah. And I think that the neat thing. So the advantage of this program versus a traditional market traded option, or futures contract, is that you do have that ability to create a price that more closely mimics your local blend price, again, net of PPD…your local III, IV mix, so you can match up utilization. And if you are…you know, you have to worry about, “Oh, I got 14 Class III contracts and 7 Class IVs, and how does it all come together?” Under the umbrella of one product you can dial in that Class III, IV mix appropriately, and you can do it to reflect your component values that you estimate that you have in your farm. So there’s a level of customization that takes it beyond the utility of just conventional futures and options. And then there’s a whole notion of…and it’s subsidized. You know, you’re paying less than what actual traded instruments would cost you.

T3: This year, what is the Class III average so far in 2019? Has it been about $16.50 this year? I think it has, hasn’t it?

Ted: I think it’s higher than that.

Phil: It’s a little higher now.

T3: I think, yeah, we had a couple months of $20.00 milk. So maybe it’s a little bit higher. But where I’m going with this is right now, a dairy farmer has the ability to lock in a floor for 2020 that isn’t too dissimilar to what their price for the year was in 2019. Is that correct? And they’re gonna pay $0.10, maybe $0.12 a hundredweight for the opportunity.

Phil: Yeah, that’s pretty close to right.

T3: It seems like a no-brainer to me if I’m a dairy farmer, especially with corn at, what, $3. and…

Phil: 75 cents.

T3: …75 cents right now a bushel?

Phil: Yeah, so now you’re looking at pretty stout margins. I mean, if you look at what that $16.50 base insurance level, you know, translates to in terms of profitability. It ain’t…I mean, it’s not too bad. I mean, you’re looking at, you know, pretty significant dollars per hundredweight against that, you know, again, you have to go manage your grain price risk. I mean, there’s all kinds of ifs and buts around that. But sure, it’s super competitive in terms of what kind of level you can protect. And I think that’s why the numbers are so big. I think, you know, Tiffany has or Katie has the numbers. I mean, we have seen massive amounts of milk booked through this program.

T3: What percentage of the milk in the United States right now do you think has been hedged for 2020 using the DRP program?

Katie: So it is a massive amount, especially for a program that is just more than a year old. So, since the program rolled out last October, more than 50 billion pounds of milk have been enrolled. And when we look at what seems to me more or less on the books for 2020, it’s about 27 billion pounds of milk. So on an annualized basis, that’s about 12% of the U.S. milk supply. So especially for a program that is pretty new, that’s a pretty impressive uptake. And when you compare that 27 billion pounds that’s been booked between July 1 and today, that amounts to about 130,000 futures contracts. We look at how much Class III open interest is on the books as of today, it’s only 20,000. So we’re about six times more in terms of how much DRP is on right now compared to Class III open interest.

T3: Wow. So that’s 12…so we haven’t even hit January 1 of 2020 yet. And 12% of the national milk supply is already hedged.

Katie: More or less.

T3: What are your expectations? What percentage of the milk supply…just this is a guess, I know it is. But what percentage of the milk supply do you think ultimately will be hedged for 2020 with the DRP program, any idea?

Katie: I think we should get close to 30% to 40%. In some states, though, we’ve already seen pretty massive uptake. So for instance, in South Dakota more than 40% of the milk on an annualized basis has been hedged since July 1. So that’s really impressive. It does vary by state. So we’re up to more than 30% in Kansas as well. And in states like Wisconsin, or Minnesota, we’re at 10% to 20%. So it’s been pretty impressive. Plus, I think one of the main drivers of it is just that the prices are so good today. So when you figure you can lock in prices, between $16.00 to $16.50. The five year average for Class III is about $15.50 a hundredweight. So you’re already doing $0.50 cents to $1.00 better than the long run average. And because of that people have really jumped on it.

Phil: You have to be careful about making generalizations, but I would say that for the average large dairy producer in the United States, I would guess that they’re happy over $14.50. You know, they’re delighted over $15.50 and they’re really making pretty good money over $16.50. Again, on average, so the numbers that you can lock in today are not just marginally profitable. I think they’re, you know, modestly to really nicely profitable in terms of where producers are at. And I would say that, you know, one thing to keep in mind and we don’t wanna get too far down the alphabet soup of risk management products.

But the other government program would be the dairy margin contract program, the old… So that’s a different program. And that has super appeal for farmers of 200 cows or less. So if you came to us and said, “Hey, I’ve got 200 cows, what should I do?” We would point to the DMC program because it’s basically free, and you can cover really big margins. And so you’re up to 5 million pounds of milk per year. So we’re not likely to see a lot of smaller producers gravitate towards DRP because they have a better and even cheaper avenue of coverage under the DMC program.

T3: So they didn’t get rid of the DMC program when they instituted the DRP program?

Phil: Nope.

T3: Both programs are in existence?

Phil: Correct.

T3: Does a dairy farmer have to choose whether they use one or the other?

Phil: No.

Tiffany: I’d like to piggyback on that just a little bit too. Same kind of theme. But I think a big reason we’ve seen such large uptake, at least definitely from a Western perspective, is that this program is scale neutral. So it is the same price per hundredweight, you know, regardless if you have 50 cows or 50,000 cows. And it’s kind of the first government-ish programs we’ve seen operate that way to Phil’s point, you know, the other programs have been more appealing to mid-sized, smaller farms. And so that has definitely been looked upon favorably.

Anna: On The Milk Check podcast, we tackle questions and share ideas that move dairy forward. Now we’re making it easier for you to get answers to your lingering questions. Do it with one click, submit your questions online at jacoby.com/askted.

Phil: You know, just that if you were at Dairy Forum last year, Marin Bozic, you know, who had a big hand in crafting this program, one of the things he talked about, you know, in terms of safety…you know he was talking about the safety net. And he said, “You know, it’s one thing to talk about a safety net.” But in essence, what we’re creating here is almost a safety cocoon for a good portion of the dairy production community. So smaller producers with DMC, which is really, really strong in terms of what kind of margin level you can protect. And then DRP going beyond that for larger producers, now, DRP is only as good as the market. So if milk produce were at $13.50 right now, you know, I don’t think we would see 25 billion pounds of milk under management, right? So I mean, DRP is market dependent. It’s only gonna be as good as the market at any given time, right? If futures were at $15.00 bucks, there’d be no $16.50 insurance for $0.20 cents.

T3: So it sounds like what DRP is doing is that there are a lot of producers that haven’t been hedging that now that DRP is available, they’ve started using this tool to hedge?

Tiffany: Yeah, we’ve seen…I would say 90% of the clients we’ve worked with are totally new to the milk risk management space, there have been things that have precluded them from participating before. And we’re finding that this program is answering a lot of those concerns. And so it’s really exciting because we’re having conversations with a lot more dairy producers that I think otherwise we just couldn’t have had. It’s encouraging for maybe general market participation, you know, that this is the first step and maybe it’ll progress more. So you know, folks fearing about loss of liquidity in the futures and options markets, I kind of think it’s the opposite. I think we see new players coming in and thinking about this more than they ever were. So there’s opportunities for the future.

T3: So when you buy it’s essentially a put option. But when you buy a put option, you have to put the money up front. Is it the same With the DRP program?

Phil: Nope.

Ted: How do you pay for it?

Katie: Sure. No, you don’t have to pay for it up front. And that’s one of the other reasons that people really like the program. So let’s say today, you wanted to take some coverage for the first quarter of 2020. So we have to wait to see what the milk prices are January, February, March. So we get to the end of March, there’s also a milk production component. So we have to wait for the milk production data that comes out in March. So essentially, if you’re receiving a bill, you don’t have to pay for it until the beginning of April. And because of the deferred payment, that’s one of the reasons it’s been popular. So if there is a payment, then your premium is just deducted from the payment that you’re owed. Whereas if you do owe money you owe as a premium, then you’ve had a few months in advance to plan for that. And if the program doesn’t pay out, that means that milk prices were good. And so because of that, it’s a little bit delayed, so there’s no money needed upfront.

T3: So let’s say you’ve paid $0.10 to lock in a $16.17 price floor for the second quarter. Let’s say you’ve got 10 million pounds of milk a month. So that would cost you if it’s $0.10 a hundredweight, $10,000.

Phil: Yeah, basically.

T3: So if the milk price in that quarter, or let’s pick the month of April…

Phil: No, it has to be the quarter, average for the quarter.

T3: It has to be the whole quarter?

Phil: Average for the quarter.

T3: So it’s the whole quarter?

Phil: Average for the quarter.

T3: Average for the quarter. So if the milk price comes in at a $20.00, average for that quarter, it’s $10,000. No more than that.

Phil: Correct.

T3: And if the milk price comes in at, let’s say, $14.17. So they’d owe you $2.00 a hundredweight, which is $200,000 minus the $10,000, is that correct?

Phil: Taking out the $10,000, yeah.

T3: So basically, you’d get a check for $190,000?

Phil: Correct.

T3: So the most you can lose is the $10,000 that it cost you but the most you can gain to however low the milk price could go?

Phil: Correct.

T3: So I gotta ask this, I’m not a dairy farmer, but in our business, we’ve got a little bit of price risk too, can I access this program? Or do I have to be a dairy farmer?

Phil: Oh, you have to be a dairy farmer. Yeah.

T3: So your friendly neighborhood broker can’t access the DRP program, it’s too bad…

Phil: Correct.

T3: …because this is a great program.

Ted: Let me pose a question. How do you keep the milk production from going through the roof in 2020?

Phil: I think that’s a fair question. I think that, you know, again, if you’re talking about a safety net, safety cocoon, I mean, I think you’re providing a pretty high floor on your milk production. I think what you do is, I don’t know, if you encourage production so much, if prices do come down, it gives you a little bit more…you know, it takes a longer time to wash production out on the downstroke more… You know, I think if you’re a producer, you know, you might have more confidence to expand if you have the $16.50 insurance program, whatever, I mean, but I would say that it’s more about preserving production on the down-tick than it is about encouraging milk production in a high price climate. You’re gonna do that anyway, right? $20.00 milk is going to make more milk. What this does is if we start to slide because farmers have insurance, theoretically you would say it gives them more longevity in a down market than otherwise would be the case.

T3: How far out can you hedge? Can people be hedging 2021 right now?

Katie: Yes, right now you can go up to the first quarter of 2021. And we’ll be loading up the second quarter for sale here before the end of the year.

T3: So what will happen is, just back to your question, Dad, about will it encourage oversupply? It will mean it will cause drops in income to be slower, because every year or every…you know, right now they could hedge 2021, soon they’ll be able to…let’s say in nine months, they’ll be able to hedge 2020, start hedging 2022. But if you keep stimulating more and more milk production, or are preventing farmers from going out of business, maybe the better way to put it, the more likely scenario is that your cheese price is gonna start coming down, because you’re gonna make more cheese, your powder price is gonna start coming down and your butter price is gonna start coming down. So next year, you’re not gonna be able to lock in at $16.50. It may be more like $15.50. And the year after that, it maybe $14.50…

Phil: Yeah, you’re gonna get a progressively worse market signal, right, you’re gonna get a progressively deteriorating market signal, that cocoon starts to fray as the markets go down.

T3: Right.

Phil: So it’s not self-perpetuating. Now, DMC is a little bit different. Because that’s a fixed margin. But on the DRP program, again, yeah, six months from now, if we have lower milk prices, well, that next tranche of DRP coverage going forward is not gonna be as exciting as what we’re looking at today. So there’s a deterioration factor. So I think it can differ. It can tie people over for longer than otherwise would be the case, which is, you know, accretive to production. But it can’t perpetuate forever because at some point, you get to a point, a price point that the insurance isn’t worth…it’s not worth insuring $14.00 milk for these guys, right?

T3: But it also sounds like ultimately, whatever hole we may dig with overproduction is gonna be that much harder to get out of too.

Phil: I think that’s…I mean, again, it’s all theoretical. But I mean, from an economics perspective, yeah, I mean, I think that at some point, you’re subsidizing supply and you get more supply, right?

T3: Yeah, the cure for high prices is high prices.

Phil: So it just adds…I think it adds…theoretically adds a longer tail to the whole process. Now, we’ve not seen it in motion. So we don’t know. But I think that theoretically, if you got a bunch of producers with $16.50 price insurance out there, you know, they’re gonna be able to withstand more $14.00 markets. If that’s, you know, ultimately what happens, but then the next time around, they’re not gonna be able to insure quite as good a price.

Anna: Costs are rising, margins are shrinking. Markets are more complicated. A lot has changed since TC Jacoby and Company started in 1949. What hasn’t changed is our commitment to helping farmers focus. With the latest administrative support tools we work every day to keep co-ops and family fires running at their peak. Start by emailing me Anna Donze at anna@jacoby.com. That’s A-N-N-A@jacoby.com.

T3: So what other questions about the DRP program have we not asked that we should be asking or that the farmers would wanna know? What about volume? Like is there a limit on the volume that they’re able to hedge? I’m assuming it’s the amount of milk they can produce in a given year?

Tiffany: And you can do up to 100% of your volume. What will happen is if for any quarter there’s an indemnity owed to you. They will ask for copies of milk statements to confirm that you produce at least 85% of what you’ve insured on milk volume, or 90% of your components. So there’s even a little wiggle room there, and you can insure 100% through this program, you can also participate in DMC at the same time, and you can participate in your creameries forward contracting program as both futures and options, no limitations. The only limitations are DRP alongside LGM Dairy, you would not be able to double up those two programs.

T3: And you have to be Grade A producer, right?

Tiffany: Yes.

Phil: And you have to have…I mean, because it’s part of USDA is risk management, and it runs through FSA, I think you have to have certain…there are certain things you have to have been enrolled in. You have to be all square with FSA to get the green light and get the subsidy.

Ted: Aren’t the banks gonna love this program?

Phil: I think the banks…well, yes, the banks definitely love this program. Some of the banks sell crop insurance. So they especially love the program, the farm credit system, many of your farm credit banks are chartered co-op insurance agents.

T3: So they’re pushing it.

Phil: Yeah, I think they’re definitely pushing it.

Ted: I could see the banks saying, “If I’m gonna make you a loan, you’re gonna be a member of this program.”

Phil: Yeah, I think that’s legit.

T3: Is it legal for a bank to do that?

Phil: Well, I mean, I don’t think it’s likely straight up coercion, but I think it could be, you know, we strongly suggest you have crop insurance, whether you buy it from them or somebody else.

Ted: Sure it’s legal.

Phil: Yeah. I mean, it’s the only secure decision.

Ted: It doesn’t matter where you buy it from, but it’s the fact that you got it.

Phil: It’s an element of securitization, right?

Ted: Yeah.

Phil: I know, Tiffany, you were mentioning earlier today, you thought there were five things that dairy farmers really liked about this program? And maybe we’ve touched on those points. But maybe you’d be a good summary for the listeners to hear what those five points are.

Tiffany: Yeah, we have kind of touched on them. But I think there really are…I mean, traditionally, producers have been very concerned about leaving money on the table, right, in the good time so folks that have come and maybe flat price their milk in years like 2014 when we saw dairy prices run high left money on the table. And then haven’t been back to do it since because they need those good years to kind of recover from the bad. So the fact that this program is just about securing milk price floor, a minimum price that leaves all the upside open has been huge. So if you say, “Well, traditionally they could have done that by buying puts,” right, but as we touched on, puts can be very expensive, particularly for lots of milk and further out and you have to, you know, pony up some money the next day. The fact that these are subsidized and the premiums aren’t due ’til after the quarter have also been tremendously popular.

The fact that, you know, it’s scale neutral, we touched on that, it doesn’t matter what size your dairy is, it’s the same price per hundredweight has been very favorable. We also touched on, “Well, this just doesn’t work for my region.” Well, the program is customizable enough as we’ve spoken to, to get that mix of Class III and IV and dial in on your component. So we can get pretty close, fairly, very flexible in that regard. And I think finally, dairy producers have often said, “Oh, risk management, it’s just too complicated. I don’t know how to get at it. I don’t know how to structure it?”

This program, if you read about it, it can sound complicated, I think quite honestly, it’s because of crop insurance jargon and lingo, but really, it’s just kind of five simple decisions. “How much of my milk do I wanna cover? How far out, at what floor level, and my mix and match of Class III and Class IV.” And it’s really that simple. We just don’t need to make it any more complicated than that. And so once we can kind of talk through that with them. Those are the reasons there that have driven participation and brought new folks into the space.

Phil: I would say that crop insurance generally has a favorable impression, dairy farmers generally have a favorable impression of crop insurance writ large, you know. So a lot of dairy producers that are using this program are using…you know, if they’re growing row crops, they already are familiar with crop insurance. And I would say, as a general statement, they view crop insurance positively.

T3: So if a dairy farmer who’s never…who maybe is hearing of the DRP program for the first time, or has been thinking about it, but didn’t know where to start, where’s the best place for them to start? If they have a crop insurance guy, would it be to give them a call? Or would it be to call Blimling?

Phil: I have a better idea?

T3: Okay.

Phil: You know, I think one of the first things you can do is go to drp.blimling.com, and you’ll find a calculator there that shows, it actually shows you a calculation of today, “I live in this state, I wanna do this many million pounds, and I wanna do Class III,” and it shows you the rates. So that’s a very handy tool just to scope it out. I would prefer people call us. But if you call the Blimling team or get in touch with us with that calculator, we can certainly help. But yeah, crop insurance agents of all stripes can help, but just like I am a licensed commodity broker and I could trade crude oil. I don’t know a lot about crude oil, you’d be better off with a crude oil broker. We’d like to think that, you know, for dairy producers, understanding the dairy nuance I think is the value add for people like us who are also selling DRP versus the guy on the street, so to speak.

T3: If they wanted to reach out to you, how would they do it?

Phil: I think the best way is to call us at 608-249-5030.

T3: Well, I think it’s a fantastic program. And I think I would encourage every dairy farmer to get involved because this is a great way for them to hedge their downside risk and the ultimate cost is tiny compared to the benefit they can get from it.

Phil: We all are looking for the crystal ball to predict exactly what’s gonna happen in 2020 and, you know, how will these forces unfold. And we don’t know, we don’t know if that $16.00 policy for Q2 or $16.50 for Q3 is ever gonna pay off. But I think if it doesn’t that’s even better news, right? That means that price strength is continuing. But I think all of us have been around long enough to know that the good times don’t tend to last forever. And so for, you know, a relatively modest price you can protect against that event. And you can save yourself a lot of heartache and financial difficulties for a year, year and/or more out, so.

T3: I would agree. I think we’re good. Katie, Tiffany, thank you very much for joining us. We really appreciate it.

Tiffany: You bet. Thanks, guys.

Anna: We welcome your participation in The Milk Check. If you have comments to share or questions you want answered, send an e-mail to podcast@jacoby.com. Our theme music is composed and performed by Phil Keaggy. “The Milk Check,” is a production of TC Jacoby and Company.

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It's less than a year and a half old, but the USDA's new Dairy Revenue Protection program has already led farmers across the U.S. to hedge an estimated 12% of the national milk supply. Blimling and Associates' Phil Plourd, It's less than a year and a half old, but the USDA's new Dairy Revenue Protection program has already led farmers across the U.S. to hedge an estimated 12% of the national milk supply.<br /> <br /> <br /> <br /> Blimling and Associates' Phil Plourd, Tiffany LaMendola and Katie Burgess join Ted and T3 to explain how this price risk management tool works and discuss why quick adoption of the program bodes well for the industry.<br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Company, where we share market insights and analysis with dairy farmers in mind.<br /> <br /> <br /> <br /> T3: Hello everybody, this month on The Milk Check we have another guest on our panel, Phil Plourd is President of Blimling and Associates. And he and his team are here to help us learn about DRP or the Dairy Revenue Protection program recently created by the USDA to help dairy farmers protect downside milk price risk. Well, we're excited today to be here with Phil Plourd, Phil's got two other members of your team that have joined us.<br /> <br /> <br /> <br /> Phil: Yes. So we have on the line today Tiffany LaMendola, who's the Vice President of our risk management practice and she is based in the Modesto, California area. And also Katie Burgess, who is one of our Risk Management Leads. And the two of them have spent a lot of time over the past year working on the DRP insurance program. So been out in the field, working with dairy farmers and getting them enrolled and getting them going in the program.<br /> <br /> <br /> <br /> T3: So what I thought today would be a great topic to discuss with Phil in town was the dairy revenue protection program, which is a great program that's been set up for dairy farmers, but a program also that I have to admit I don't know a lot about.<br /> <br /> <br /> <br /> Ted: And I have to concede, I don't know anything about it either.<br /> <br /> <br /> <br /> T3: So I thought we'd go ahead and have Tiffany, and Katie, and Phil, kind of give us their view of what the program is all about, how it works. And Dad, you and I can just ask questions, and it's gonna be an educational experience for us as well as for the farmers that listen.<br /> <br /> <br /> <br /> Ted: It can't help but be educational for me.<br /> <br /> <br /> <br /> T3: Phil, Katie, Tiffany, what is it?<br /> <br /> <br /> <br /> Tiffany: It's a relatively new program for dairy producers to manage milk price risk. It was first rolled out in October of 2018. There was a slight delay while the government was shut down. And so it really is quite new. So don't feel bad if you don't know much about it. We're finding actually a lot of producers are still learning about it themselves. At its simplest terms, it is the ability to buy a milk price floor at subsidized levels, it's very customizable by... So, you know, obviously different producers in different regions have different milk price risk, you know, based on how their milk prices are determined. And this allows a producer to go in and sort of do their best to mimic how their milk is determined with some combination of Class III and Class IV. And look out into the future and set milk price floors kind of based on where the markets are at, at a quarter-by-quarter. And really kind of dial in as close as we can to, again, how their milk price is determined. It is offered through the Risk Management Agency of USDA as a crop insurance program. So you do have to buy essentially the program through a crop insurance agent, so producers kind of across the U.S. will be working with crop insurance agents to access this program.<br /> <br /> <br /> <br /> Ted: So where are these agents located, in the local extension service?<br /> <br /> <br /> <br /> Tiffany: They're kind of all over. So we have agents on our team. You know, we'd like to think we have the dairy expertise piece of it that's been quite important. T.C. Jacoby & Co. - Dairy Traders clean 39:00
Cheddar block futures contracts are coming to the CME https://www.jacoby.com/cheddar-block-futures-contracts-coming-to-cme/ Fri, 20 Dec 2019 16:50:39 +0000 http://www.jacoby.com/?p=1610 In this episode, Ted and T3 are joined by Eric Meyer, President of HighGround Dairy in Chicago. Eric explains the CME's new block cheddar futures contracts, which will begin trading on Jan. 13. The panel also reacts to surprising NDPSR data for the month of November. Eric is reminded that the St. Louis Blues won the 2019 Stanley Cup. Anna: Welcome to "The Milk Check," a podcast from T.C. Jacoby & Company, where we share market insights and analysis with dairy farmers in mind. T3: Welcome everybody to the T.C. Jacoby & Company Milk Check podcast. Today, we have a guest speaker: Eric Meyer, President of HighGround Dairy. And we thought we'd talk about the milk production report and a little bit about markets, and then also talk about the new cheddar block futures contracts that are going to be introduced on the CME in the middle of January. Eric, welcome. Eric: Thank you very much. It's great to be here in a cold and snowy St. Louis. It's almost colder here and snowier than up in Chicago, so I feel for you. Ted: How about the St. Louis Blues who played Chicago on Monday night? Eric: Oh, do we need to talk about that? I was also told, I think, four or five times since arriving last night that you guys are currently the Stanley Cup champions. That's always nice to hear after three of them in the previous five years. T3: I'm glad you know that. It's Wednesday, December 18. It just so happens the milk production report was released not ten minutes ago, before we started this, recording this podcast. Milk production in November came in at up 0.9% in November for the country and up 0.5% in the 24-state. And that's a bit of a surprise to the downside. I think most people were expecting something up about 1.5%. Eric, what are your thoughts on that? Eric: So we were in that same camp, so we thought that the all U.S. number was gonna be in the 1.2 range with the 24 states that have been trending a lot higher. And we'll talk about that. I think there's a big shift in the last year of the 24 states straying from the all U.S. number, a big dichotomy between the larger farms in the dairy-centric states and the rest of the country. So we were in that camp, 1.5% was what we were thinking. Those were the numbers from both September and October, and so these numbers are definitely below expectations, a bit of a change in trend from the previous two months. With that number being up 0.9%, we also had a 60 million-pound downward revision in the October number, which represented a 0.3% decline. So USDA originally reported a 1.3% all U.S. gain and now it's down to just 1% higher. We are getting more milk. I think there is, from a fundamental perspective, the first half of this year, we were down on milk production. And we hadn't been down on milk production since 2013. I mean, it's been four, five-plus years that we've been growing milk production. And so the poor economics in 2018 and in the early 2019 kinda did the market in. Farmers finally responded, which, you know, we rarely see. That said, the large scale farming communities, the ones that are larger that are more apt to hedging that have brought costs of production down, economies of scale, we feel like they've maintained, and are now starting to pick up that growth. So one of the items in this production report that we saw that is notable, we didn't have any change this month from October to November from a herd perspective. But we now are in the 24 states which represents right around 96% of total milk production in the country. We're now above previous year on the overall milking herd while the all U.S. is down 27,000 head. So certainly a surprise in the marketplace, especially after a unprecedented decline in cheese prices here over the last two weeks. Ted: Question about the timing, you know, we've had high pricing during October, November, and on a Class III particularly, up in the $2-plus range. Farmers basically are seeing that right now.

In this episode, Ted and T3 are joined by Eric Meyer, President of HighGround Dairy in Chicago. Eric explains the CME’s new block cheddar futures contracts, which will begin trading on Jan. 13.

The panel also reacts to surprising NDPSR data for the month of November. Eric is reminded that the St. Louis Blues won the 2019 Stanley Cup.

Anna: Welcome to “The Milk Check,” a podcast from T.C. Jacoby & Company, where we share market insights and analysis with dairy farmers in mind.

T3: Welcome everybody to the T.C. Jacoby & Company Milk Check podcast. Today, we have a guest speaker: Eric Meyer, President of HighGround Dairy. And we thought we’d talk about the milk production report and a little bit about markets, and then also talk about the new cheddar block futures contracts that are going to be introduced on the CME in the middle of January. Eric, welcome.

Eric: Thank you very much. It’s great to be here in a cold and snowy St. Louis. It’s almost colder here and snowier than up in Chicago, so I feel for you.

Ted: How about the St. Louis Blues who played Chicago on Monday night?

Eric: Oh, do we need to talk about that? I was also told, I think, four or five times since arriving last night that you guys are currently the Stanley Cup champions. That’s always nice to hear after three of them in the previous five years.

T3: I’m glad you know that. It’s Wednesday, December 18. It just so happens the milk production report was released not ten minutes ago, before we started this, recording this podcast. Milk production in November came in at up 0.9% in November for the country and up 0.5% in the 24-state. And that’s a bit of a surprise to the downside. I think most people were expecting something up about 1.5%. Eric, what are your thoughts on that?

Eric: So we were in that same camp, so we thought that the all U.S. number was gonna be in the 1.2 range with the 24 states that have been trending a lot higher. And we’ll talk about that. I think there’s a big shift in the last year of the 24 states straying from the all U.S. number, a big dichotomy between the larger farms in the dairy-centric states and the rest of the country. So we were in that camp, 1.5% was what we were thinking. Those were the numbers from both September and October, and so these numbers are definitely below expectations, a bit of a change in trend from the previous two months. With that number being up 0.9%, we also had a 60 million-pound downward revision in the October number, which represented a 0.3% decline.

So USDA originally reported a 1.3% all U.S. gain and now it’s down to just 1% higher. We are getting more milk. I think there is, from a fundamental perspective, the first half of this year, we were down on milk production. And we hadn’t been down on milk production since 2013. I mean, it’s been four, five-plus years that we’ve been growing milk production. And so the poor economics in 2018 and in the early 2019 kinda did the market in. Farmers finally responded, which, you know, we rarely see. That said, the large scale farming communities, the ones that are larger that are more apt to hedging that have brought costs of production down, economies of scale, we feel like they’ve maintained, and are now starting to pick up that growth.

So one of the items in this production report that we saw that is notable, we didn’t have any change this month from October to November from a herd perspective. But we now are in the 24 states which represents right around 96% of total milk production in the country. We’re now above previous year on the overall milking herd while the all U.S. is down 27,000 head. So certainly a surprise in the marketplace, especially after a unprecedented decline in cheese prices here over the last two weeks.

Ted: Question about the timing, you know, we’ve had high pricing during October, November, and on a Class III particularly, up in the $2-plus range. Farmers basically are seeing that right now. And yet all of a sudden, boom, in the time when they haven’t seen the check that reflects the new drop in the cheese market yet.

T3: And they won’t see that check until February.

Ted: That’s right. They won’t see it for a couple months. So, suddenly the production drops almost 1% year-on-year.

T3: Well, you’re still up almost 1%.

Ted: Excuse me for being skeptical, but it seems like it’s a little counterintuitive, that the productions should suddenly drop like that during actually the highest prices we’ve had for the last five or six years.

Eric: My opinion is that the numbers from September, October were well above expectations. And we’re speculating here, we need to see more months ahead, especially with relatively decent milk checks on the way, the outlook is still fairly favorable. We haven’t seen a ton of movement in the futures market outside of Jan-Feb, you’re actually seeing a shifting back of the forward curve, where we’ve been inverted for the last number of months, meaning, spot is high, futures are lower. All the while feed cost has been relatively stable. It was an interesting year, but it wasn’t like we had $7, $8 corn. We went from $4.40 corn to $3.50 corn, and we’re at $3.80 corn. Still, the economics of making milk are currently quite favorable.

You’ve had a forward curve that’s allowed for many farmers that have a low cost of production to hedge this whole way. Certainly, they’ve lost out on some opportunities. So, my feeling on the milk production side is that perhaps it was overcooked to the upside through this fall, and that maybe we return back to a norm of something near 1% growth. As we fast forward to next year, what will milk production growth look like? Well, we’ve already turned the needle on the milking herds.

The milking herd is likely to continue to grow over the next six months, and you’re gonna be comparing against some poor numbers. The comparables in the first half of 2019 are gonna be quite low. So it’s very possible that we start to see numbers that are closer to one half in the first half of the year, because we’re comparing against flats below previous year of production from 2018.

T3: Well, it’s interesting. If we’re only 1% to 1.5% up in the first half of next year, considering that for most of those months, we’re comparing against 0.5% to what, 0.7%, 0.8% down. That’s actually not very strong growth. From a trend line perspective, that means we’re actually relatively flat over the last two years, and that shouldn’t cause a big pullback in prices.

Eric: True. 2019 was one for the ages from a volatility perspective. We saw the barrel cheddar market, just as an example, because it was the most volatile, we went from $1.16 in mid-January of this year to a high of $2.39 in October, I believe. We bounced around in the mid-twos for a little while, in the $2.20 range. And then we have from early December to 2 days ago, we fell almost $0.70, it was over 30% move in the market. But we went from low to high, a 106% increase. That’s unprecedented. You throw that against any commodity market, food, non-food, metals, that was the most volatile commodity of the year.

And we’ve also seen for the first time in four or five years, a decline in American cheese stocks. And those numbers were very poor in October’s numbers. And I would imagine with this type of milk, the cheese production in November also will not show any major strength. And that those cold storage figures are still gonna be well below previous year. In October, they were down 8.5%.

So, should the market have gotten up to the historically high levels? Well, you put a few different things together and we caught a perfect storm to catch a multi-year high. We’re moderating and maybe we’ve overshot to the downside given how traumatic the fall is, the calendar time of year, but we’re still expecting above-average prices for 2020.

Anna: Costs are rising, margins are shrinking. Markets are more complicated. A lot has changed since T.C. Jacoby & Company started in 1949. What hasn’t changed is our commitment to helping farmers focus. With the latest administrative support tools, we work every day to keep co-ops and family farms running at their peak. Start by emailing me Anna Donze at anna@jacoby.com. That’s anna@jacoby.com.

T3: One of the things that I found interesting looking at the milk production report today, you know, as a country, we’re up 0.9%. But we were down, what, 1.3% in Wisconsin?

Eric: Correct.

T3: I think that does say a lot about why cheese had gotten as tight as it had. I was traveling in Wisconsin in November, and I can tell you, it was a mess. It kept raining, nobody could get the corn out of the fields. Silage was bad, pasture was non-existent. It was not the kind of conditions that milking cows thrive in and produce a lot of milk in. So in hindsight, thinking back on that, it’s not a surprise that milk production in Wisconsin was down. Well, that will directly—Wisconsin is such a Class III state, just about all that milk goes into cheese. Not a surprise that cheese was a little bit tighter than people expected in November and going into early December.

And I guess it’s almost not a surprise now that it seems we really bounced off a hard bottom here after falling almost $0.70 in barrels. We’re stabilizing in what I would call still a relatively high market. Usually, once Christmas orders are filled, you know, you go back to a place where people are willing to build inventories. Historically, that’s a $1.30, $1.40. This year, you’re right, it might be more like $1.60, $1.70. You know, I usually tend to be the bear in the room, but that would make me optimistic, at least for the first half of 2020. And given that dairy farmers right now could hedge the whole year for something above $17 a hundredweight for Class III, you know, that’s a promising start to next year.

Eric: Absolutely. I agree. I think the fundamentals suggest that we are in and across a number of different commodities. Butter may be the exception, but in general, from both the U.S. as well as on a global scale, we’re in a bit of a destocking environment right now. The previous two years, we made a lot of cheese in this country, and we built up inventories quite large. And that’s changing, similar in the non-fat market that’s a lot more of a globally traded commodity market. We’re now in this destocking environment, we lost the billion pounds of European intervention stock that’s now, you know, gone.

And so the market needs to rebuild that, and we’re just now giving farmers around the world signals to make more milk. And so we thought four or five months ago, we would have expected milk production to take longer to recover. Those previous two milk production reports to this one suggested that maybe they were getting kick-started. And I think one of the other things that is different about the markets these days is we tend to think that because of how farms are set up these days, that weather doesn’t have an impact, but, boy, does it. I mean, as the numbers in Wisconsin said that we were down 1.5%, and the weather played a fairly decent impact of that.

While price next year won’t be an issue from a feed perspective, quality certainly may. I mean, it was one of the more odd growing years, you know, that we’ve seen in history, while it may not be expensive, it may not be effective once it’s been fed to the cows.

Ted: What do you think about the retrenchment in pricing as far as international sales are concerned? Are we gonna move inventory internationally with this retrenchment on cheese? Are we at that level yet or are we gonna stay there or what?

T3: We’re probably too late. It’s the middle of December. I think most of the export orders, those sales contracts tend to be closed before Thanksgiving, tends to be an October, November timeframe that gets the first quarter done. Europe got the orders because they were probably a good $0.20 lower than the U.S. on a delivered basis through most of Asia and the Middle East this year for cheese.

And that doesn’t mean we’re not gonna export, it just means that all that marginal business, those users of cheese in Asia, in the Middle East that could use either European cheese or U.S. cheese this year bought European cheese for the first half of the year. We are still, even with this pullback, keep in mind that what was driving this cheese market was the barrel market which was a real surprise to many people.

And so the pullback, the $0.70 drop from $2.24 to $1.57 before we bounced off the bottom this morning was barrels. Blocks had only dropped about $0.15 in the same timeframe. And blocks is really the driver of the export market. We export some barrels, we export a lot more block cheese or cheese that’s priced off the block markets such as mozzarella. And we are still priced too high to be truly competitive in the export market.

Eric: I think the only things that can help that, which I think at the very earliest would be Q2, but most likely a second-half play would be a really generous CWT subsidy that’s pushed through, just aggressive pricing to keep market share. We’ve heard some rumors that some, particularly pizza cheese exporters moving product just to keep the business that they have currently so they don’t lose out on that market share.

It seems like, but particularly on the pizza side of the business, both New Zealand as well as Europe are pretty darn competitive and are growing their capacity to try and fill that need, as they recognize that there is a lot to go, specifically in Asia at a per capita consumption. So I think that’s an area where, could we get there? The futures need to fall further. We need a very generous CWT subsidy to push some of that through. And I think we’re at somewhat of a disadvantage. We don’t talk about it much, but there’s currently a tariff in place for European cheese. So…

T3: You mean for American cheese.

Eric: Correct. Well, we have an import tariff on current European cheese at 25%.

T3: Oh, into the U.S.

Eric: Into the U.S.

T3: Okay.

Eric: So I don’t think that has a huge impact on the U.S. market. But I do think that Europe now may have issues on moving cheese. And so they will have to discount or their price won’t move higher, they’ll have to move that elsewhere, and they’ll find places to… They’re very good at moving product. When the Russia ban kicked in 2014, when they weren’t able to ship a lot of product to their number one customer, it took a little time, but they were quite effective at finding new homes for their cheese. So I wouldn’t put it past them. They’re great export partners with folks they work with.

Anna: Dairy markets move on an international scale. Buyers and sellers thrive when they think globally. Put T.C. Jacoby and Company’s 70 years of market expertise to work for your organization. If you’re looking for someone to help you market your products or you’re looking to source supply, get in touch with us now. Email info@jacoby.com or dial 314-822-5960.

T3: Let’s talk a little bit about the new block futures contract.

Ted: Let’s talk about how that might affect our ability to export too.

T3: Sure. That’s a great idea. First, just as, kind of, a point of reference for those listeners who don’t know the nuances of the cheese market and how it trades on the CME, there’s both a block cheddar market and a barrel cheddar market. And the barrel cheddar market is really driven by processed cheese sales. And the block cheddar market is really driven by natural cheddar sales including, you know, when you go to the store you buy cheddar shreds, you know, cheddar trunks in the store, that’s natural cheddar in block form, and that’s priced off the block market. When you buy processed singles, that tends to be priced off the barrel market. For the most part, as well, most mozzarella is also priced off the block market.

One of the real challenges that hedgers have had over the last few years is that the volatility in the spread between the block and barrel markets has been historically volatile. And that is putting it mildly. The typical spread between the block and barrel market is about 3.5 cents, with the block market usually trading about 3.5 cents above the barrel market. Over the course of a year, historically, that would vary between maybe as much as a seven or eight cents spread when it was wide, and maybe invert to a negative one or two cents, when it goes the other way.

In the past three years, we have seen spreads of $0.40 and we have seen spreads of $0.20 and $0.30 the other way. And it has made hedging cheese extremely difficult. It has affected not only the overage for milk prices, for example, if you’re part of a co-op who’s primarily making cheddar barrels, there have been a lot of times where it’s been extremely difficult for those barrel manufacturers to get the kind of value out of the milk-selling barrels that you would normally expect from a Class III price. So you’ve probably seen discounts on your check. And there have been times where it’s gone the other way, and the block producers have had difficulties.

So the industry I would say over the last, oh, probably 12 to 18 months, really started talking to the CME and begging the CME to help us try and figure out a solution to this, and they came up with one. And Eric, I’ll defer to you, tell me about what the CME is doing and how do you think it’ll work?

Eric: Sure. So two years ago, as we started to see the cheese futures contract was having an impact where, in particular, our block hedgers, people that are procuring cheddar, mozzarella, nearly almost all natural cheeses are priced off of a block market, were struggling with the hedge effectiveness of the current cheese futures contract.

So, the way that cheese pricing is done, where there’s a weighted average every week, the block and barrel manufacturers report into the USDA what their price and their volume is for 40-pound color cheddar blocks and 500-pound barrels. And that flows into the final settlement of the cheese futures, which is a weighted average of both of those components.

But most end users, most buyers are likely buying one or the other. They’re either buying processed cheese or they’re buying mozzarella or buying cheddar shreds or using it as an ingredient or in food service or what have you. And their effectiveness of using these tools as well as suppliers and traders that are offering risk management solutions for those customers were struggling to provide a fair price.

And so what we started to see in my side of the business, so we are on the futures and options side where we’re working directly with customers to manage that risk is we were seeing them stray away from the exchange into the over-the-counter swap market. And what that was allowing them to do is allowing them to better their hedge effectiveness.

Now, a lot of times they were paying for that effectiveness. So their price that they were getting from their over-the-counter counterparty was providing them 100% effectiveness. Because the tool that they were using was matching up with how they were buying the product, their cash price. That said, they’re paying for that. There’s a privilege and a convenience for getting that 100% effectiveness. So they were paying up to get it done, but we were losing liquidity on the exchange. And we’re such huge proponents of exchange-based trading.

And so we started to push the CME to start exploring alternatives that their current cheese futures contract which has been around since 2010, and up until last year, has been wildly successful. It’s a very, very powerful tool. Speculators liked it because they understood it, Class III milk, for even those of us that have been in the market for a long time, it’s a hard thing to explain that that’s a part of cheese, and whey, and a little bit of butterfat. So prior to 2010, it was hard to get a lot of people on the boat to jump into this hedge thing. So cheese futures had been great, but they’re starting to lose their shine because it wasn’t as effective.

So there was a lot of work that went into it, a lot of prodding the CME. The cheese industry doesn’t have, like, the non-fat in the butter markets, where we don’t have a great, centralized, decision-making, kind of, a working group. Although, we now have one with IDFA setting one up, but, the CME finally announced last month, with more details that were published yesterday, that they are going to launch a block cheddar futures contract, which allows anyone that’s hedging a natural cheese product a much more tighter and effective hedge. That launches on January 13, and I think we’re very excited about the opportunity to have this contract.

It’s not exactly what the industry asked for, the industry had asked for the ultimate… There’s a lot of debate about what to do and if we should have changes to the spot markets, but ultimately, we asked for two separate futures contracts. We wanted a block cheddar futures and a barrel cheddar. And then due to resources, the CME said, “Look, we can launch one, and we can do it fairly quickly if you’d like to see that. And if there is a need for barrels down the road, we’ll act on it.”

Now what’s nice about this opportunity is that barrel hedgers, people that are hedging processed cheese or managing inventories of the raw material, the barrel cheddar, can still utilize a spread between the new contract and the current contract in order to get an effective hedge. So, we expect that the arbitrage, people-to-people that can make markets and make spreads between Class III, and cheese, and whey will also jump in with open arms on the block contract as well.

T3: So if I understand, Eric, you wanna hedge 20,000 pounds, which is the size of one futures contract, 20,000 pounds of block cheddar, you’d buy one future. If you actually want to hedge 20,000 pounds of barrel cheese, you’d actually go long two of the current existing cheese futures, and then short one of the block futures. And that nets out basically as a barrel future.

Eric: Correct, correct.

T3: And I will admit, I was someone who was asking the CME dairy team to put in both, because I felt that would be easier for the industry. But at the end of the day, I would have rather had one than none. And so when they came back and said, “We’ll give you the block.” I said, “We’re good.”

Eric: Exactly.

T3: “Give me the block.”

Eric: We were the same way. We also asked for a number of items. I’m a big proponent of making the option strikes more granular. So right now, cheese futures, when they were set up in 2010, they mimicked or cloned what the Class III futures were. So we have strike increments in Class III of $0.25 a hundredweight, which the industry has just generally accepted. But we had 2.5-cent spread or increments for our option strikes in cheese futures. I think that is exceptionally wide.

And it also doesn’t tie into the tick increment, which is a tenth of a penny. So I had asked for penny increments, I was told that that can be put into the project pipeline for coming down the pike in the next couple of years. It was more important to launch the product and to get the tools trading right away to solve this problem than it was to, you know, change some of the smaller things.

But, my gut tells me this will be a big win for the industry. I think over the last two or three years, we’ve seen a lot of liquidity on the exchange-traded volume dry up. We’ve seen both open interest and overall, volume trading go down over the past year or two years in the cheese futures and options contracts. Some of that may be market-based. It has not been an exciting time. We tend to see volumes get lower in bear markets, but we do know that there has been a lot of market share removed from the exchange and taken into the OTC market. We think it’s very important.

And I think there are reasons to use OTC contracts. We are actually partnered with a new company to be able to provide that to our customers. We think there are benefits to it. But if the benefit is purely hedge effectiveness and the CME can solve that problem, it should bring a wave of liquidity back into the marketplace. And that’s great from a transparency perspective. And so, as someone that’s been a big proponent of exchange, our business has grown because we’ve stuck to that and a lot of the market has moved away from the old nostalgic pit market trading, which is so much fun to see and view. But in reality, I think all market participants, producers, farmers, end-users, and everyone in the middle benefits from more transparency on the screen, that we can all see it, we can all feel it, we can all trade it. And that that provides, I think, a legitimacy to the marketplace.

T3: Do we have a date yet when block futures are going to be posted?

Eric: January 13th and they’ll start with a February contract. And the specifications of the contract are virtually the same as the current cheddar cheese contract with the only exception that they’re just breaking out the block portion and settling that to the USDA’s monthly settlement of blocks.

Nicely enough, the USDA made that separation this past summer. And so there’s a track record for it, there was always a way to calculate it. All those numbers exist in the weekly publishing of the “National Dairy Product Sales Report,” NDPSR. But now the USDA has helped facilitate this to make it an easy process. So, it’s coming less than a month away. Now, the race is on. Before I got into the office here, I just realized that all of the clearing firm back offices and all the software providers need to get this together. And dairy isn’t necessarily something that’s on these companies’ radar screens. So it’s my job, it’s the broker’s jobs to shove that down their throat to make sure that we’re all prepared to trade this product on day one.

T3: Options, same day? So we’ll be able to trade options on the 13th as well as futures?

Eric: Yes, that’s what… They’ve released all their specifications. Everything’s the same, they even reduced. So we have a relatively high threshold for… I know this is gonna sound really confusing, but the CME has a method of trading, which is called block trading. So that’s different from the block cheddar cheese. It is a method to be able to pre-negotiate trades off-screen. For brand new futures contracts, sometimes people don’t want to show their hand on big size in the market because of the lack of liquidity. Currently, with all dairy futures, you’ve got to transact at least 20 contracts per leg in order to qualify for one of these block transactions where it can be pre-negotiated off-screen and then brought to the screen that would…so it’s still an exchange-traded product at the end of the day.

It builds open interest, it builds liquidity, it’s just negotiated off the exchange. This is the one change that they’ve made. They’ve reduced that number on this new contract from 20 per leg to five. So, it at least allows for the industry to maybe start with, which is exactly how the OTC markets work, where everything’s negotiated off-screen. And the prices really aren’t that transparent to being able to do this with an exchange-based product to, kind of, help facilitate liquidity in the early stages of a contract.

So, that to us, is also exciting. It gives the opportunity for market makers and commercials to, kind of, come together off-screen through brokers to facilitate some trading and get things going, particularly in the deferred months. But we do think it’s such a straightforward contract, and I think the market-making community and liquidity providers that we work with are going to adjust their algorithms and their, kind of, auto traders to work with this new contract. It just, it fits in the model of how things will be spread and so we think it’s gonna be a successful starts.

Ted: Most of the international business is 40-pound blocks anyway, isn’t it?

Eric: Correct.

Ted: So won’t this new trading format just fit perfectly on that?

Eric: Yes. And we think a lot of those international customers are using off-exchange hedging methods to get things done. So, this has always been the benefit of the Chicago Mercantile Exchange over the other exchanges. Number one, they don’t have a cheese contract. There’s no central cheese index in Europe, which is a shame, and we hope that that industry figures it out, because that would make hedging those products a lot easier. But, for those that are trading overseas, they can come to the U.S. and use our market as a proxy hedge.

And a really good example of that is non-fat dry milk in this country. Over the last four or five years, we’ve seen the futures volume increase. There are competing exchanges, both the European Energy Exchange or EEX that does European Skim Milk Powder as well as the NZX, New Zealand Exchange that does Fonterra, GDT, skim milk powder. We have a global market that trades skim milk powder. Most of those products are…prices have consolidated. There’s a fairly decent correlation between all three of those regional markets.

But we’ve seen a lot more participation, particularly for long-dated hedges. If you wanna hedge six to 12 months out with the New Zealand skim or European skim milk powder, their exchanges are not a good place for sourcing liquidity, you won’t pay a fair price. So we’ve seen a lot of international companies come and hedge off those other non-U.S. regional skim milk powder into the U.S. non-fat dry milk market, because we do have liquidity to get things done.

Our contract size is a full truck or container versus a fourth of a container for Europe, and a twentieth of a container in New Zealand. So, there’s a lot of benefits to coming to the CME. We have a lot more members, we have better technology, we have liquidity in our market. This is just a no-brainer solution to manage that risk, whether on their own or through their supplier.

T3: Yeah. Speaking of liquidity, do you think the block futures will help or hurt liquidity of the current existing cheese futures in the Class III futures?

Eric: This is always an ongoing debate when a new contract launches. And so this was a really hot topic in 2009 when there was a thought to launch the current cheese futures contract. Will that capture liquidity, capture share away from Class III and make it a less attractive product? And in the early stages, very successful launch for cheese, Class III maintained its share. The industry has gotten much better with the solutions, so we’ve seen a much more robust options market, which is very healthy for our dairy markets to see that type of liquidity grow.

When it comes to a block cheddar contract, because there is a natural spread with the current cheese futures, and because there’s an overwhelming demand for…there’s a need for the block cheese because the majority of hedgers are leveraging. The vast majority of cheese in this country is priced off of block, we don’t make a lot of processed, you know, we only make as many barrels as we make. It’s one spec versus the prices that one commodity versus the current CME spot cheese market that pretty much prices most other products. A lot of liquidity could funnel into that, but, there is a need, specifically, for the farm community, a lot of farmers around the country are priced off of a cheese yield, that they’ll need to utilize that contract.

There’s a lot of larger players that are making both block and barrel. There’s a need for it, there’s a natural spread with Class III whey and the current cheese contract. Block fits into that nicely, and we think that the autoquoters will be quoting spreads against these contracts almost immediately. And so we think that won’t take away liquidity from some of the other contracts. It’s always a risk, but I think the history has shown, at least in dairy, that if people understand it, if we’ve made the product easier for people to use, that they will use it.

T3: Eric, it was a pleasure to have you today.

Eric: It was awesome. Yeah, thank you.

T3: Thank you so much for joining us.

Eric: Always fun.

Anna: We welcome your participation in “The Milk Check.” If you have comments to share or questions you want answered, send an email to podcast@jacoby.com. Our theme music is composed and performed by Phil Keaggy. The Milk Check is a production of T.C. Jacoby & Company.

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In this episode, Ted and T3 are joined by Eric Meyer, President of HighGround Dairy in Chicago. Eric explains the CME's new block cheddar futures contracts, which will begin trading on Jan. 13. The panel also reacts to surprising NDPSR data for the ... In this episode, Ted and T3 are joined by Eric Meyer, President of HighGround Dairy in Chicago. Eric explains the CME's new block cheddar futures contracts, which will begin trading on Jan. 13.<br /> <br /> <br /> <br /> The panel also reacts to surprising NDPSR data for the month of November. Eric is reminded that the St. Louis Blues won the 2019 Stanley Cup.<br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to "The Milk Check," a podcast from T.C. Jacoby & Company, where we share market insights and analysis with dairy farmers in mind.<br /> <br /> <br /> <br /> T3: Welcome everybody to the T.C. Jacoby & Company Milk Check podcast. Today, we have a guest speaker: Eric Meyer, President of HighGround Dairy. And we thought we'd talk about the milk production report and a little bit about markets, and then also talk about the new cheddar block futures contracts that are going to be introduced on the CME in the middle of January. Eric, welcome.<br /> <br /> <br /> <br /> Eric: Thank you very much. It's great to be here in a cold and snowy St. Louis. It's almost colder here and snowier than up in Chicago, so I feel for you.<br /> <br /> <br /> <br /> Ted: How about the St. Louis Blues who played Chicago on Monday night?<br /> <br /> <br /> <br /> Eric: Oh, do we need to talk about that? I was also told, I think, four or five times since arriving last night that you guys are currently the Stanley Cup champions. That's always nice to hear after three of them in the previous five years.<br /> <br /> <br /> <br /> T3: I'm glad you know that. It's Wednesday, December 18. It just so happens the milk production report was released not ten minutes ago, before we started this, recording this podcast. Milk production in November came in at up 0.9% in November for the country and up 0.5% in the 24-state. And that's a bit of a surprise to the downside. I think most people were expecting something up about 1.5%. Eric, what are your thoughts on that?<br /> <br /> <br /> <br /> Eric: So we were in that same camp, so we thought that the all U.S. number was gonna be in the 1.2 range with the 24 states that have been trending a lot higher. And we'll talk about that. I think there's a big shift in the last year of the 24 states straying from the all U.S. number, a big dichotomy between the larger farms in the dairy-centric states and the rest of the country. So we were in that camp, 1.5% was what we were thinking. Those were the numbers from both September and October, and so these numbers are definitely below expectations, a bit of a change in trend from the previous two months. With that number being up 0.9%, we also had a 60 million-pound downward revision in the October number, which represented a 0.3% decline.<br /> <br /> <br /> <br /> So USDA originally reported a 1.3% all U.S. gain and now it's down to just 1% higher. We are getting more milk. I think there is, from a fundamental perspective, the first half of this year, we were down on milk production. And we hadn't been down on milk production since 2013. I mean, it's been four, five-plus years that we've been growing milk production. And so the poor economics in 2018 and in the early 2019 kinda did the market in. Farmers finally responded, which, you know, we rarely see. That said, the large scale farming communities, the ones that are larger that are more apt to hedging that have brought costs of production down, economies of scale, we feel like they've maintained, and are now starting to pick up that growth.<br /> <br /> <br /> <br /> So one of the items in this production report that we saw that is notable, we didn't have any change this month from October to November from a herd perspective. But we now are in the 24 states which represents right around 96% of total milk production in the country. We're now above previous year on the overall milking herd while the all U.S. is down 27,000 head. T.C. Jacoby & Co. - Dairy Traders clean 36:03
The Milk Check interviews DMI’s Tom Gallagher https://www.jacoby.com/the-milk-check-interviews-dmis-tom-gallagher/ Mon, 25 Nov 2019 15:36:50 +0000 http://www.jacoby.com/?p=1580 A special guest joins The Milk Check this month: Tom Gallagher, CEO of Dairy Management, Inc. Ted, T3 and Anna ask about how DMI allocates the funds it collects from the Dairy Checkoff program; Gallagher explains why recent changes to DMI's advertising strategy position the industry to interact with today's consumers. (Spoiler: There's a reason you don't see "milk mustache" commercials on TV anymore.) Gallagher also urges farmers to band together against aggressive animal rights groups who he says want to put dairy farms out of business.   Anna: Welcome to "The Milk Check," a podcast from T.C. Jacoby & Co. where we share market insights and analysis with dairy farmers in mind. Today on "The Milk Check," we interview Tom Gallagher, CEO of Dairy Management, Inc. DMI is responsible for increasing sales and demand for dairy products by spending the money generated through the Checkoff program. T3: First, I'd like to say thanks for joining us today. We really appreciate you taking the time to discuss DMI and some of DMI's activities and the Checkoff program. And I think the best place to start this conversation would be Tom, tell us about the Checkoff program and how the money is used and where DMI is spending Checkoff dollars today. Tom: Okay. Well, on the Checkoff money we get money, $0.15 per hundredweight that is provided by dairy farmers by law to the Checkoff. And $0.05 of that goes to the National Dairy Board and $0.10 goes to local promotion groups. So let me start there and also state that the Checkoff's been in place since 1983 when dairy farmers approached Congress and said, "Look, the government is sitting on 17 billion pounds of excess product. That's not good for the government, it's not good for taxpayers, it's not good for dairy farmers. We have had a voluntary Checkoff for years. We'd like a mandatory Checkoff and we will fund it. We will pay for USDA oversight because we believe farmers need a voice in the marketplace." And since that time, we have seen per capita consumption grow 75 pounds per person in the United States. And prior to that, which really shocks a lot of people, in the early decades of the 1900s, per capita consumption was on a straight decline until just about the time the Checkoff went into place. So we take that money that we receive and we do a number of things with it. We have an export company that is run by former secretary Vilsack from USDA. And there are 120 members of that company that export dairy products. And through that company, the Checkoff funds about $20 million in marketing activities. The 120 members fund about $1.5 million that can be used for policy, trade policy, so the dairy in the street speaks with one voice, which is really a very, very powerful and important thing to do as an industry to make sure that we're unified. And it's necessary to have those member dollars because Checkoff cannot do lobbying. So with that, that company was created in 1995 by processors, manufacturers, traders, farmers. And then the Dairy Management organization itself focuses on increasing sales and trust. So maybe I should stop there and let you take it deeper. Ted: Roughly what percentage of the Checkoff money goes to USDEC? Keeping in mind that Jacoby & Co. is one of the original members of the USDEC. And we greatly value the assistance that USDEC has given our company in marketing products overseas. Tom: Yeah. Well, and we appreciate that you were an early member. And so Dairy Management, Inc. was formed by the National Dairy Board, which gets the nickel, and that's about $100 million. And then state and regional organizations that get the $0.10 but not all of them are members. So they have about $100 million to $120 million. Not all state and regionals are members. We have about $200 million or $220 million in total and we fund, of that, about $21 million to $25 million. You know, when I think about it, it's about $25 million. A special guest joins The Milk Check this month: Tom Gallagher, CEO of Dairy Management, Inc.

Ted, T3 and Anna ask about how DMI allocates the funds it collects from the Dairy Checkoff program; Gallagher explains why recent changes to DMI’s advertising strategy position the industry to interact with today’s consumers. (Spoiler: There’s a reason you don’t see “milk mustache” commercials on TV anymore.)

Gallagher also urges farmers to band together against aggressive animal rights groups who he says want to put dairy farms out of business.

 

Dairy Management, Inc. CEO Tom Gallagher

Anna: Welcome to “The Milk Check,” a podcast from T.C. Jacoby & Co. where we share market insights and analysis with dairy farmers in mind. Today on “The Milk Check,” we interview Tom Gallagher, CEO of Dairy Management, Inc. DMI is responsible for increasing sales and demand for dairy products by spending the money generated through the Checkoff program.

T3: First, I’d like to say thanks for joining us today. We really appreciate you taking the time to discuss DMI and some of DMI’s activities and the Checkoff program. And I think the best place to start this conversation would be Tom, tell us about the Checkoff program and how the money is used and where DMI is spending Checkoff dollars today.

Tom: Okay. Well, on the Checkoff money we get money, $0.15 per hundredweight that is provided by dairy farmers by law to the Checkoff. And $0.05 of that goes to the National Dairy Board and $0.10 goes to local promotion groups. So let me start there and also state that the Checkoff’s been in place since 1983 when dairy farmers approached Congress and said, “Look, the government is sitting on 17 billion pounds of excess product. That’s not good for the government, it’s not good for taxpayers, it’s not good for dairy farmers. We have had a voluntary Checkoff for years. We’d like a mandatory Checkoff and we will fund it. We will pay for USDA oversight because we believe farmers need a voice in the marketplace.” And since that time, we have seen per capita consumption grow 75 pounds per person in the United States. And prior to that, which really shocks a lot of people, in the early decades of the 1900s, per capita consumption was on a straight decline until just about the time the Checkoff went into place.

So we take that money that we receive and we do a number of things with it. We have an export company that is run by former secretary Vilsack from USDA. And there are 120 members of that company that export dairy products. And through that company, the Checkoff funds about $20 million in marketing activities. The 120 members fund about $1.5 million that can be used for policy, trade policy, so the dairy in the street speaks with one voice, which is really a very, very powerful and important thing to do as an industry to make sure that we’re unified. And it’s necessary to have those member dollars because Checkoff cannot do lobbying. So with that, that company was created in 1995 by processors, manufacturers, traders, farmers. And then the Dairy Management organization itself focuses on increasing sales and trust. So maybe I should stop there and let you take it deeper.

Ted: Roughly what percentage of the Checkoff money goes to USDEC? Keeping in mind that Jacoby & Co. is one of the original members of the USDEC. And we greatly value the assistance that USDEC has given our company in marketing products overseas.

Tom: Yeah. Well, and we appreciate that you were an early member. And so Dairy Management, Inc. was formed by the National Dairy Board, which gets the nickel, and that’s about $100 million. And then state and regional organizations that get the $0.10 but not all of them are members. So they have about $100 million to $120 million. Not all state and regionals are members. We have about $200 million or $220 million in total and we fund, of that, about $21 million to $25 million. You know, when I think about it, it’s about $25 million. So 10% or a little bit better than 10% goes into exports. And, you know, with the priority of sales overseas, as Ted and you guys know better than anyone, we really believe China, as we get the trade reverse tariffs done, they will be a great market for U.S. cheese. We have great things that could happen in China. I mean, in Japan, Southeast Asia, and, of course, Africa. So I believe over time we’re gonna see a lot more resources move from the domestic program into the export program.

Ted: If 10% of the money goes to USDEC, where does the other 90% go, just roughly?

Tom: Yeah. Just roughly, about $35 million goes directly into partnerships with milk companies to try to stimulate innovation, companies like Dairy GO, Dairy Farmers of America, and others. And then some of the money goes into partnerships with Taco Bell, McDonald’s, Pizza Hut, and Dominoes where we have placed product development people to make sure that dairy is top-of-mind as they develop these products. So that’s where, you know, $35 million to $40 million of that money goes. And then the other categories, I would say nutrition and research is close to $10 million.

Over the last—since 2002, for example, we have funded 57 nutrition research projects at universities to show the value of whole milk in the diet. And that’s critical because as USDA and others create the dietary guidelines, it is not the best science that determines what they come up wit, it’s the preponderance of the science. So volume, in this case, matters. So another $10 million or so goes there. And then we have initiatives in sustainability. We have initiatives at school, “Fuel Up to Play 60.” And then a large chunk of our local and national budget goes into communications across the board to build trust about the various things that dairy does.

T3: Tom, when you talk about communications, is that including advertising and social media and things like that?

Tom: Yeah. You know, we have gotten out of TV advertising but we have really focused on social media and influencers. So both us doing social media directly with the industry and using influencers like chefs, nutritionists, and others to really get to the conversations that are influencing the discussions about the dairy products. And it’s just amazing the misinformation about dairy and its role in the diet. But maybe even more so than that, the environmental footprint of dairy and the misinformation there. So we found that being on social media is most critical to us right now.

T3: Tom, tell me a little bit more about kinda how DMI thinks about social media and is using that to help dairy farmers. And the reason I ask the question that way is I think, and I’ll speak for myself and I’m assuming that most of the population is kinda in the same boat I am, advertising has really changed a lot in the last 10 years as, you know, social media has become a much bigger source of ways to get the word out to the people that you want to hear your story. But I don’t think everybody really understands that change and how, for example, food marketing, in general, has changed. From your point of view and from DMI’s point of view, how has that change affected dairy and what is DMI doing about it?

Tom: Well, I think the change has been huge. And we really moved away from advertising around 2008 because both of the amount of money it was starting to take of the budget and then the dispersion of channels and, you know, so many options and then, of course, now, social media and live streaming and that. But, you know, I think one of the most important things about social media is that you really…people have a short attention span. And so you really have to have something that appeals to that target audience. And in the past when you think…when I was growing up when we had three main networks, well, it was all a one-way push-out of the advertising, one-way communication from the advertiser out. And you could saturate the market with one TV ad.

Well, now, you really need to segment people in a very refined, specific way. And those people, they don’t want to be talked at, they want to be engaged with. And so the most successful marketers today are those that really have things that cut through the clutter on social media and where people interact, even ideally, with the employees of the brand. And in our case, the most effective interaction occurs with dairy farmers. Dairy farmers carry a lot of credibility with the consumer. So I’d say, to answer your question, we’re out of the one-way push-out of information and the two-way conversation and the segmenting of the audience is more refined than it’s ever been.

Anna: On “The Milk Check ” podcast, we tackle questions and share ideas that move dairy forward. Now, we’re making it easier for you to get answers to your lingering question. Do it with one click. Submit your questions online at jacoby.com/askted.

Ted: You know, for years, Kraft Foods was the bedrock of dairy promotion, if you will, particularly where cheese, cream cheese, and cottage cheese was concerned. And now, we have Kraft a little bit aside and also we have Dean Foods moving aside who, basically, were the large marketer of food products. This looks grim from a promotional standpoint going forward. How does DMI and your organization propose that we’re gonna be able to deal with this when it comes time to market our products?

Tom: Well, I’d say a couple things and, you know, specifically in Dean’s case, you know, first of all, I think that yes, fluid milk has been on a decline while overall dairy per capita consumption has been on a, you know, straight line up. But in the case of Dean’s and fluid milk, I think Dean’s is a business story that’s been 30 years or more in the making. And what I mean by that is, and I’m gonna draw, you know, an absolute here when nothing’s that totally absolute but, you know, they are a predominantly white-gallon business. And the white gallon was created at a time in this country when there were large families who ate almost every meal as a family together. Today, a very small percent of families even eat a meal once a week together. We have more people who want things on-the-go because less than half of the dollar spent on food today are spent on at-home meals. And so I think we can say, well, it’s changing consumer tastes.

But the flip of that is innovation. You know, the dairy industry in some products and in some companies has not been quick to innovate. And by innovate, I mean package size, what’s in the bottle, the actual packaging itself. And, you know, you can look at some very clear successes in the fluid milk category the last few years. You have Fairlife, which is different what’s in the bottle with less sugar and more protein. But the packaging is unique and the size is unique. And they’re selling that at a rate that’s, you know, several dollars above what a gallon goes for. And when they introduced that, they’ve taken 60% of their sales now are coming from people who were formerly drinking plant-based alternatives. So, you know, there are successes but it takes innovation. And if you just are a company that’s gonna say, “Here’s our white gallon, take it…” And, you know, at Jacoby you guys know that better than anybody. It’s the same thing in the overseas markets. If people want butter of a certain color and salt constitution, we can’t say, “Well, ours is yellow and of this constitution.” So I am optimistic because people still love dairy.

The plant-based thing, I want to comment on that. You know, it’s just like soy. Soy was all the rage but they never had more than 5% of the fluid milk category. And now, they’re on the way down with almond milk on the way out. And they’re still not at 5%. So while, you know, fluid milk we could be very negative about because it’s been down so long, I think through innovation, different product sizes, and portability and shelf stability and more and more products being lactose-free and still tasting great, I’m very optimistic. So a long-winded answer but maybe if I didn’t answer the question exactly, you could follow up.

Ted: The point I was trying to make is that Kraft spent a lot of money on advertising and promotion and very effectively for many, many years, probably 20 of those last 30 years. And is DMI gonna be able to fill that void? And if they can’t or if they only can take part of it, who’s gonna take the balance? We agree that the future looks good and we agree that the high protein direction of things is the way to go. It certainly is in our household and in our way of thinking. But we’ve had so many years with skim milk and we’ve lost a lot of customers because it tasted so bad. Now, we’ve gotta bring it back. We’ve got to bring that consumption level back. That’s gonna be a tough job.

Anna: Well, and to tie that directly to what he was saying, you know, you have Fairlife who’s been a great success. And yes, they had an innovative product and yes, they have new packaging, but they also have a massive marketing budget and a huge machine behind them pushing that.

Ted: Thanks to Coke.

Anna: Yeah.

T3: Well, and that’s, I think the point. It’s, you know, where are the marketing budgets in dairy today, outside of DMI? You know, you always had Kraft. You maybe had some of the other, Dean Foods. You know, today, I think there are still companies that I think have good marketing budgets, you know, whether it’s the Fairlife and Coca-Cola, whether it’s Tillamook out west, whether it’s, you know, Dannon and Chobani.

Anna: I was gonna say Chobani.

T3: Chobani’s, I think, been a leader.

Anna: I think Bell Brands did a very good job for a long time too.

T3: So they come. And I also think the other thing, I’m glad we talked about social media because the other thing that I think has happened is there’s been a real shift in the way food is marketed in this country. And so part of it is the marketing happens in a different way than it did when Kraft was the leader.

Tom: I agree with everything you all are saying. And, you know, I think on that last point on social media, that’s why a lot of brand companies I’m working with now have gone from the lion’s share of their money to TV to now, maybe 30, 40% of it to TV, if that, because you can target more specifically and for fewer dollars through social media. But to answer the original question, you know, with this industry having thin margins and not a lot of money, even if they innovate to market, you really need others who can come into the category who have some deep pockets, who have some money.

So in the case of Fairlife, that’s one of the reasons we wanted to work with them was we knew Coke would put a lot of money behind it and they had staying power. They didn’t turn a profit for over three years and they were spending at marketing levels higher than all the brands put together in fluid milk. So to answer the question, I think that co-ops who are really leading the way in the resurgence of fluid and others are gonna have to partnerships with people…You know, we have the technology. We need partnerships with people who are willing to invest and have the staying power. So that could be equity funders. It could be, you know, a Pepsi. It could be a Coke. But I don’t believe the money to do the needed marketing exists within the confines of the industry as we know it today.

Ted: Well, it’s necessary that we come up with the money somewhere. And I like the idea of partnerships. But, you know, when it comes down to it, about 50% of the value on the grocery store shelf is in the marketing and what goes with it. Where you draw the line is, of course—logistics is probably included in that. But the dairyman is only winding up with 20% or 25% of the value of the product on the shelf. You know, we’re gonna have to do something about that. You know, it almost can’t continue that way. The dairyman has gotta be rewarded better. And yet, every time we turn around, we have more competition and we’re being harassed by some of these animal rights people and so on. So it’s a tough job.

T3: You know, since you brought up animal rights, why don’t we throw that question at Tom. From your perspective and from DMI’s perspective, what do we do about the increasingly aggressive tactics that, you know, the organizations like PETA and The Humane Society and Harm have started towards especially large dairy farms?

Tom: Well, I think there’s two things that need to be done. And I think the industry’s doing real well on one of them. One is we need to have the evidence base that we have the appropriate programs in place for animal care like the farm program and sustainability issues and that. And I think we’re making great progress there. The other is we have to have an awareness of what their strategies are. HSUS, to me, constitutes the single-largest threat to dairy. It’s not plant-based. It’s not lab-grown. It’s HSUS. They’re well-funded. They’re well-organized. They have shell organizations like the Organization for Competitive Markets. And their strategy has changed. Their strategy now is to infiltrate into organizations that really aren’t anti-animal agriculture but they might be concerned about climate, they might be concerned about other things, and then to gear their agenda against dairy and agriculture.

And one of the things they’re doing, they have people on their payroll, if you can believe this, that are former dairy farmers that work for HSUS that are going out to small farmers saying, “Sign our petition for this or for that because we’re on your side. We just want to get rid of large farms. it’s not you we want to get rid of, it’s large farms.” Well, once they get rid of the large farms, they’re gonna get rid of the small farms. So farmers really can’t fall for that. They need to stand united. They need to understand, “Yeah, we’re not all gonna agree, you know, on all things within the dairy farming community.” But I believe that our diversity and I think the secretary who runs DEC would tell you our diversity of geography, of types of farms, size of farms is really one of our great strengths. HSUS is using us to divide farmers and that way, they divide farmer voice on Capitol Hill.

Ted: Well, there’s no question that they’ve done a great deal of damage. How do we try to deal with that?

Tom: Well, I think there’s a couple of things. If you’ve watched farmers on different social media sites, that’s where a lot of this division occurs. And I think it’s up to the Checkoff and co-ops and other leadership groups to do a couple things. I think one is to give farmers the information and the facts to understand what HSUS really stands for. There’s so many farmers, guys that I talk to who have really bought into this notion that HSUS is against the large farms only. Well, that’s just not true. So I think one is information. But the other thing that I want to just mention is I think it’s up to people like me and National Milk leadership and promotional leadership and co-op leadership to paint a picture of what the farming of the future will look like and how people can be successful in that. That doesn’t mean we can guarantee success for all farms. You know, we’ve, obviously, been on a decline in farm numbers over the years. And I will take responsibility. I don’t think we’ve done a great job painting the picture.

And so farmers, I think feel, rightfully so, “Well, geez. Now, I’ve got this animal care stuff and it’s costing me money. And I gotta do this sustainability stuff. And then there’s, you know, consumers are getting anything they want and no one’s standing up to them.” I think if we look forward at where the consumer’s gonna be in 5 and 10 years and paint a picture of where farming will be within that and how it can be prosperous financially, I think that would be the best thing we can do to hold farmers together and defeat HSUS. And I think somebody raised it here earlier. It’s not something that I personally specifically can do something about because of the charter of the Checkoff, but I firmly believe that the industry has to look at how farmers are paid in the marketing chain.

And it’s an archaic system set up 80 years ago and, you know, it’s more about price discovery. But it doesn’t include—it’s kinda disconnected from cost. So it’s not realistic in today’s market, in today’s global market. So I think we really need to look at that as part of the future. And I do believe that there will be very important revenue resources for all size farms on the environmental side. I don’t think environmental has to be a negative with, you know, heavy regulatory pressure. I think we can do things whether it’s a large farm doing certain things or small farms that can actually be revenue generators. So I don’t know what…I’d love to hear what you all think.

Ted: Tom, you mentioned the methodology of compensating dairymen. And, of course, we do understand that DMI and your programs basically are on the marketing side. However, lately, we’ve been involved peripherally in some discussions with regard to the Federal Order system and so on. And I don’t want to wander too deeply into the weeds because I realize that, probably, that isn’t something that DMI is that close to. But, you know, in view of the fact that we have such a bad record with regard to Class I sales and that the Federal Order system is based basically on premium pricing for Class I sales, how are we gonna deal with this going forward? I mean, we have our lady in Class I marketer heading the law. And we have a record of continued decline in Class I, albeit whole milk seems to be reversing the trend a little bit. Is it feasible that we’re gonna be able to continue with the current regulatory system, business as usual, and put off changes to another day? You know, it seems to me that this is a rather urgent problem.

Tom: It is urgent. And, again, I’m gonna speak as Tom Gallagher and not as the Checkoff for a second because it’s an area that I can’t influence. I’ll just give you my opinion is farmers need a change in the pricing system in order to survive. This global economy and global pricing system was never contemplated back in the ’20s and ’30s when the system was put together. And one thing that I can do, and have done, is farmers working with the industry have created a project we call 2030. And we’re not trying to project forward current consumer trends. We’re trying to take a look at the consumer and how they will eat, what they will eat, and how they will consume information in the year 2030. And what we’re looking at is we’ve been about futurists, technologists. We’ve looked at patents from Google and otherwise really understand what that world conceivably could look like. And then from there, take any information we glean from that and immediately start implementing. We’re not gonna wait until 2030.

But I’m working with, you know, through the Innovation Center, which is a company we haven’t mentioned, but it’s about 200 dairy industry companies plus dairy farmers. And what we’re doing is we’re getting a study done on what that future looks like, not what dairy should do with it. And then we, as an industry, will look and say, “Okay. Here’s what we need to do to meet that successfully.” And so people like Jim Mulhern and Michael Dykes from IDFA and National Milk are on it. I reversed those but they’re on it, and processors and co-ops. And so when we get done with the initial work and we set up, “Okay, here’s the blueprint to the future,” we will break into different committees. One, I hope, deals with pricing and maybe pricing within the whole value chain. One with legislative issues. One with regulatory issues. One with how do you rebuild the plant infrastructure? One with, you know, marketing. So that, to me, is how I hope the industry can come together without the Checkoff, without Tom Gallagher, you know, being involved directly to say, “Yeah, we see this in the study. We see the need for change. And IDFA and National Milk, carry the ball forward.”

Ted: Well, we’ve noted from our viewpoint that the plant and equipment in the U.S. dairy industry, generally speaking, is rather antiquated. And one of the advantages of the current pricing system or marketing system, if you will, is classified pricing. And it’s gonna be a little difficult to make this change, to make a change in the pricing methodology while we foster increases in plant and equipment or bricks and mortar spending. And those prices have basically doubled in the last 10 years. Yeah, we do have some new commodity-type operations producing cheddar and barrels and even a butter powder plant or two. But we haven’t really seen an upgrading in the infrastructure for the U.S. dairy industry now for many, many years. And, of course, the quality of the product keeps getting better in spite of that. And another thing that’s happened is our testing gets better and more immediate. So, you know, it’s hard to visualize how we’re gonna be spending that money and how we’re gonna be paying the dairymen and then get it all done at the same time that we’re revising our Federal Order system.

Tom: Yeah. It weighs heavily on my mind because I think the future of farming is at stake there. And, you know, I’ve gone about as deep as I’m comfortable legally with the Checkoff feels going. But I will say, you’re raising all the right issues. And like the old saying goes, if it were easy, it would have been done already. So we have just got to—processors, manufacturers, farmers, and even retailers I would say—we’ve got to hold hands here and figure out a way that we can all survive.

Anna: Costs are rising. Margins are shrinking. Markets are more complicated. A lot has changed since T.C. Jacoby & Co. started in 1949. What hasn’t changed is our commitment to helping farmers focus. With the latest administrative support tools, we work every day to keep co-ops and family farms running at their peak. Start by emailing me, Anna Donze, at anna@jacoby.com. That’s anna@jacoby.com.

T3: There is one question that I want to ask. We talked quite a bit about social media. One of the great things about social media is the way it interconnects everybody. We have a social media presence. We know there is a lot of dairy farmers out there that have a social media presence. With DMI’s presence on social media, is there a way that companies like ours or other dairy farmers that are involved in social media can help spread the word that you guys are trying to create?

Tom: You know, there absolutely is. The Innovation Center, which is…it’s not a material real structure. It’s a virtual organization of the industry. As I mentioned earlier, they’ve put together a campaign called Undeniably Dairy. And through that, we provide, you know, like toolkit type information and turnkey messages that are tested with consumers. So that’s a way that companies can engage and hopefully, we’re saving them some research dollars and other things. And with farmers, we have some sites, the dairy Checkoff farmer group, and some other things. But I really want to try to step up our ability to get farmers on social media because, as I said earlier, they’re our best spokespeople.

T3: I agree.

Ted: Yep. Tom, do you have anything further on your end that you’d like to address?

Tom: No. I really appreciate the opportunity because that subject that came up about HSUS, I’d really emphasize to your listeners, let’s be aware of who is trying to divide us, what their messages are. Let’s be aware that HSUS and PETA are not your friend, no matter what they tell you that they’re on your side, just against big farmers or vice versa. They want you out of business. And so, again, I just appreciate the opportunity today.

Ted: Well, we appreciate it also. And if you have any further thoughts, we’d be very glad to give whatever input that we’re capable of doing.

T3: I would agree.

Tom: Well, I sure appreciate that. And, you know, as we get a little closer on the 2030 project, I’d like to be back in touch with you just to get your opinions, you know, to let you weigh in on a couple thoughts we have.

T3: We’d love to talk to you.

Ted: We’re always willing to weigh in, Tom.

Tom: Okay.

T3: Jacoby has never been afraid of having an opinion.

Tom: All right, guys. Thanks, everybody.

T3: Hey, thanks, Tom. We really appreciate you joining us today.

Anna: We welcome your participation in “The Milk Check.” If you have comments to share or questions you want answered, send an email to podcast@jacoby.com. Our theme music is composed and performed by Phil Keaggy. “The Milk Check” is a production of T.C. Jacoby & Co.

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A special guest joins The Milk Check this month: Tom Gallagher, CEO of Dairy Management, Inc. - Ted, T3 and Anna ask about how DMI allocates the funds it collects from the Dairy Checkoff program; Gallagher explains why recent changes to DMI's advertis... A special guest joins The Milk Check this month: Tom Gallagher, CEO of Dairy Management, Inc.<br /> <br /> Ted, T3 and Anna ask about how DMI allocates the funds it collects from the Dairy Checkoff program; Gallagher explains why recent changes to DMI's advertising strategy position the industry to interact with today's consumers. (Spoiler: There's a reason you don't see "milk mustache" commercials on TV anymore.)<br /> <br /> Gallagher also urges farmers to band together against aggressive animal rights groups who he says want to put dairy farms out of business.<br /> <br /> <br /> <br /> <br /> <br />  <br /> <br /> <br /> <br /> Anna: Welcome to "The Milk Check," a podcast from T.C. Jacoby & Co. where we share market insights and analysis with dairy farmers in mind. Today on "The Milk Check," we interview Tom Gallagher, CEO of Dairy Management, Inc. DMI is responsible for increasing sales and demand for dairy products by spending the money generated through the Checkoff program.<br /> <br /> T3: First, I'd like to say thanks for joining us today. We really appreciate you taking the time to discuss DMI and some of DMI's activities and the Checkoff program. And I think the best place to start this conversation would be Tom, tell us about the Checkoff program and how the money is used and where DMI is spending Checkoff dollars today.<br /> <br /> Tom: Okay. Well, on the Checkoff money we get money, $0.15 per hundredweight that is provided by dairy farmers by law to the Checkoff. And $0.05 of that goes to the National Dairy Board and $0.10 goes to local promotion groups. So let me start there and also state that the Checkoff's been in place since 1983 when dairy farmers approached Congress and said, "Look, the government is sitting on 17 billion pounds of excess product. That's not good for the government, it's not good for taxpayers, it's not good for dairy farmers. We have had a voluntary Checkoff for years. We'd like a mandatory Checkoff and we will fund it. We will pay for USDA oversight because we believe farmers need a voice in the marketplace." And since that time, we have seen per capita consumption grow 75 pounds per person in the United States. And prior to that, which really shocks a lot of people, in the early decades of the 1900s, per capita consumption was on a straight decline until just about the time the Checkoff went into place.<br /> <br /> So we take that money that we receive and we do a number of things with it. We have an export company that is run by former secretary Vilsack from USDA. And there are 120 members of that company that export dairy products. And through that company, the Checkoff funds about $20 million in marketing activities. The 120 members fund about $1.5 million that can be used for policy, trade policy, so the dairy in the street speaks with one voice, which is really a very, very powerful and important thing to do as an industry to make sure that we're unified. And it's necessary to have those member dollars because Checkoff cannot do lobbying. So with that, that company was created in 1995 by processors, manufacturers, traders, farmers. And then the Dairy Management organization itself focuses on increasing sales and trust. So maybe I should stop there and let you take it deeper.<br /> <br /> Ted: Roughly what percentage of the Checkoff money goes to USDEC? Keeping in mind that Jacoby & Co. is one of the original members of the USDEC. And we greatly value the assistance that USDEC has given our company in marketing products overseas.<br /> <br /> Tom: Yeah. Well, and we appreciate that you were an early member. And so Dairy Management, Inc. was formed by the National Dairy Board, which gets the nickel, and that's about $100 million. And then state and regional organizations that get the $0.10 but not all of them are members. So they have about $100 million to $120 million. Not all state and regionals are members. T.C. Jacoby & Co. - Dairy Traders clean 35:46
These market anomalies are worth watching https://www.jacoby.com/market-anomalies-worth-watching/ Tue, 15 Oct 2019 13:38:31 +0000 http://www.jacoby.com/?p=1510 As the industry preps for the holiday buying season and looks forward to 2020, some abnormal market conditions—both domestically and internationally—caught our attention. Ted, T3 and Anna discuss market anomalies that might set the tone for markets in the new year. Anna: Welcome to "The Milk Check", a podcast from T.C. Jacoby & Co. where we share market insights and analysis with dairy farmers in mind. We're going to talk about dairy markets today but this isn't just another discussion of markets. That's because there are several anomalies we're watching that we think will impact the way markets behave through the end of this year and into 2020. Ted, let's start with you. Milk production in Europe has caught your attention. Why? Ted: As far as Europe is concerned, production seems to be starting to come up and the question is why. The reason is the Dollar has been so strong and the Euro has been relatively weak. Their production costs have reflected that also. We look at currency valuation as—we have in the past—we've looked at it as what's the cost of putting milk powder into China or the Philippines or wherever. And the Euro is one value, the Dollar is another value and it reflects on the landed price of the product. Well, if you look at the mailbox price in Europe relative to the mailbox price in the United States, the European prices, you know, 15%, 20% lower than ours depending on the country and so on. So what that means is that our currency valuation is a hell of a lot more... T3: It's having a negative influence on our ability to export. Ted: Well, it reflects on the producers' costs in a way that we really haven't acknowledged up to now. Their cost of production has got to be a lot lower than ours in order for them to be increasing production at the price level that they have. Their production's going up, not down and these are basically smaller dairymen than ours, less efficient than ours. And their production is starting to bottom out and go up. What I'm conjecturing on this is that...or concluding on this is that the value of the currency affects their production costs in ways that we haven't really come to grips with. You know, we tend to think in terms of landed price of product somewhere in the world but it also affects their production cost. If their production costs were quid pro quo with ours, they wouldn't be increasing production. Europe is a lot bigger than we are and if we're gonna be competing for markets particularly in the trade discussions, with the trade discussions going on and so on we're gonna be competing for markets. In this kind of environment we're gonna have a tough time doing it. T3: I think we were...I think last year feed quality was very poor and I think this year feed quality is better. So when you're talking about a 1% change in milk production levels, feed quality is enough to change that dial about 1%. I think the more relevant question may be, "is it sustainable?" And I haven't heard anyone that strongly believes European milk production is going to be growing at that, you know, 2%, 3%, 4% rate that it has in the various years, in the last five years because as you say, I don't think the numbers are there. Ted: Well, maybe not. But, you know, we also have to factor in our feed quality which right now is on the edge. This is one of the anomalies. We have not had a good growing season. If we're looking at our frost here in the northern...in the upper Midwest in the next week or two, it's gonna greatly affect the feed quality for the next year. Anna: Dairy markets move on an international scale. Buyers and sellers thrive when they think globally. Put T.C. Jacoby and Co.'s 70 years of market expertise to work for your organization. If you're looking for someone to help you market your products or you're looking to source supply, get in touch with us now. Email info@jacoby.com or dial 314-822-5960. T3: Domestic dairy prices are pretty high. As the industry preps for the holiday buying season and looks forward to 2020, some abnormal market conditions—both domestically and internationally—caught our attention.

Ted, T3 and Anna discuss market anomalies that might set the tone for markets in the new year.

Anna: Welcome to “The Milk Check”, a podcast from T.C. Jacoby & Co. where we share market insights and analysis with dairy farmers in mind. We’re going to talk about dairy markets today but this isn’t just another discussion of markets. That’s because there are several anomalies we’re watching that we think will impact the way markets behave through the end of this year and into 2020. Ted, let’s start with you. Milk production in Europe has caught your attention. Why?

Ted: As far as Europe is concerned, production seems to be starting to come up and the question is why. The reason is the Dollar has been so strong and the Euro has been relatively weak. Their production costs have reflected that also. We look at currency valuation as—we have in the past—we’ve looked at it as what’s the cost of putting milk powder into China or the Philippines or wherever. And the Euro is one value, the Dollar is another value and it reflects on the landed price of the product.

Well, if you look at the mailbox price in Europe relative to the mailbox price in the United States, the European prices, you know, 15%, 20% lower than ours depending on the country and so on. So what that means is that our currency valuation is a hell of a lot more…

T3: It’s having a negative influence on our ability to export.

Ted: Well, it reflects on the producers’ costs in a way that we really haven’t acknowledged up to now. Their cost of production has got to be a lot lower than ours in order for them to be increasing production at the price level that they have. Their production’s going up, not down and these are basically smaller dairymen than ours, less efficient than ours. And their production is starting to bottom out and go up.

What I’m conjecturing on this is that…or concluding on this is that the value of the currency affects their production costs in ways that we haven’t really come to grips with. You know, we tend to think in terms of landed price of product somewhere in the world but it also affects their production cost. If their production costs were quid pro quo with ours, they wouldn’t be increasing production. Europe is a lot bigger than we are and if we’re gonna be competing for markets particularly in the trade discussions, with the trade discussions going on and so on we’re gonna be competing for markets. In this kind of environment we’re gonna have a tough time doing it.

T3: I think we were…I think last year feed quality was very poor and I think this year feed quality is better. So when you’re talking about a 1% change in milk production levels, feed quality is enough to change that dial about 1%. I think the more relevant question may be, “is it sustainable?” And I haven’t heard anyone that strongly believes European milk production is going to be growing at that, you know, 2%, 3%, 4% rate that it has in the various years, in the last five years because as you say, I don’t think the numbers are there.

Ted: Well, maybe not. But, you know, we also have to factor in our feed quality which right now is on the edge. This is one of the anomalies. We have not had a good growing season. If we’re looking at our frost here in the northern…in the upper Midwest in the next week or two, it’s gonna greatly affect the feed quality for the next year.

Anna: Dairy markets move on an international scale. Buyers and sellers thrive when they think globally. Put T.C. Jacoby and Co.’s 70 years of market expertise to work for your organization. If you’re looking for someone to help you market your products or you’re looking to source supply, get in touch with us now. Email info@jacoby.com or dial 314-822-5960.

T3: Domestic dairy prices are pretty high. We’re talking $18 Class III, you know, maybe even 18 and a half. That is a good price for the dairy farmer. I’m not saying it’s a home run but it’s better than what we’ve been seeing the last few years.

Ted: You’re gonna have half the dairy farmers in the country saying that that’s not good enough and the other half saying, “Well, maybe I can survive at that.” You’re gonna have about half of them mad at you and the other half tacitly acknowledging.

T3: But I think they’ll all agree it’s better than the last two years.

Ted: Everybody will agree with that.

T3: Some of the anomalies that I’m seeing in the market is these price levels. And I’ll start by talking a little bit about cheese. One of the things that’s pulled that Class III price up has been…cheddar blocks have been short and there’s been very healthy demand for cheddar blocks. Meanwhile, there has not been terribly great demand for cheddar barrels. Yes, the market for cheddar barrels has been gyrating and you’ve got this block barrel spread that…it got as wide as $0.40 at one point and then closed back up to $0.20, you know, may close back up to $0.10 but the reality is what’s driving this cheese market right now is natural cheddar demand, not processed cheese demand, which translates to 40 pound block demand rather than barrel demand.

The anomalies that I’m seeing in the cheese market are even though there seems to be good cheddar block demand right now, we’re not seeing a material change in cheese inventories. And that concerns me because what that’s telling me about this market is that there’s currently a demand for young cheese but we’ve got a lot of old cheese sitting in warehouses throughout the country and that eventually comes back to haunt our market.

It won’t hurt our market as long as Christmas and the holiday buying season and maybe even the Super Bowl buying season is in front of us but eventually when people start…when we get into that time of the year when it’s about inventory building, the fact that many people already have a fairly decent amount of cheese in inventory is going to affect their purchasing decisions.

And so let’s say February 1st to June 1st I’m concerned about our cheese markets because of the inventories. And then also we were just talking about European milk prices relative to U.S. milk prices. In the international market, U.S. cheese prices are also, you know, a good 20% above European cheese prices. That’s having a material effect on how much we’re exporting. We’re not competitive in the world market right now.

And so you’re gonna see high cheese inventories affecting inventory builders’ decision making process. You’re gonna see low export prices, low export volumes affecting it. And so even though we can talk about U.S. milk production and even say, “Hey, I don’t think it’s gonna grow that much,” and we can get into that in a second, I have concerns about the sustainability of this cheese market right now as we get into the middle of next year.

Ted: Well, I certainly agree with that and again, we referred a minute ago to the currency valuations and how it affects exports and also, how it affects production costs, milk production costs. That’s an anomaly which we’re a little unaccustomed to dealing with. And then you look at the feed quality in the United States and the fact that it may or may not be suspect. We have been of the opinion that this market will go to about where it is now. I think when we go…if we go back six or eight months from where we are, it’s ending up after a lot of gyration about where we thought it would. But we also thought that we’d be looking at $20 milk in 2020 and I’m beginning to question that a little bit for the reasons that we’ve discussed. But unless something happens with the juxtaposition of milk values in Europe versus the United States, it’s hard for me to say that the United States markets are gonna be strong next year. There’s a lot of things that can happen between now and then to give us strength and maybe feed quality, maybe increased departure of milk producers from the United States side might have an effect. But given the current factors and the way we’re looking at it, it’s beginning to be suspect that this market is gonna continue to move up as fast as we thought it would.

T3: It was interesting. There was—recently at a conference out in California, two back-to-back speakers giving their thoughts on the macroeconomic environment. The first one said that they thought the macroeconomic environment was going to be very difficult and milk prices were gonna suffer. Then the second one came on and said, “Well, the macroeconomic environment’s pretty good and we think milk prices will benefit.” Well, the difference was the first one was a European-based pundit and the second one was a U.S.-based pundit. And that just kinda says there’s a different attitude about the macro environment outside the U.S. borders as there is inside the U.S. borders. In other words, the world is not…the world right—most of the world right now is either in a recession or in the process of entering a recession at least in terms of the way people are thinking. Both in Southeast Asia, Oceana and Europe, that’s kinda the attitude right now of what they’re seeing out there. The U.S. is still relatively healthy but the question is are we gonna remain there. The general consensus of economists that I pay attention to are basically saying we’re gonna enter a shallow but lengthy recession sometime next year and it’ll last for a few years. It won’t be 2009, but it’s gonna be a kind of a slight, you know…let’s call it burdensome environment for a couple of years.

That…if we do enter that, that’s still probably enough to take the bloom off the rose in terms of $20 milk for the dairy farmer. Especially if we have decent milk production. My inclination thinking about it as a global perspective is I think macroeconomically next year’s gonna be a bit of a challenge.

Ted: I don’t think we’re heading for a recession next year. I do think our growth rate is not gonna be 4%. I think it’s probably gonna be down somewhere between two and three which will still be pretty good.

T3: Hey, if we have 2% to 3% GDP next year, to me, that’s good news for milk prices.

Ted: That’s good news and I expect under those circumstances that we will grow and maybe we can nibble away a little bit at the $20. But it’s not gonna be…we’re not gonna take it by storm. Unless something really inordinate happens.

T3: Let me bring up another anomaly that we’re paying attention to. Recently Trump administration announced that there were EU tariffs on cheese. You know, European cheese is being imported into the U.S. which actually includes butter as well. I don’t know if that’s gonna have a huge effect on domestic milk prices but there are small places where I think it could. One place that ultimately I think will be beneficial in that package for the American fairy farmer is in butter. You know, the talk had been about cheese but buried in there was also the same 25% tariffs on European butter.

The number two…I don’t know how many people realize this but the number two butter brand in the U.S. today is Kerrygold, Irish butter. Right now as I understand Kerrygold has a lot of butter in inventory they’ve already imported. You’re not gonna see a change in Kerrygold butter prices on the supermarket shelf in 2019 but as you get into 2020 and they have to reload their inventory levels it’s coming in at a 25% higher tariff than it did this year and that may be a positive thing for, you know…on the margins. Not huge but a positive thing for the U.S. dairy farmer. On the cheese side, it’s harder to say because I’m not sure how much European brie is gonna be replaced by domestic brie and things like that.

Ted: Well, I don’t think cheese will have any effect at all and the reason is, we export cheese. So what’s Europe gonna do with the cheese that doesn’t go to the United States? It’s gonna wind up somewhere else in the world market. So cheese that doesn’t come to the U.S. competes with us on exports. So I don’t see us having any effect because of tariffs on cheese. I don’t see that as an issue but I do agree with you on the butter. And I think basically the fact that butter fat is also included in the cheese price, it’s also a factor. So if the overall butter fat goes up and if you’re looking at 25%, you’re looking at $0.60, $0.55 per pound butter. That’s a huge factor. And if the butter price goes through the roof and really takes off, let’s say it hits $3.00 and so on, that will affect the cheese market. And it’ll affect the disposition of milk. You’ll wind up having more milk and butter powder and less milk and cheese. So that could have a big effect.

T3: So when we look at dairy markets in our office, we tend to discuss dairy markets in three buckets, let’s say. Fundamentals, you know, which is like milk production is this, demand’s gonna be this, therefore we think prices are gonna be this. That’s where you start. But then the second thing is, you know, we’re…we talked to a lot of different buyers and sellers, you know, throughout the dairy industry at various levels whether it’s on the farm level, whether it’s on the end user level because we’re trading a lot of dairy products. And so kind of that anecdotal evidence. Is everybody trying to buy or is everybody trying to sell? And that plays a factor in how we look at the dairy markets. The third way we look at the dairy markets is what you call technical analysis. Anybody out there who does a lot of futures and options trading, you know, has probably seen technical analysis when these futures brokers, you know, bring out their charts and say the market’s doing this and that and they talk about resistance lines and they talk about support lines and things like that.

In the technical side for butter right now in the last few weeks, butter has broken a critical support line. Butter had a…, it was like a seven or an eight year trend of steadily increasing pricing at a base level. And it’s no longer on that trend. And if the butter price which is…you know, again, early October sitting here around $2.15. If it drops any further, especially if it drops below $2.00, somebody who solely looks at markets from a technical analysis perspective would argue that the butter market has the potentially to fall all the way to $1.20. I’m not saying it’s gonna do that. What I am saying is there are some signs of weakness in the butter market that we’ve started paying attention to that we don’t understand yet, that we can’t necessarily talk about from a fundamentals perspective, but we’ve learned over the years to trust certain things when you’re looking at technical analysis and this is a strong one. And so internally, we’re kind of having our eye on the butter market and we’ve got some skepticism.

Anna: On “The Milk Check” podcast we tackle questions and share ideas that move dairy forward. Now we’re making it easier for you to get answers to your lingering questions. Do it with one click. Submit your questions online at jacoby.com/askted/.

T3: Let’s talk a little bit about powder markets. So the nonfat market this year is another market that’s been confusing. And nonfat drives the skim solid side of the Class IV price. We’ve talked a little bit about butter but what about nonfat? The nonfat market started out the year kinda steadily increasing and things were looking pretty good and then it hit a hard cement wall and has actually been a very flat to lower market over the last four or five months. It took us…I’ll admit it took us a little bit to kinda get our heads around why because we felt pretty good about nonfat this year. Ultimately the reason ended up being pretty simple. If you look at European powder exports this year…I don’t know the exact number but I wanna say at least 250,000 metric tons over last year. But their production is flat versus last year. The difference has to do with the intervention stocks. There were over a billion pounds of powder in intervention in Europe and a lot of those intervention stocks mostly last year got bought and got taken out of government hands and into primarily European dairy trader hands.

What we’re pretty comfortable saying in retrospect happened was Europe was very aggressive selling powder in the world market. A lot of that either directly or indirectly with intervention stock powder. And it ended up having a negative effect on global nonfat prices. And nonfat dry milk…whey powder or nonfat dry milk are by far the most global of all the, you know, of all the domestic dairy products we produce. And so they’re very affected by international markets.

Here’s the good news. There are no more intervention stocks. Next year, EU is not going to export 250,000 metric tons more powder than they did last year. And so that bodes well for nonfat dry milk prices in the U.S. If there’s one market that I feel comfortable saying is more likely to be higher over the next 12 months than lower, I would say it’s powder prices, it’s nonfat dry milk prices because I think that the world market has…there could be some good international demand for milk powder and the intervention stocks are now gone.

And so, you know, we talk about anomalies, we talk about a market sending mixed signals. You know, I’m skeptical about cheese demand next year. I’m skeptical about butter demand next year. I’m feeling good about powder demand next year. But whey powder, we think it’ll continue to be a mixed bag and a hard market to predict. We had a discussion about the African swine fever that’s been kinda going through Southeast Asia, China and Southeast Asia over the last few months. That still continues to have a material effect on whey powder prices. Primarily, the non-protein side of the whey market, lactose and permeate. It is still having a material effect. There’s a lot of people who say, “Hey, it’s getting better. Maybe permeate prices are gonna start going up.” But there’s just as many people who say, “I don’t buy it. There’s still too much damage out there from African swine fever.” So I would say permeate remains to be seen, but it’s so low that it’s probably more likely to go up than down but that has a lot more to do with where the price is today than anything else.

Ted: Well, the whey price will be a damper on the Class III price. No question to that. $0.01 is $0.06 on the Class III, so right now the whey price is gyrating in the mid-$0.30s. So that translates basically $2.00 a hundredweight on the Class III price. If it goes down a dime, $0.60 difference on the Class III so it does make a difference. Although I’ve read a few articles that they’re starting to get a handle on the swine flu and that whey and permeate is expected to begin to pick up but it’ll be a slow process.

T3: And then finally, the protein side of the whey market. The protein side of the whey market actually was pretty good this year but just how we had that macroeconomic discussion about, you know…that may have an effect on cheese, you know, and how the economy’s going. I think the same thing can be said for the protein market. And so it…if we have a…if we get to that 2% to 3% GDP next year, I think the protein market will hold up. If things weaken, that protein market could weaken too.

Anna: Dairy markets move on an international scale. Buyers and sellers thrive when they think globally. Put TC Jacoby and Company’s 70 years of market expertise to work for your organization. If you’re looking for someone to help you market your products or you’re looking to source supply, get in touch with us now. Email info@jacoby.com or dial 314-822-5960.

T3: Finally, one last comment on Class I sales.

Ted: Well, I think Class I sales are holding up the fluent milk industry. They’re continuing to increase as the percentage of overall sales. I’m referring to whole milk Class I is increasing at 4% or 5% as a matter of the total. However, the overall Class I sales, which include skim and 2% and so on, continue to go down and drag it down. But there are several things with regard to whole milk sales, fluid. I’m noticing more and more whole milk products in the grocery store. We buy, in our house, kefir and that’s always been a low-fat, no-fat product. Well, Wallaby, which is Danon, at Whole Foods now has a 3.5% probiotic kefir and you look down to the competing products on the shelf and whole milk products are starting to show up there, too. And I think those products in the bottle like that are Class 1 products. It looks like whole milk is where it’s gonna be and whole milk certainly is more flavorful than the 2% and the skim. So it could…it has a possibility of turning it around as we go forward. And you can almost set a destruction date when people can’t qualify their milk because they don’t have enough Class I sales. I can see the graph now, the decline of 3% and 4% per year and how much milk is needed to qualify. It’s gonna be a collision course in a few years. No question about it.

Anna: That’s already ugly now. That’s already ugly now.

T3: Explain that a little bit. I’m not the milk guy in the office. I’m the cheese guy in the office, so I don’t understand what’s going on there.

Anna: So for [Federal Order] 33 for example you’ve got qualification months where you have to go to a Class I plant or a supply plant affiliated with them with a certain amount of your milk. Right now we’re in the middle of qualification. So for 33, it’s two days production for each producer has to hit one of those plants. If they don’t need it, they won’t take it and you can’t get qualified, you can’t participate in the pool with that producer for the rest of the year. Or you have to take it to a Class I plant every single month for the rest of the year.

T3: So what happens to that producer? He just falls out of the Federal Order?

Anna: Yeah, he just wouldn’t be pooled.

Ted: The producer doesn’t pick up the tab for that. His handler does. Generally, a co-op that’s still in the qualified.

T3: Are we starting to see reductions in…you know, for example, take the geographical area that covers 33. Is the percentage of milk that is actually participating in the pool dropping right now?

Anna: No, in this year it’s a little bit different. Last year was harder. This year hasn’t been nearly as difficult for qualification. Last year was tough though.

T3: Why do you think that is?

Anna: There just wasn’t the demand for it. You didn’t need as much Class I. So the point of qualification was always to make sure that the Class I plants had it in the months where they most needed it. And especially when it was…you know, in 33 especially when it was ugly over the past few years. They really weren’t dying to get more milk into a Class I plant.

T3: Oh, got it. So the…what happened was milk production tightened up which made it easier to actually get qualification spots.

Anna: Yes. Yeah.

T3: Got it. But if milk production grows again, that’ll get ugly again?

Anna: Oh, yeah.

T3: And as class 1 sales drop, that’ll get ugly too.

Anna: Yes.

T3: And eventually get to a point where you’re literally forcing farmers out of the Federal order because of the continual drop in Class I sales.

Anna: Which is why some orders, their qualification needs or demands are very, very flexible. They don’t…they know they don’t have the Class I demand so they’re not making you go in there all the time. Thirty is an example of that.

Ted: I think Order 7 is 10 days’ production, isn’t it?

Anna: 5 is one day’s production every month and I thought seven was similar. Maybe you’re thinking of the 10% because that’s the diversion limit.

Ted: Maybe I’m thinking of 6. It’s becoming more and more of an issue as the Class I sales decline.

Anna: Well, the other part of that equation though too is is everyone going to care if they aren’t getting qualified.

Ted: As are the PPD.

Anna: Yeah. And especially for orders where so much of the usage is class 3 anyways. Those PPDs are not sizeable enough for it to make a difference. And we’ve seen people jump on and off of…

Ted: Order 33 as an example.

Anna: Yes. And we’ve seen people jump on and off of 33 over the past few years. You know, if they’re riding a border between like 32 or 33, they might just stick with 32 because it’s cheaper to do the qualification.

Ted: And maybe the approach is just let it die. If we expect Class I sales to continue to decline the way they are, it’s gonna happen one day anyway. So we’ll see. Maybe being prepared for that or try to do some projections on that might be a fruitful enterprise.

T3: Lastly, I think it’s worth mentioning that in our next podcast we potentially have an opportunity to interview Tom Gallagher who’s president of DMI which…and he’d like…he wants to talk about the checkoff and exactly how the checkoff works. The, you know, 15 cents that’s dedicated from most every dairy farmer’s check. Tom Gallagher runs the organization that manages that money. And Tom’s been someone we’ve known for years and we’re looking forward to the opportunity to talk to him and if there’s any of our listeners who have any questions that they’d love for us to ask Tom Gallagher if we have him on, feel free to send them to us at…what’s the email address?

Ted: Podcast@jacoby.com.

Anna: We welcome your participation in “The Milk Check”. If you have comments to share or questions you want answered, send an email to podcast@jacoby.com. Our theme music is composed and performed by Phil Keaggy. The “Milk Check” is a production of TC Jacoby and Company.

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As the industry preps for the holiday buying season and looks forward to 2020, some abnormal market conditions—both domestically and internationally—caught our attention. - Ted, T3 and Anna discuss market anomalies that might set the tone for markets ... As the industry preps for the holiday buying season and looks forward to 2020, some abnormal market conditions—both domestically and internationally—caught our attention.<br /> <br /> Ted, T3 and Anna discuss market anomalies that might set the tone for markets in the new year.<br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to "The Milk Check", a podcast from T.C. Jacoby & Co. where we share market insights and analysis with dairy farmers in mind. We're going to talk about dairy markets today but this isn't just another discussion of markets. That's because there are several anomalies we're watching that we think will impact the way markets behave through the end of this year and into 2020. Ted, let's start with you. Milk production in Europe has caught your attention. Why?<br /> <br /> Ted: As far as Europe is concerned, production seems to be starting to come up and the question is why. The reason is the Dollar has been so strong and the Euro has been relatively weak. Their production costs have reflected that also. We look at currency valuation as—we have in the past—we've looked at it as what's the cost of putting milk powder into China or the Philippines or wherever. And the Euro is one value, the Dollar is another value and it reflects on the landed price of the product.<br /> <br /> Well, if you look at the mailbox price in Europe relative to the mailbox price in the United States, the European prices, you know, 15%, 20% lower than ours depending on the country and so on. So what that means is that our currency valuation is a hell of a lot more...<br /> <br /> T3: It's having a negative influence on our ability to export.<br /> <br /> Ted: Well, it reflects on the producers' costs in a way that we really haven't acknowledged up to now. Their cost of production has got to be a lot lower than ours in order for them to be increasing production at the price level that they have. Their production's going up, not down and these are basically smaller dairymen than ours, less efficient than ours. And their production is starting to bottom out and go up.<br /> <br /> What I'm conjecturing on this is that...or concluding on this is that the value of the currency affects their production costs in ways that we haven't really come to grips with. You know, we tend to think in terms of landed price of product somewhere in the world but it also affects their production cost. If their production costs were quid pro quo with ours, they wouldn't be increasing production. Europe is a lot bigger than we are and if we're gonna be competing for markets particularly in the trade discussions, with the trade discussions going on and so on we're gonna be competing for markets. In this kind of environment we're gonna have a tough time doing it.<br /> <br /> T3: I think we were...I think last year feed quality was very poor and I think this year feed quality is better. So when you're talking about a 1% change in milk production levels, feed quality is enough to change that dial about 1%. I think the more relevant question may be, "is it sustainable?" And I haven't heard anyone that strongly believes European milk production is going to be growing at that, you know, 2%, 3%, 4% rate that it has in the various years, in the last five years because as you say, I don't think the numbers are there.<br /> <br /> Ted: Well, maybe not. But, you know, we also have to factor in our feed quality which right now is on the edge. This is one of the anomalies. We have not had a good growing season. If we're looking at our frost here in the northern...in the upper Midwest in the next week or two, it's gonna greatly affect the feed quality for the next year.<br /> <br /> Anna: Dairy markets move on an international scale. Buyers and sellers thrive when they think globally. Put T.C. Jacoby and Co.'s 70 years of market expertise to work for your organization. If you're looking for someone to help you market your products or you're lo... T.C. Jacoby & Co. - Dairy Traders clean 29:14
Killing off minimum price under the order—too controversial? https://www.jacoby.com/killing-off-minimum-price-under-the-order-too-controversial/ Tue, 03 Sep 2019 19:25:37 +0000 http://www.jacoby.com/?p=1478 What would happen if Federal Milk Marketing Orders' minimum price provisions were eliminated? Would it increase returns to dairy farmers? And even if it did, would it wreak too much havoc in the industry to be worth trying? Ted, T3 and Anna dive into what might be The Milk Check's most controversial conversation yet. Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market analysis and insights with dairy farmers in mind. The topic of Federal Order Reform is never far from our minds. Whether it's a conversation on The Milk Check or a chat around the office, we talk about it all the time. Today, we’re addressing it head-on. And we assume the industry will have strong opinions about this. Email us your thoughts at podcast@jacoby.com, or submit a question to www.jacoby.com/askted. Do minimum price provisions still make sense? What would happen if we got rid of them? Would conditions on dairy farms change for the better? Or is Federal Order reform of this sort not worth the chaos it would likely cause? Ted: What's the objective of Federal Order Reform? From the dairy farmer standpoint and from the industry standpoint, from my perspective, the objective is to increase the price to the dairyman. The objective... T3: We're not talking about what the objective was 90 years ago when it was started. Ted: Well, be it... T3: But what it would be to change what we have now into something else. Ted: Ninety years ago, it was started to monitor the veracity involved in weights and tests in butterfat and protein—well, we didn't even have protein. We had butterfat and skim. And the perception in the '20s and early '30s was that everybody was cheating the dairy farmer on butterfat tests. And so they requested a Federal Order that monitored the tests. Eight or ten years later, it morphed into a price mechanism. And over the years, we've had classified pricing. So now we have basically two regulatory systems. And you have the Capper-Volstead Act, which allows dairymen to band together, similar to a labor union and bargain collectively. And then you have a regulatory system, which allows cooperatives to pay less than the mandated price, or the minimum price under the Federal Order into a pool plant. You have two regulatory issues involved here. You have collective bargaining, and the second issue is the classified pricing system, which prices fluid milk at one price, and yogurt and cottage cheese, and whips and dips at another, ice cream. And then you have the cheese at one price and you have butter / powder at another price. In order to participate in the classified pricing system, you have to participate in the regulatory system. T3: But there's not a rule that says you have to. Ted: You can go unregulated if you want, unless you're a bottling plant. If you distribute milk, quote-unquote, in the marketing area, in the defined marketing area, by law, you are going to be a pool plant. There are certain percentages involved that by law, you have no choice, you're gonna be a pool plant. And anyone who sells milk into that pool plant is gonna be qualified. And it's against the law to sell milk into that pool plant at less than the minimum price under the order. T3: And the pool plant would basically be a plant that's bottling milk that is sold as fluid milk at a store, gallon of milk, or a quart of milk, or whatever. Ted: No, that's the distributing plant. T3: Okay. Ted: A pool plant can be anything, it can be a silo down at the end of the string of silos, it can be a whole plant, it can be anything that you wanna make it. It depends on how you pipe it and how it's approved by the regulatory system. The distributing plant is a bottling plant that distributes milk in the marketing area. T3: And a pool plant can really be any plant that is also participating in the federal order. Ted: Right, you could have a bank of silos that's a half a mile long, What would happen if Federal Milk Marketing Orders’ minimum price provisions were eliminated? Would it increase returns to dairy farmers? And even if it did, would it wreak too much havoc in the industry to be worth trying?

Ted, T3 and Anna dive into what might be The Milk Check’s most controversial conversation yet.

Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market analysis and insights with dairy farmers in mind. The topic of Federal Order Reform is never far from our minds. Whether it’s a conversation on The Milk Check or a chat around the office, we talk about it all the time.

Today, we’re addressing it head-on. And we assume the industry will have strong opinions about this. Email us your thoughts at podcast@jacoby.com, or submit a question to www.jacoby.com/askted.

Do minimum price provisions still make sense? What would happen if we got rid of them? Would conditions on dairy farms change for the better? Or is Federal Order reform of this sort not worth the chaos it would likely cause?

Ted: What’s the objective of Federal Order Reform? From the dairy farmer standpoint and from the industry standpoint, from my perspective, the objective is to increase the price to the dairyman. The objective…

T3: We’re not talking about what the objective was 90 years ago when it was started.

Ted: Well, be it…

T3: But what it would be to change what we have now into something else.

Ted: Ninety years ago, it was started to monitor the veracity involved in weights and tests in butterfat and protein—well, we didn’t even have protein. We had butterfat and skim. And the perception in the ’20s and early ’30s was that everybody was cheating the dairy farmer on butterfat tests. And so they requested a Federal Order that monitored the tests. Eight or ten years later, it morphed into a price mechanism. And over the years, we’ve had classified pricing. So now we have basically two regulatory systems. And you have the Capper-Volstead Act, which allows dairymen to band together, similar to a labor union and bargain collectively. And then you have a regulatory system, which allows cooperatives to pay less than the mandated price, or the minimum price under the Federal Order into a pool plant. You have two regulatory issues involved here. You have collective bargaining, and the second issue is the classified pricing system, which prices fluid milk at one price, and yogurt and cottage cheese, and whips and dips at another, ice cream. And then you have the cheese at one price and you have butter / powder at another price. In order to participate in the classified pricing system, you have to participate in the regulatory system.

T3: But there’s not a rule that says you have to.

Ted: You can go unregulated if you want, unless you’re a bottling plant. If you distribute milk, quote-unquote, in the marketing area, in the defined marketing area, by law, you are going to be a pool plant. There are certain percentages involved that by law, you have no choice, you’re gonna be a pool plant. And anyone who sells milk into that pool plant is gonna be qualified. And it’s against the law to sell milk into that pool plant at less than the minimum price under the order.

T3: And the pool plant would basically be a plant that’s bottling milk that is sold as fluid milk at a store, gallon of milk, or a quart of milk, or whatever.

Ted: No, that’s the distributing plant.

T3: Okay.

Ted: A pool plant can be anything, it can be a silo down at the end of the string of silos, it can be a whole plant, it can be anything that you wanna make it. It depends on how you pipe it and how it’s approved by the regulatory system. The distributing plant is a bottling plant that distributes milk in the marketing area.

T3: And a pool plant can really be any plant that is also participating in the federal order.

Ted: Right, you could have a bank of silos that’s a half a mile long, and one silo down at the end and that’s a pool plant and the rest of it is unregulated.

T3: And there’s a lot of cheese plants and powder plants that are essentially set up that way.

Ted: Essentially yes, because the minimum price requirements are very seldom enforced for manufacturing plants. But most of them are set up just in case they have a pool facility at some point in their operation that’s piped correctly. Nothing wrong with it. I mean, it’s just the way it is and technically at least, even if the milk goes into that facility, the minimum price is defined at the regulated price at that location minus the freight and that is the regulated price of the dairyman. So if a proprietary handler carries his own milk supply, he has to pay his suppliers, his dairymen who sell him milk, the minimum price under the order where the dairyman pays the freight to get into the plant.

Now, in distributing plants, let’s call them distributing plants, you can call them bottling plants, the two are the same, you have a high volatility of production, you have sales, you bite off contracts, you have weather phenomena, a hurricane moving into the Southeast, for example, will cause a surge in requirements for milk. And then the minute the hurricane leaves, all of a sudden, nobody wants nothing. And you got to get rid of all that milk. So proprietaries are at a severe disadvantage in handling their own milk supply with their own producers, because they have to pay that minimum price. Which means basically, if they do their own balancing, they gotta pick up the tab. It’s always been expensive. But lately, it’s really gotten expensive, because the hauling costs have gone through the roof. And so balancing is a big, big issue. And for the last two or three years, particularly, we have seen that as milk have moved from one area to another area at huge discounts with the supplier paying the hauling for the privilege of getting it there.

T3: So let’s say you have a distributing plant in Atlanta, Georgia, they have to pay at least the minimum of price under the order for the milk. But maybe they’ll only buy the milk Monday through Thursday. But the cows give milk every day. And so Friday, Saturday and Sunday, now you have to get rid of that milk. Well, if the distributing plant got rid of that milk, they’d still have to pay for it into the minimum price into the order. And then they’d have to ship it to a non-distributing plant, let’s say a Class III plant, which would be shipping it all the way to Wisconsin, maybe they don’t need to go that far. But they need to ship it a long way which could cost them $3 or $4 a hundredweight.

Ted: I could ship it across the street. But if the guy doesn’t wanna pay the minimum price, he might wanna pay $5 under.

T3: So essentially the cost could be $3, $4, $5 a hundredweight…

Ted: Or more.

T3: Or more. As a result, that cost of balancing is become so cost prohibitive that distributing plants will always have contracts with a cooperative to buy only the milk they need when they need it. So that the cooperative has to handle the balancing. Because under the Capper-Volstead Act, the cooperative is allowed to sell that milk under the minimum price under the order.

Ted: The Capper-Volstead Act allows for collective bargaining. The Federal Order system provides for the minimum price under the order. And the cooperative can do what’s called check off. It can check off the balancing costs from the collection of producers that it has. It may have one small customer that it’s servicing that kicks its milk back on Saturday and Sunday, for example, or whenever. And then that is re-blended among the whole milk supply that that cooperative controls. The customers of that cooperative pick up the tab. And that’s an accepted phenomena under the current rules and regulation. And that’s the reason that 95% of the milk or thereabouts, 90-something percent of the milk of the United States is cooperative. Now, cooperatives perform a valuable service in this regard with regard to servicing the market. And then, of course, under the Capper-Volstead Act, they agencies in common, where they can set prices to multiple customers in the same marketing area. And then they, in effect, undertake the balancing responsibility for that marketing area.

T3: And that balancing responsibility can often mean losing $2, $3, $4 a hundredweight to move that milk elsewhere rather than into the distribution plant.

Ted: It could move that or even more. But the minimum price under the order supports the cooperative supplying the area and it supports the construction of marketing agencies in common. Let’s call them that. We also call them superpools, okay, where you sell in a designated area, cooperatives band together and set a price. Now, there’s a lot of practical reasons for that under the current rules. And the reason that that is practical is the minimum price provision under the order that keeps the proprietary customer from maintaining his own milk supply.

My contention is that given where we are right now, if you accept the premise that competition for the milk at the farm is what increases returns to the producer, then you need to put the fluid distributing plant in the game, and allow him to carry his own milk supply. It doesn’t mean he can’t negotiate with a co-op. But what it means is is he can carry his own milk supply and then he can afford to re-blend based on what the cost of his balancing issues are. And he can afford then to go out in the field and be competitive with other handlers in the field, including cooperatives. I would support that argument by saying that if you note who has the highest mailbox prices in the country, sometimes it’s Florida, because they have a very encapsulated system down there, which is generally just fluid and a little bit of Class II. But a lot of times it’s Wisconsin, why? Wisconsin has the lowest minimum price under the order. But they also have everybody competing for the milk.

So as a result, instead of, even under the surplus we’ve had for the last three or four years, all the handlers up in Wisconsin, all the plants who had their own milk supply paid a premium to their producers. They bought milk from out of the area and paid huge discounts, bought it at huge discounts. But they kept their own producers intact and paid those own producers a premium. If you eliminate the minimum price under the order, what in effect you would do is put bottling plants in competition with cheese plants and butter powder plants for premiums. If the bottling plant loses business, and he has to drop the price to his producers, the producers have the option of leaving that plant and going to someone else, perhaps a cheese plant or whatever. In my perspective, it does not mean that you change the qualification provisions. I can see where it might result in a reduction in PPDs under that scenario. But the PPDs in some areas have become superfluous anyway. The PPDs are through the roof, but then the check-offs are three and four times the PPD.

So it becomes basically a dance that everybody does, they have this superpool price into the agency. It’s terrific, it looks great. But when it comes time to pay the dairymen, often they get checked off $3 or $4 a hundredweight at certain times of the year. So if the minimum price provision wasn’t there, you would have people competing to pool the milk and putting it in at an agreed price, obviously, it would be lower than an agency mandated price. But at the same time, you would have more competition for the milk out in the field, which would wind up with more money, in my view, in most areas, not all areas because some…the manufacturing plants in some areas have been driven out of business. But in a lot of areas where you have manufacturing, the premium for manufacturing will compete with the premium for a distributing plant. And the dairyman will be the beneficiary.

Anna: But if you’re reducing the price so that the Class I plant doesn’t have to pay that…

Ted: No.

Anna: …then…

Ted: It does not. If you eliminate the minimum price under the order, you pay whatever you agree to.

T3: But at the same time, what it also means, this, I think, is where you’re going, is now the distributing plant has to handle their own balancing.

Ted: Doesn’t have to but they could.

T3: And they have options now that they wouldn’t have had before. For example, one thing that a distributing plant could do is in order to fill up some of the excess capacity in their plant, they could have a big sale for milk. And let’s say they discount the milk by $2 a hundredweight and pass that savings on to the supermarket, but it would have cost them $3 or $4 a hundredweight to ship that milk all the way to Wisconsin and wherever else they would have had to ship it to. And in today’s rules, they basically can’t do that.

Ted: Let me take it one step further. Suppose you’re selling to a chain store who are becoming bigger factors in the market these days. If the chain store is faced with the option of shipping the milk somewhere and getting it delivered at $5 under or discounting it and having a $0.99 sale over the weekend at his store. That’s an option that’s to the benefit of everybody because it puts milk on the grocery store shelf where customers can get it. Right now that’s a big problem. We’re losing market share. We’re losing market share because of our antiquated price provisions. We’re losing it to almond milk, for example, that has absolutely no nutritional value, we’re losing it to oat milk, which has only a little bit more than almond milk. And here the dairy industry is losing this market share. It doesn’t take a rocket science for someone who wants to market veggie milk to sit down and figure what the cost is gonna be under the current regulatory system. And what his product is gonna cost on the grocery store shelf to be competitive with it. It doesn’t take a rocket science to do that.

So you can throw a grenade in the room, if you will, by saying your grocery store, if he has his own producers and he’s not moving as much milk as he wants to take care of his own producer, he either moves the milk somewhere else or he has to drop producers. Or he has a sale at his store, which adds to the difficulty of the competition to compete with fluid milk. Plus, it puts more milk on the cereal in the morning when the price is cheaper for kids going to school and so on. It provides much more flexibility than the current system provides for. And my argument is that all these things will result in more money to the dairyman. More money to the dairyman as opposed to the current agency in common type system that we have.

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T3: So I can’t help but feel that the next question that needs to be asked is if we don’t have a minimum price on the order, why do we need an order at all?

Ted: Well, that’s a good question. I regard the classified pricing system as an advantage. An advantage on marketing, domestically and internationally. You have different returns that vary for your manufacturing alternatives. You have cheese markets on one side, you have butter powder markets on another side, you have yogurt markets, and ice cream markets on another side. And these markets change, you might have $2 or $3 a hundredweight difference between the butter powder market and the cheese market one way or the other. The dairyman or, pardon me, the manufacturer who’s sitting there running a manufacturing plant with his own producers. If he’s making cheese, and the butter powder return is $3 a hundredweight better at a given point in time, he’s gonna have a problem paying his producers a competitive price. You still have an effect, a market effect.

T3: But isn’t it better for the producer, if that milk would go to the butter powder plant where the value is $3 a hundredweight higher?

Ted: No, not if it’s pooled. If you keep the classified pricing system, it would be pooled. There might be an advantage because the markets change and the margins change with it. But by the same token, the classified pricing system, it doesn’t eliminate the difference, but it, let’s just say it ameliorates it a little bit. So that you wind up with a cushion between the various alternatives that allow manufacturers to invest only in cheese facilities and not having to invest in cheese facilities as well as butter powder facilities. So there’s hundreds of millions of dollars involved in that in terms of capitalization and in terms of the industry as a whole. If the industry had to go out and invest in butter powder facilities as an alternative, to protect themselves against the juxtaposition of varying prices, it would cost the industry billions, billions of dollars.

T3: So I can’t argue with that, the pooling in the federal order system helps reduce the total capital needs of the industry as a whole. But to me, it would still seem that it would benefit the dairy farmer best if there was always an incentive for the milk to go where it would receive the highest return. So for example, if the Class IV price was $3 above the Class III price, you would want every Class IV plant in the neighborhood to be maxed out instead of the Class III plants. And in the practical experience, I think we both know that that doesn’t always happen. In fact, at times the opposite happens.

Anna: Well, from our perspective, when we’re moving everything, the question is who has room for it on the days that I have it? Where’s the hauling the cheapest? When we’re picking a plant to send milk to, we don’t care what they’re making.

T3: Right. But if I’m the dairy farmer, and I’m looking at the utilization under that particular order, I would want, under the scenario I’m talking about, the most utilization possible in Class IV because that’s where the highest price is and Class IV is the class that month that would actually pull the blend price up, and therefore pull the minimum price for the order up.

Anna: I would say in general, that’s true. But depending on what your plants are, and who’s pooling it and everything else, if you can de-pool that, if that volume can get pulled off, it’s not gonna change the price. It doesn’t help. Especially if it’s II, you know…?

Ted: In the real world, the hot alternative, if it happens to be cheese or butter powder, the hot alternative will reach out for milk, because of the marginal profit possibilities that are associated with moving it into a hot market. So the marketplace does actually move the milk from the lower return to the higher return under the classified pricing system. But remember, you have contracts with producers, they’re not leaving and coming and going on a daily basis. They’re contracted, usually for a year with an anniversary date or something. And they’re obligated to go to a plan, which they like and which they have a relationship with and so on. So they don’t go jumping around from one day to another based on what’s the best return, butter powder or cheese. Which is another reason why the comfort of the classified pricing system is nice.

Now in Europe, they don’t have the regulatory system in the same way that we do. Most of the plants there are multipurpose plants, where they can react to different market possibilities, I view the minimum price into the order as the problem right now. It’s why we had the big surplus, why we have big check-offs in certain regions of the country, multi-dollar check-offs that wind up coming out of the dairyman’s pocket. Whereas if you get rid of those minimum price provisions, you put the distributing plants in a competitive environment with cheese plants and butter powder plants and so on. And competition for the milk will maximize the return to the dairyman based on whatever the markets are. If the markets are good, the dairyman will benefit, if the markets are bad, he’ll have same problem he has right now. When you have poor markets, you have poor markets.

Anna: The only way that argument makes sense to me is if the assumption that people will buy more milk if it’s cheaper is true. And I don’t think that that’s true.

Ted: Well, you sound like a cooperative, that philosophy has been there for 80 years. They think that milk is inelastic. I argue that milk is not inelastic. And then if you wanna be competitive with almond milk, or ersatz and veggie milks, and so on, you can’t tie your milk into a classified price that’s predictable for the next five years.

Anna: But I don’t think anyone’s buying almond milk because it’s cheaper.

Ted: I think they are.

Anna: I would disagree. I think most people that are buying that are buying it because they believe that it will be healthier for some reason or they’re lactose intolerant or, I mean, it’s not taste in my opinion.

T3: Well, I think there is a false belief out there with a substantial portion of the population that some of these ersatz milks are actually healthier for them than dairy milk. We are of the opinion, I think correctly, that that just isn’t true.

Anna: I think that’s part of it. I think part of it is just habits changing. You know, we’ve talked about this before, but I think, you know, grains being vilified, you know, cereals being vilified has more to do with the decrease then because almond’s cheaper, almond milk is cheaper.

Ted: The decrease in cereal consumption is a very real part of the problem, I agree with that.

Anna: Yeah.

Ted: But let’s face it, our marketing of dairy products, not only bottled milk, but across the board. Kraft Foods is no longer carrying the ball on marketing. They still market certain products that they have. And they, of course, do a good job on advertising nationally, even internationally and so on. But the dairy industry has got a lot of catching up to do on how they market their product. And consider the brand value of all those products on the grocery store shelf, 50% of the value of that product is the brand. And the dairyman winds up at 20%, 25% of the value. We’re gonna have to get their marketing squared away. And I think also minimum price provisions make it much more difficult to market.

Anna: I think if you didn’t have so many cooperatives, that might be more true because so much of it is cooperative milk. I don’t know how much that really inhibits anything.

Ted: Let’s think about that a minute. First of all, you have cooperatives who do an excellent job of marketing. But also there’s a lot of cooperatives that only bargain. And they’re just horrible at marketing, when they get a retail product, it shows up and it’s unattractive and it’s not marketed properly. They bargain with an ever shrinking group of customers that markets to the grocery store. I think changing the system in this regard would make a big difference. It would force the cooperatives to spend more time marketing their products and their retail products more aggressively. And it would also wind up, some of that 50% brand value in the cooperatives’ pocket, which then winds up in their dairyman’s pocket. Where right now it’s not. You know, you can’t be too categorical, because you do have some excellent marketing cooperatives. But as a general rule, the cooperatives are more interested in collective bargaining than they are marketing.

T3: You’re suggesting that getting rid of the minimum price that a bottling plant would pay for milk would actually, even though it’s counterintuitive, lead to a higher price that the farmer would see for their milk. Because the reality is today, even though there is a “minimum price,” there are costs that are outside that pricing mechanism that are passed down to the dairy farmer anyway. And so the reality is that even though there’s a minimum price under the order, the dairy farmer can be paid well under that minimum price. And so the minimum price is actually kind of pointless today. If you get rid of it, all you’ll really do is put more competitors into the marketplace for the dairy farmers’ milk. Most people on the surface would maybe argue that that’s not true that you’re actually lowering the price that a bottling plant would pay for the milk. But the flip side is also true that you’re also moving around where the costs are incurred. And so you put more costs in the form of balancing on the distributing plants’ and bottling plants’ plate. And so even though they may pay less for the milk, they bear more of the costs, and therefore less of those costs are passed down to the dairy farmer, ultimately.

Ted: They’ve got more options to get rid of the milk, if they had surplus. The cooperative can shuffle it down to the nearest butter powder plant or cheese plant to get rid of it. The distributing plant can run a sale. He can do a lot of things with regard to the balancing. He can vary his production schedule. If there’s an advantage, a cost advantage to jimmying that schedule and that’d be more convenient from the standpoint of disposing of the available milk supply, that can be done. So there’s a lot of options there that aren’t being taken advantage of today. And also, I would point out that Class I sales are declining at 1.5% to 2% per year.

T3: By the way, it was 4% the last quarter.

Ted: Yeah, well, let’s hope it winds up being 1.5%, 2% for the year instead of 4% for the year. And this is a big problem also. So locking yourself into a price under that kind of a scenario, you know, talk about counterintuitive.

T3: Yeah, you need the flexibility to truly compete with your competitors. And right now, we are losing that war.

Ted: We’re losing market share to veggie milks. But we’re also losing market share to the customer because we’re not doing a good job of marketing.

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T3: Anna, what are you thinking?

Anna: Well, he talked about check-offs. And the two biggest pieces of that are always hauling and premiums. When anybody has those things that come out of their check. And I can see how you arguing that if you have more milk that’s going, you know, on a shelf getting sold at 99 cents, if that reduces how much balancing is out there, how much moving it around and shipping it around that that would improve the price. But again, I only think that works if people actually buy more milk, if people actually drink more milk. And…

Ted: There’s been an argument for decades, multiple decades that milk pricing is inelastic and price doesn’t mean anything. I disagree with that. You know, and I’m sure if you go to a lot of dairy economists, they will disagree with me.

Anna: I think that it’s possible. But it does take, I mean, I’ve said for a long time it takes that marketing push, it really takes the advertising and everything else that has to come first, it won’t just be reducing that price and giving them a break on the minimum price. So if you did that, though, would you leave everything else intact, qualification and all that?

Ted: Yes, I would.

Anna: All that would stay the same?

Ted: I’d leave it there. And then depending on how much the PPD was, then the various handlers could decide whether or not they wanna ship a portion of their milk into distributing plants to maintain qualification standards.

Anna: So your pool distributing plant would still be responsible for their portion over the Class III price, the PPD, into the pool, they would still be responsible for that?

Ted: That’s the way I envision it, yes.

Anna: They just wouldn’t have to pay their own proprietary producers the minimum price.

Ted: Well, they could buy the milk whatever price they want for qualification. Let’s say we wanna qualify milk, where, right now, we have August through November qualification period. And let’s say it’s a long year, gee, I got to put that milk in there at 25 cents under to maintain qualification standards. We could do that, no minimum price. He could buy at whatever he can get away with.

Anna: You could do that. I think that actually would hurt the producers. I think your better option in that case would be to change the qualification provisions in each order. Because right now, I mean, even in Order 33, we’re working pretty extensively. Most of those plants don’t need, or haven’t needed for the past few years, the amount of milk that they would have to take in to get everyone in that order qualified and they’ve done it anyways. That’s a loser for everyone. The hauling’s expensive, everything about it is rough. I mean…

Ted: If it’s not cost effective, don’t do it.

Anna: Well, that’s why I’m saying. To me, changing the qualification provisions makes more sense than giving them the opportunity at a cheaper price.

T3: What if you got rid of the minimum price into the order, and at the same time actually tightened up the qualification provisions? I mean, what you’d actually do is force more farmers out of the order, but probably in a way that doesn’t necessarily hurt those dairy farmers.

Ted: I don’t think so. I think you’d have a negative effect. When you tighten the qualification provisions, basically, it adds a burden to the manufacturing facility.

T3: In what way?

Anna: That works against the entire point of the Federal Order system.

Ted: That’s how we got rid of all the manufacturing plants in the Southeast over the last 40, 50 years is because we tightened up the qualification to such an extent nobody could live with it. So as a result, you wound up with the cooperatives having all the milk, they could do the re-blending and doing the check-off for the producers and so on. The manufacturing facility couldn’t so there are no manufacturing facilities of note today in the Southeast. And there’s none with their own milk supply.

T3: But many would argue that the real reason there’s a lot less milk in the Southeast is because the weather of the Southeast is just not the right kind of weather.

Ted: Cost of production’s higher.

T3: Yes.

Ted: No doubt. No doubt, it is. However, certain products, depending on what kind of a premium they have to pay for their milk, certain products could be produced there. Fifty years ago, we had a vibrant manufacturing sector in the Southeast, vibrant. It was big time. Kentucky and Tennessee and the Western Carolinas, North Georgia and so on. Alabama, and Mississippi. All those plants had significant manufacturing. And it’s all gone today primarily because they tightened the qualification provisions up in order to eliminate the manufacturing plants and force the milk into the bottling plants. So no, I don’t agree that you ought to make the qualification provisions onerous. There probably needs to be some work done as to what’s the right level of difficulty. But I think depending on what the PPD is and so on, then you have to make a decision as to whether you wanna compete for qualification or not. And if you don’t, you don’t, you don’t have to. Keep in mind that a lot of milk up in Wisconsin, where the PPD is relatively low, people decide whether they wanna qualify or whether they don’t. And they put the pencil to it and decide based on pennies whether it’s useful to qualify an Order 30 or Order 32.

So they make that decision. I’ve come up with this thought because the other option is just get rid of the whole damn thing. And that’s sort of like Brexit, you know, where you got a cold shower of adjustment to the fact that you have these competing values, and you’ve got the responsibility to dairy farmers and so on. And we’ve had this qualification system for so many years that if you throw the whole thing out, you could wind up with a mess that would last for several years before it gets cleaned up.

Anna: I think it would be a big mess. But I think that one of the things that people keep trying to do is change it without figuring out what the motive is for changing it except for that they know it doesn’t work. Because…

Ted: Go back to your objective, what’s the objective?

Anna: Yeah, because the objective before was to make sure that you had manufacturing around for when the Class I plants didn’t need it. And to make sure that the producers had a place to go so they didn’t end up with no home and go out of business over the summer when school is out. That’s not the motive anymore.

Ted: That’s right. The objective has to be to improve the price of the dairyman.

Anna: Absolutely.

Ted: There’s all sorts of platitudes that we hear. Orderly marketing conditions and so on, you know, as if this is some sort of a panacea that we’re all searching for, orderly marketing conditions. You know, I don’t believe in that and never have. I sort of like disorderly marketing conditions where basically markets are established. That’s what markets are for, is to move milk from disposition A to disposition B.

T3: Well…

Ted: There is no such thing as orderly marketing conditions that are to the advantage of anybody.

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What would happen if Federal Milk Marketing Orders' minimum price provisions were eliminated? Would it increase returns to dairy farmers? And even if it did, would it wreak too much havoc in the industry to be worth trying? - Ted, What would happen if Federal Milk Marketing Orders' minimum price provisions were eliminated? Would it increase returns to dairy farmers? And even if it did, would it wreak too much havoc in the industry to be worth trying?<br /> <br /> Ted, T3 and Anna dive into what might be The Milk Check's most controversial conversation yet.<br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market analysis and insights with dairy farmers in mind. The topic of Federal Order Reform is never far from our minds. Whether it's a conversation on The Milk Check or a chat around the office, we talk about it all the time.<br /> Today, we’re addressing it head-on. And we assume the industry will have strong opinions about this. Email us your thoughts at podcast@jacoby.com, or submit a question to www.jacoby.com/askted.<br /> Do minimum price provisions still make sense? What would happen if we got rid of them? Would conditions on dairy farms change for the better? Or is Federal Order reform of this sort not worth the chaos it would likely cause?<br /> Ted: What's the objective of Federal Order Reform? From the dairy farmer standpoint and from the industry standpoint, from my perspective, the objective is to increase the price to the dairyman. The objective...<br /> <br /> T3: We're not talking about what the objective was 90 years ago when it was started.<br /> <br /> Ted: Well, be it...<br /> <br /> T3: But what it would be to change what we have now into something else.<br /> <br /> Ted: Ninety years ago, it was started to monitor the veracity involved in weights and tests in butterfat and protein—well, we didn't even have protein. We had butterfat and skim. And the perception in the '20s and early '30s was that everybody was cheating the dairy farmer on butterfat tests. And so they requested a Federal Order that monitored the tests. Eight or ten years later, it morphed into a price mechanism. And over the years, we've had classified pricing. So now we have basically two regulatory systems. And you have the Capper-Volstead Act, which allows dairymen to band together, similar to a labor union and bargain collectively. And then you have a regulatory system, which allows cooperatives to pay less than the mandated price, or the minimum price under the Federal Order into a pool plant. You have two regulatory issues involved here. You have collective bargaining, and the second issue is the classified pricing system, which prices fluid milk at one price, and yogurt and cottage cheese, and whips and dips at another, ice cream. And then you have the cheese at one price and you have butter / powder at another price. In order to participate in the classified pricing system, you have to participate in the regulatory system.<br /> <br /> T3: But there's not a rule that says you have to.<br /> <br /> Ted: You can go unregulated if you want, unless you're a bottling plant. If you distribute milk, quote-unquote, in the marketing area, in the defined marketing area, by law, you are going to be a pool plant. There are certain percentages involved that by law, you have no choice, you're gonna be a pool plant. And anyone who sells milk into that pool plant is gonna be qualified. And it's against the law to sell milk into that pool plant at less than the minimum price under the order.<br /> <br /> T3: And the pool plant would basically be a plant that's bottling milk that is sold as fluid milk at a store, gallon of milk, or a quart of milk, or whatever.<br /> <br /> Ted: No, that's the distributing plant.<br /> <br /> T3: Okay.<br /> <br /> Ted: A pool plant can be anything, it can be a silo down at the end of the string of silos, it can be a whole plant, it can be anything that you wanna make it. It depends on how you pipe it and how it's approved by the regulatory system. The distributing plant is a bottling plant that distributes milk in the marketing area. T.C. Jacoby & Co. - Dairy Traders clean 39:05
Feed, milk production, market psychology and more: A conversation about everything https://www.jacoby.com/feed-milk-production-market-psychology-and-more-a-conversation-about-everything/ Tue, 20 Aug 2019 14:59:48 +0000 http://www.jacoby.com/?p=1461 It's a traditionally slow month for the dairy industry, so Ted and T3 take a whirlwind tour of the state of the industry. Topics include potentially bad crop yields, slowing milk production, the trade situation with China and a dose of market psychology. Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market analysis and insights with dairy farmers in mind. It's early August and things are slow in the dairy industry. We're taking a step back to look at markets as they stand today and discuss where things might go from here. We'll start by discussing feed. You don't need to be a feed expert to know it's been a hard year. T3, what's your understanding of the feed situation? And how might this year's issues affect milk production? T3: You know, my understanding of the issues with feed are, you know, we've had a lot of rain, the corn that's in the ground is, for the most part, running behind and in some cases, we'll probably never catch up, they're just gonna run out of time. Ted: It's running behind, the question is where it's running behind. T3: Absolutely. You know, where we live in, in St. Louis and in the parts of Missouri and Illinois down by us is actually in pretty good shape. We're hearing that there are parts of Illinois that are not in as good as shape but the fields that I've seen are in good shape around here. A couple of weeks ago though, I was up in Wisconsin, eastern side of Wisconsin between Madison and the lake and I saw a lot of really bad fields that were just in bad shape for, you know, for the second to last week in July, they weren't even up to my waist yet and they certainly weren't anywhere near getting ready to tassel. Ted: Michigan is the same way. Northern Ohio, same way. Northern Indiana, same way. T3: And I'm hearing Minnesota is the same way too. I'm hearing that northern Iowa might be struggling a little bit, but southern Iowa was in pretty decent shape. Here's where I'm going with that discussion. You know, a lot of the corn that turns into being feed for dairy cows is actually silage. What I'm actually hearing is the silage is not gonna be a problem, the dairy farmers are gonna have enough silage, and also due to tariffs and other things, brewer's grains and some of the other things that dairy farmers feed their cows, there's also gonna be an ample supply of. And so, ironically, even though the corn is not looking good, the corn directly is not gonna be the problem, the problem is going to be that the same weather that's caused the corn to be behind has caused the pasture, whether it's hay or alfalfa or whatnot, is a major problem. That whether they're gonna get one or two fewer cuttings this year, and the quality of the cuttings they do get, it's a pretty big problem. And so it's very safe to say that feed quality is going to be an issue but the issues probably gonna be more an issue of feed quality than feed price. You know, the basis has gone up and so maybe the feed costs a little bit more in various places but the bigger issue for the dairy farmer is gonna be feed quality in most parts of the country. Ted: Well, that's a price-related factor. T3: So that eventually will have a negative effect on milk production per cow. And so you've got cow numbers down, you know, I'm not ready to say milk production per cow is gonna be down because it's usually up a little bit every year but heifer numbers are down. We know that a lot of dairy farmers are breeding with Angus and other beef cows rather than Holsteins or Jerseys. The sense I get is that there's more, they're replacing out the Holsteins much more than they're replacing out the Jerseys. Ultimately, you're gonna have a smaller number of heifers in the pipeline to eventually go into their first lactation. So between poor feed quality, fewer milking cows, lighter heifer pipeline, there's reason to believe that milk production is gonna stay relatively flat to maybe ... It’s a traditionally slow month for the dairy industry, so Ted and T3 take a whirlwind tour of the state of the industry. Topics include potentially bad crop yields, slowing milk production, the trade situation with China and a dose of market psychology.

Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market analysis and insights with dairy farmers in mind. It’s early August and things are slow in the dairy industry. We’re taking a step back to look at markets as they stand today and discuss where things might go from here.

We’ll start by discussing feed. You don’t need to be a feed expert to know it’s been a hard year. T3, what’s your understanding of the feed situation? And how might this year’s issues affect milk production?

T3: You know, my understanding of the issues with feed are, you know, we’ve had a lot of rain, the corn that’s in the ground is, for the most part, running behind and in some cases, we’ll probably never catch up, they’re just gonna run out of time.

Ted: It’s running behind, the question is where it’s running behind.

T3: Absolutely. You know, where we live in, in St. Louis and in the parts of Missouri and Illinois down by us is actually in pretty good shape. We’re hearing that there are parts of Illinois that are not in as good as shape but the fields that I’ve seen are in good shape around here.

A couple of weeks ago though, I was up in Wisconsin, eastern side of Wisconsin between Madison and the lake and I saw a lot of really bad fields that were just in bad shape for, you know, for the second to last week in July, they weren’t even up to my waist yet and they certainly weren’t anywhere near getting ready to tassel.

Ted: Michigan is the same way. Northern Ohio, same way. Northern Indiana, same way.

T3: And I’m hearing Minnesota is the same way too. I’m hearing that northern Iowa might be struggling a little bit, but southern Iowa was in pretty decent shape. Here’s where I’m going with that discussion. You know, a lot of the corn that turns into being feed for dairy cows is actually silage. What I’m actually hearing is the silage is not gonna be a problem, the dairy farmers are gonna have enough silage, and also due to tariffs and other things, brewer’s grains and some of the other things that dairy farmers feed their cows, there’s also gonna be an ample supply of.

And so, ironically, even though the corn is not looking good, the corn directly is not gonna be the problem, the problem is going to be that the same weather that’s caused the corn to be behind has caused the pasture, whether it’s hay or alfalfa or whatnot, is a major problem. That whether they’re gonna get one or two fewer cuttings this year, and the quality of the cuttings they do get, it’s a pretty big problem. And so it’s very safe to say that feed quality is going to be an issue but the issues probably gonna be more an issue of feed quality than feed price.

You know, the basis has gone up and so maybe the feed costs a little bit more in various places but the bigger issue for the dairy farmer is gonna be feed quality in most parts of the country.

Ted: Well, that’s a price-related factor.

T3: So that eventually will have a negative effect on milk production per cow. And so you’ve got cow numbers down, you know, I’m not ready to say milk production per cow is gonna be down because it’s usually up a little bit every year but heifer numbers are down. We know that a lot of dairy farmers are breeding with Angus and other beef cows rather than Holsteins or Jerseys. The sense I get is that there’s more, they’re replacing out the Holsteins much more than they’re replacing out the Jerseys.

Ultimately, you’re gonna have a smaller number of heifers in the pipeline to eventually go into their first lactation. So between poor feed quality, fewer milking cows, lighter heifer pipeline, there’s reason to believe that milk production is gonna stay relatively flat to maybe even slightly negative for some time even if the milk price goes up.

Ted: And then in addition to that you have an economy which is doing pretty well, promising to stay well.

T3: I’ll debate you a little bit on the economy, not that I think it’s going bad but the fact that the Fed lowered interest rates by a quarter percent, you know, because they see some rain clouds on the horizon bears watching. I’m not gonna assume the Fed is wrong if they’re reacting now to something in the future.

Ted: Well, I agree with that too but the trade issue and so on, I think as far as the dairy industry is concerned is overblown a little bit. You know, it hasn’t really affected our cheese sales into places like Mexico which is our biggest customer and if there is an effect, it’s marginal. And China isn’t a big buyer of cheese anyway, even though that’s the biggest trade issue we got right now. They buy a lot of whey, they buy permeate to feed pigs and swine flu is more of an issue with China than anything else.

T3: The African swine fever has hurt our exports to China probably more than any tariff issues. And I will also say that I get the distinct sense that the Chinese economy is not doing well at all, not just because the tariffs are hurting them but they’ve got their own internal problems. Just talking to some of our contacts around the world who may be sell dairy products into China from Europe or from Oceana, they’re not bullish on the Chinese economy right now, they’re bearish on it.

The Chinese raise and have raised tariffs on various U.S. dairy products, on a certain level it’s just a game of musical chairs. Somebody else gets the Chinese business and then the U.S. gets the business into that country that is ordering from the U.S. because where they were getting it from Europe is now going to China.

The sense that I get is China, while they ordered pretty strongly in the first quarter, it’s really dropped off in the second quarter and there’s not a lot of orders in the pipeline for the third quarter which tells me that there’s something going on deeper than just they’re not buying dairy at the moment.

Ted: The object of the trade negotiations such as they are, I think is to get China back to pay attention to the WTO rules.

T3: And maybe to stay out of the South China Sea as well.

Ted: Well, I’m not so sure that it’s that, I think the WTO is the big issue. We backed China’s admission to the WTO 20 years ago and they used trade basically to bring themselves to a first-rate economic power today. But if we let it go forever, where’s it gonna go? So I’m sure that that’s what the major objective is even though there is a military issue involved with the South China Sea.

I don’t think that’s really been discussed very well. They’re talking about trade issues and trade wars and so on. And I don’t think anyone really understands what it’s all about, I don’t think the trade deficit as such is really the issue. I think it’s more an issue of getting them back to conform to WTO rules. So we’ll see how that works out. But in the meantime, I don’t think it affects the dairy industry much. If we get China as a major trading partner 20 years down the road, they’ll be a big cheese user, then the dairy industry will thrive with trade with China. If we can get them on the rails now, we can get to that point later.

T3: I agree with that.

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T3: So we have flat to lower milk production. We have a relatively healthy domestic economy. Prices have come up lately to about $18.00 a hundredweight. It’s a lot better than the $14.00 and $13.00 a hundredweight they were dealing with a year and two years ago especially considering that the basis in places like Michigan and Indiana and in Ohio has also improved and probably will continue to improve, meaning that, you know, instead of getting, you know, $2.00 under the blend price, I have to believe that basis is moving back towards zero. So that’s gonna be pretty helpful for the dairy farmer.

And in theory, you’d expect that if that’s happening that you’re gonna start seeing expansion again. But we suspect that maybe that’s a little bit of a ways off because there’s a couple of headwinds that are gonna make it difficult for milk production to increase in the next 12 months.

Ted: We’ve talked about the cycle that we’ve grown accustomed to. It’s basically 18 months to two years cycle where we have prices go down it takes a while to turn it around and then 18 months later they’re high and then back down again. In my opinion, that cycle has changed. I think sex semen and so on have caused the cycle to extend. Rather than looking at a year and a half, we’re looking at maybe a three-year or four-year cycle because of the difficulty in getting back on the beam to bring a heifer along to get back into the milking herd, you’ve got three years once you decide to do it.

So now we were at $18.00 roughly and so an efficient, well-managed dairyman is probably saying, “Well, maybe it’s time for me to change direction.” Well, so he’s looking at 2023. It’s different than it was, you know, ten or 20 years ago and the consequences are much different.

T3: What that also means is this, and let’s segue into a demand discussion and then segue back to this if you don’t mind. So we’ve risen up to about $18.00 a hundredweight. My gut tells me between, now this is what, August 2 when we’re recording this and the end of the year, we’re gonna have trouble getting much higher. The reason I believe that is because I believe that most of the buyers of dairy products have ample inventory.

There has been a lot of cheese in inventory, there’s been a lot of butter in inventory, there’s been a decent amount of powder in inventory globally, and as a result we’re seeing in our office is a slow-down in the interest of purchasing dairy products even as we’re going into the fall when usually demand picks up.

The reason I think that’s relevant is, and I think it ties in well with what you’re saying about that cycle extending is it seems more likely to me that we’ll struggle to break through that $18.00 range this year but what will happen is demand will continue to be there. You know, milk production will continue to, let’s say be stagnant rather than growing and you’re not gonna build back your inventories. You’ll run them down this year and then you will struggle to build them back next year. And if you’re gonna break out to a higher number, I’m of the belief that’s gonna be 2020. You know, maybe the sooner the better if you’re a dairy farmer, but my gut tells me you are at that point, you know, whether it’s $18.00 Class III milk or it’s a $1.85 cheese, where you’re starting to get a bit of pushback resistance from the consumer that’s buying the products and so you’re gonna have to tighten up further and actually get your inventories to the point where people have to really pay up more for cheese if they really want it. And I just don’t think we’re gonna get there this year even though milk production is running negative.

Ted: Well, I agree but your idea of what constitutes an increase in price, I guess I would think that a push to $20.00 is out. I don’t see that for the reasons that you describe, the Class III I’m thinking of, or a calculated Class IV. But I do see, you know, you have in the cheese industry you have such phenomena as people needing fresh cheese and so on and we see milk tightening up here when schools start and so on and it’ll stay tight for two or three or four months.

You already got a cheese block market that’s up in the 180s. It wouldn’t take much to see that block market up another ten or 15 cents. And that I think is what you’re probably looking at is some marginal tightening between now and the end of the year, and then it’ll back off next year for the first half and then the phenomena is they’ve worked down the inventories and so on, the phenomena that you’re talking about in the second half of 2020 is very likely. And then that same thing would go on for another two or three years. I don’t see a major explosion a la 2014. I don’t see that at all.

T3: We’re in a 100% agreement there, I don’t see it either. Let’s talk a little bit about market psychology because I think this $18.00 point is in my belief, a classic market psychology point. From the perspective of the dairy producer, they’re like, “Hey, great, we’ve gotten to $18.00, we’re getting back to the point where maybe we’re making a little bit of money, but hey, milk production is still negative, we can keep going higher, you know, what’s another ten to 15 cents cheese or $1.00, $1.50 a hundredweight milk?”

But the buyer has kinda got a different point of view. Keep in mind, the cheese buyer has been, you know, 2015, 2016, 2017, 2018, now you’re getting into 2019, for five years, price hasn’t gone much higher than $1.80. It hasn’t really gone much higher than $1.70. And so they’re reacting to it as, I can’t promote anymore because my cheese price is the highest it’s been in five years, so I’m gonna run less promotions in the fall.

You know, price of cheese is really high, maybe I shouldn’t be putting two slices of cheddar on my burger or two slices of American cheese on my burger. This is that point where because they’re not used to the prices this high, their attitude is if it goes any higher, I’m gonna make changes in the way that I use my cheese or the way that I buy my cheese. It’s the psychology of that price point that’s new.

In today’s day and age, five years is an eternity. And so you’ve hit that point where we’re sitting right now in price where anything higher is gonna have a demand response. You know, could we go up to $1.95 for a month? Yes. Well, then I guarantee you this, in our office where everybody calls when things get long, our cheese desk, is the phone’s gonna start ringing with all these people looking to sell cheese. And we’re gonna call them back and say, “Nobody’s buying.” And so I think it’s gonna be difficult to get us too far above $18.00 a hundredweight milk, a $1.85 cheese and and have it stay there for any length of time, that’s where the tipping point is right now. And the only you get through that point and stay through that point is if you don’t have any inventory to draw on.

Ted: Well, I’m gonna disagree a little bit. In today’s market that people who buy cheese to put on burgers have already got their cheese priced and budgeted for the next 12 months.

T3: They don’t have their promotions priced yet though.

Ted: Okay. If you want to split that hair, that’s fine, but they already have their pricing locked in on the futures market for whatever they are gonna need on a regular basis. And if you want to say that they’re gonna save a small portion of it for the spot market, I’ll concede the point. But I don’t think $1.80 is a psychological point, I think $2.00 is a psychological point. And that I think will cause major resistance in the cash market when they get to two bucks.

I’m gonna be a little bit more bullish from that standpoint and even though you’re the cheese seller, I’m gonna say that all the people in the cheese business have pretty much got their budgets in and they already know what their cheese is gonna cost, it’s there. So if the spot market, which we’re involved with, goes from $1.80 up to $1.95, it’s not gonna make any difference to them, they’ve got it hedged anyway.

T3: I’d say for the 60% of the market that’s gonna buy the cheese regardless of the price and so they always hedge it, you’re right. But the tipping point is that last 2% of the market.

Ted: The $2 is the magic number, that’s the big Kahuna.

T3: Two dollars is a bigger magic number than $1.80. But don’t underestimate $1.80.

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T3: Butter, since we’re talking about some of the downstream products from the dairy farmer. Butter market’s been interesting this year. Milk production has particularly shrunk east of the Mississippi and one of the results of that is the cream market, the butterfat market, as opposed to the butter market, has been very tight.

The butter market in the, however, has kind of stayed in its range between about $2.10 and $2.40, you know, for the whole year. Kinda got down to close to $2.10 in January and has slowly climbed up until about $2.40 until about two weeks ago where it suddenly fell out of bed and is moving back down, you know, towards $2.30.

The butter market has been in this $2.10 to $2.40 range for almost five years now. Some of us thought that because milk production was lower, it would get tight enough to break out of that range this year, maybe it will. But I’m starting to believe it won’t for the same reasons when we were talking about cheese, everybody who needs the inventory has the inventory.

Ted: We also have imports.

T3: We have imports and we have fewer exports. And so this butter market just seems to me to be a market that needs more momentum than it has right now if it’s gonna break into a new price range. Any dairy farmer who’s been selling corn over the last 20 years, corn always had a tendency to trade in a certain range for a very long period of time. And as a result, when it broke out of that range, it broke out of that range explosively.

Butter has started taking on that pattern because it’s been in that range for so long. And so the likely scenario with butter is when it does break out of that range, it breaks out explosively and I don’t think that that’s gonna happen this year. And so I think we can expect butter prices to stay about where they are for the remainder of the year, it’s gonna stay within the range.

And the reason is because even though butterfat has gotten really tight on the east coast, on the west coast, there’s more than enough inventory. But I will also say this, if you do see butter break out of the range, if you see that butter, it go to $2.50, my guess is it’ll go all the way to $3.00.

Ted: We’ll see. I guess I’m more concerned with the fact that we do have imports coming into the U.S right now and the European price for once for butterfat is quite a bit lower than ours. I think that is probably gonna put a lid on how far we’re gonna go.

Do we want to get into a discussion with regard to the ersatz milk and the effect that it might have?

T3: I think the way you talk about it is like this. So Class I sales have been down at a 4% clip a year over the last, what, three to four years due to a variety of factors. Kids don’t drink milk, they don’t drink or eat cereal like they used to for breakfast like when we were growing up. You have the ersatz milk, you have almond milk, you have soy milk, you have the new oat milk, so people are moving away from dairy and towards those milks. And so Class I milk sales are down, let’s call it 4% to 5%.

And so you have, you know, to kind of bring it all together, you’ve got total milk production in the U.S. let’s say down 0% to 0.4%. You’ve got cheese production generally higher, maybe as much as 1.5% and that’s coming at the…and you probably have Class II utilization up a little bit. And so that increase in Class III production is coming at the expense of Class I and Class 4.

Ted: I’m gonna take a little bit of issue on that, you know, marketing is over half the price of our product. Whether it’s cheese, whether it’s fluid milk, whether it’s yogurt, no matter what it is. And if you look at the marketing plans for some of the major proprietary companies for particularly Class II products, they’re talking about protein-based products as part of their repertoire of products. Now you have to assume that the margin on those products is higher than the milk, otherwise, they wouldn’t be pushing them.

T3: When you talk about protein, are you talking about plant-based protein or dairy protein?

Ted: Plant-based protein.

T3: Okay.

Ted: I’m assuming that the reason that they’re latching onto it, people in particularly the Class II industry, for example, I’m assuming that they’re gonna spend their marketing dollars on marketing-plant based products as opposed to dairy-based products because the margins are bigger so that could cause us a lot of headaches.

T3: I don’t disagree.

Ted: It’s a long-range issue and of course there’s a lot we don’t know about plant-based products. What’s the flavor profile? Has it got to be competitive? Is it gonna be attractive? I assume that if it’s there that they have approved it so there must be something that’s marketable there. What’s the cost to production? If the people that are spending half the value of the product marketing it, are marketing that at the expense of the dairy side, it doesn’t…not good for dairy at all.

If we look at Kraft, has carried the marketing side of our industry for 60, 70 years, they’re gone pretty much. I am expecting as we—to circle back for a moment—that we are looking at a gradually increasing price for the next three years or so. But it’s gonna be a slow pace as we face the problems with imitation products and so on.

T3: What you’re saying is we are gonna see milk prices go up, not in a demand-driven market but in a supply reduction market.

Ted: You’re right. I think that’s gonna be, it’s always supply and demand both but I think the supply side of the industry is gonna suffer.

T3: And I agree. I am not feeling excited about the way the consumer is reacting to dairy at the moment. It’s, you know, in my 30 years of being in this industry, it’s about the worst I’ve ever seen it.

Ted: And maybe that’s the right way to phrase it. The structure of the industry now has reached the point where the people who carry the load for marketing our product, which I’ll point out again repetitiously, it’s 50% of the value, it’s not there anymore. We don’t have the marketing side covered. We market tank loads of fluid milk and cream and truckloads of powder and cheese, but the people who actually take those products that we sell and put it on the grocery store shelf and actually convince the customer to buy the package product are nowhere to be found.

I think we’ve got a problem there. I don’t think that it’s gonna be any sort of collapse, but I do think that when it comes time for our pricing to move forward and up, that’s gonna be an issue. We’ll see how it works out. If the value, the marketing dollars in returns are more favorable to plant-based products, you know, that’s gonna be stiff competition for the dairy industry.

T3: And I agree. And I do agree that the industry’s got a marketing issue right now. I will say this just to give a little bit of a positive spin on it, there are dairy companies out there that I do think are doing a good job. I think Tillamook is doing a really good job out on the west coast, I think Sargento is doing a good job. I think Fairlife has done a good job, Chobani I think has done a good job.

Ted: I agree with you on all of those.  But the old stalwarts that we’ve had for all these years are nowhere to be found anymore.

T3: And I agree with that too.

Anna: We welcome your participation in The Milk Check. If you have comments to share or questions you want answered, send an email to podcast@jacoby.com. Our theme music is composed and performed by Phil Keaggy. The Milk Check is a production of T.C. Jacoby & Co.

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It's a traditionally slow month for the dairy industry, so Ted and T3 take a whirlwind tour of the state of the industry. Topics include potentially bad crop yields, slowing milk production, the trade situation with China and a dose of market psycholog... It's a traditionally slow month for the dairy industry, so Ted and T3 take a whirlwind tour of the state of the industry. Topics include potentially bad crop yields, slowing milk production, the trade situation with China and a dose of market psychology.<br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market analysis and insights with dairy farmers in mind. It's early August and things are slow in the dairy industry. We're taking a step back to look at markets as they stand today and discuss where things might go from here.<br /> <br /> We'll start by discussing feed. You don't need to be a feed expert to know it's been a hard year. T3, what's your understanding of the feed situation? And how might this year's issues affect milk production?<br /> <br /> T3: You know, my understanding of the issues with feed are, you know, we've had a lot of rain, the corn that's in the ground is, for the most part, running behind and in some cases, we'll probably never catch up, they're just gonna run out of time.<br /> <br /> Ted: It's running behind, the question is where it's running behind.<br /> <br /> T3: Absolutely. You know, where we live in, in St. Louis and in the parts of Missouri and Illinois down by us is actually in pretty good shape. We're hearing that there are parts of Illinois that are not in as good as shape but the fields that I've seen are in good shape around here.<br /> <br /> A couple of weeks ago though, I was up in Wisconsin, eastern side of Wisconsin between Madison and the lake and I saw a lot of really bad fields that were just in bad shape for, you know, for the second to last week in July, they weren't even up to my waist yet and they certainly weren't anywhere near getting ready to tassel.<br /> <br /> Ted: Michigan is the same way. Northern Ohio, same way. Northern Indiana, same way.<br /> <br /> T3: And I'm hearing Minnesota is the same way too. I'm hearing that northern Iowa might be struggling a little bit, but southern Iowa was in pretty decent shape. Here's where I'm going with that discussion. You know, a lot of the corn that turns into being feed for dairy cows is actually silage. What I'm actually hearing is the silage is not gonna be a problem, the dairy farmers are gonna have enough silage, and also due to tariffs and other things, brewer's grains and some of the other things that dairy farmers feed their cows, there's also gonna be an ample supply of.<br /> <br /> And so, ironically, even though the corn is not looking good, the corn directly is not gonna be the problem, the problem is going to be that the same weather that's caused the corn to be behind has caused the pasture, whether it's hay or alfalfa or whatnot, is a major problem. That whether they're gonna get one or two fewer cuttings this year, and the quality of the cuttings they do get, it's a pretty big problem. And so it's very safe to say that feed quality is going to be an issue but the issues probably gonna be more an issue of feed quality than feed price.<br /> <br /> You know, the basis has gone up and so maybe the feed costs a little bit more in various places but the bigger issue for the dairy farmer is gonna be feed quality in most parts of the country.<br /> <br /> Ted: Well, that's a price-related factor.<br /> <br /> T3: So that eventually will have a negative effect on milk production per cow. And so you've got cow numbers down, you know, I'm not ready to say milk production per cow is gonna be down because it's usually up a little bit every year but heifer numbers are down. We know that a lot of dairy farmers are breeding with Angus and other beef cows rather than Holsteins or Jerseys. The sense I get is that there's more, they're replacing out the Holsteins much more than they're replacing out the Jerseys.<br /> <br /> Ultimately, you're gonna have a smaller number of heifers in the pipeline to eventually go into thei... T.C. Jacoby & Co. - Dairy Traders clean 26:55
Should dairy farmers be concerned about milk without a cow? https://www.jacoby.com/should-dairy-farmers-be-concerned-about-milk-without-a-cow/ Wed, 10 Jul 2019 19:29:34 +0000 http://www.jacoby.com/?p=1430 Recent advances in gene editing technology have made the production of dairy proteins in lab settings viable and potentially scalable. If the techniques can scale cost-effectively, and if consumers buy in, the dairy industry as we know it will change. Ted, T3 and Anna discuss what's at stake and ask: Should dairy farmers be worried? Anna: Welcome to "The Milk Check," a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. We want to discuss something today that we think will cost significant issues for the dairy industry in the coming years. You've probably heard of Burger King's Impossible Whopper, beef made in a lab, not from a cow. Well, it's happening in dairy too. But before we discuss milk without a cow, let's spend a few minutes on markets and pricing. Over the last several months, we've predicted that prices would continue to strengthen. Since we last spoke, persistent wet weather across the country has made it very tough going for farmers getting crops planted. Ted: Looking at the pricing today, I think we're on a slow trajectory up. I think it's gonna continue for a period of years. I don't see a change even next year and next spring. I think we may have a little bit of cycling. But given the crop situation, and so on, and the forage situation, 2020 looks like a continued strong year. Do I see an explosion? No, but a steady move up. The butter fat situation, probably, is not gonna be as explosive as we thought before, because I noticed an article come through the other day, that the average test is now reaching 3.8, the standard of identity on milk is 3.67. So, it's almost 1.3% up. Imagine what a big difference that's gonna make for the demand from ice cream, and cream cheese, and butter, and so on, is concerned. So, I suppose we'll see. Do you think we'll break $20 by the end of the year on the Class III price? I doubt it, but I think we could come fairly close. I think $19 is probably doable. That would mean cheese at $1.90 at some point, maybe in September, October. T3: I'm less bullish cheese in Class III than I am Class IV, because I think the continued lack of growth in the milk supply is going to affect the Class IV market more than the Class III market. I think the cheese plants will get their milk. But there’ll be some Class IV that won't. I'll add this to it, though. What I think is going on with the weather right now, and how wet it is, and how much people are struggling to get corn into the fields and things like that. It's already had its effect, and it will continue to have its effect. You may not see the effect of it in milk prices, or I should say in milk production, before this year's harvest. So, between now and September, I don't think you'll see much. But that higher feed cost may force some dairy farmers who are on the bubble out of the business. So, it may increase or continue to support, even at higher prices, the exodus of dairy farmers we've been seeing over the past couple of years. And so, I would say that it does have a bullish effect on 2020. Ted: The slaughter numbers that I've been following for the last couple of months, we were at about 70,000 per week, now it's 58, 59, 57. T3: A lot of that is seasonal, though. Ted: It is seasonal. But the bottom hasn’t fallen out of it. Even with the increase in price, we've seen the Class III price and the blend prices go up a couple of bucks, a hundredweight. Big numbers. And still the slaughter numbers are staying up there. It sort of follows along with the predictions that we've been hearing, and that the smaller dairymen are, given the good job market and so on, are going into a different line of work. Anna: I think the really small guys are, but we say that small farms are leaving, and I think that that's true, and I think that will continue, like we've always said. But I think the net impact, I don't feel from where I'm sitting at my desk, like, Recent advances in gene editing technology have made the production of dairy proteins in lab settings viable and potentially scalable. If the techniques can scale cost-effectively, and if consumers buy in, the dairy industry as we know it will change. Recent advances in gene editing technology have made the production of dairy proteins in lab settings viable and potentially scalable. If the techniques can scale cost-effectively, and if consumers buy in, the dairy industry as we know it will change.<br /> <br /> Ted, T3 and Anna discuss what's at stake and ask: Should dairy farmers be worried?<br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to "The Milk Check," a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. We want to discuss something today that we think will cost significant issues for the dairy industry in the coming years. You've probably heard of Burger King's Impossible Whopper, beef made in a lab, not from a cow. Well, it's happening in dairy too. But before we discuss milk without a cow, let's spend a few minutes on markets and pricing. Over the last several months, we've predicted that prices would continue to strengthen. Since we last spoke, persistent wet weather across the country has made it very tough going for farmers getting crops planted.<br /> <br /> Ted: Looking at the pricing today, I think we're on a slow trajectory up. I think it's gonna continue for a period of years. I don't see a change even next year and next spring. I think we may have a little bit of cycling. But given the crop situation, and so on, and the forage situation, 2020 looks like a continued strong year. Do I see an explosion? No, but a steady move up. The butter fat situation, probably, is not gonna be as explosive as we thought before, because I noticed an article come through the other day, that the average test is now reaching 3.8, the standard of identity on milk is 3.67.<br /> <br /> So, it's almost 1.3% up. Imagine what a big difference that's gonna make for the demand from ice cream, and cream cheese, and butter, and so on, is concerned. So, I suppose we'll see. Do you think we'll break $20 by the end of the year on the Class III price? I doubt it, but I think we could come fairly close. I think $19 is probably doable. That would mean cheese at $1.90 at some point, maybe in September, October.<br /> <br /> T3: I'm less bullish cheese in Class III than I am Class IV, because I think the continued lack of growth in the milk supply is going to affect the Class IV market more than the Class III market. I think the cheese plants will get their milk. But there’ll be some Class IV that won't. I'll add this to it, though. What I think is going on with the weather right now, and how wet it is, and how much people are struggling to get corn into the fields and things like that. It's already had its effect, and it will continue to have its effect.<br /> <br /> You may not see the effect of it in milk prices, or I should say in milk production, before this year's harvest. So, between now and September, I don't think you'll see much. But that higher feed cost may force some dairy farmers who are on the bubble out of the business. So, it may increase or continue to support, even at higher prices, the exodus of dairy farmers we've been seeing over the past couple of years. And so, I would say that it does have a bullish effect on 2020.<br /> <br /> Ted: The slaughter numbers that I've been following for the last couple of months, we were at about 70,000 per week, now it's 58, 59, 57.<br /> <br /> T3: A lot of that is seasonal, though.<br /> <br /> Ted: It is seasonal. But the bottom hasn’t fallen out of it. Even with the increase in price, we've seen the Class III price and the blend prices go up a couple of bucks, a hundredweight. Big numbers. And still the slaughter numbers are staying up there. It sort of follows along with the predictions that we've been hearing, and that the smaller dairymen are, given the good job market and so on, are going into a different line of work.<br /> <br /> Anna: I think the really small guys are, but we say that small farms are leaving, and I think that that's true, T.C. Jacoby & Co. - Dairy Traders clean 23:25 Does dairy product marketing need an overhaul? https://www.jacoby.com/does-dairy-product-marketing-need-an-overhaul/ Thu, 23 May 2019 14:15:52 +0000 http://www.jacoby.com/?p=1270 In a follow-up from our previous episode, Ted, T3 and Anna discuss the state of dairy product marketing. Plant-based milk alternatives are on the rise. Fluid milk sales have been in decline for decades. Is dairy falling behind? Does the way the industry markets its products need a makeover? And if it does, what would it look like? Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. In our last episode, we talked about changing consumer expectations and how those have impacted the dairy industry. But that discussion is incomplete without also talking about the ways dairy products are marketed. Before we ended the previous episode, T3 alluded to the difficulty the industry has had in marketing to consumers whose expectations have changed. We'll pick up where we left off. T3: Where are the greatest growth opportunities for the dairy industry today? Every single one of them is small and I don't mean that in a negative way. It's more specialty cheese, more unique products, more local products. I think that's where the opportunities are for the dairy industry. Smaller farms, smaller plants, smaller demand for products and things like that. That's where all the growth opportunities are. I think there's a ton of opportunities there, but I think our industry, for a couple of reasons, is really struggling with how to access that market, how to successfully meet the consumers' request there, and I think it's because we're so overwhelmed by, you know, we need to clear more milk. We need to clear a lot more milk. Let's build a big plant and that we're focusing on move the big things to solve this problem we've had about dairy demand and oversupply that we're not focusing on where the true opportunity is which is in the smaller opportunities. Anna: I would imagine that's harder to do too because with all the government regulation on food safety and everything, that's pretty cost-prohibitive for some of the small plants as well. T3: Yes. Ted: And if you look at the fact, switching to the demographics, you know, the population is not growing that fast anymore and our consumption has flattened out a little bit. Certainly, we're negative in Class I milk, which is probably a marketing issue more than anything else, but we're negative in Class I milk, but we're still growing in cheese, specialty cheeses and fractionated products and pizza cheese and so on. Yogurt has flattened out. So, the question, then, is building a 10-million-pound plant to produce a small piece of cheese where the industry needs to go? And my answer would be no. We need to adopt a different strategy, a strategy where you set up an environment where small producers who produce a highly specialized product can take advantage of the infrastructure that a group might develop, and I think that's where we're probably going to go because we certainly have a limited ability to continue to build 10-million-pound plants that produce one product and chew up that much milk in one product. It isn't going to work. You're going to hit the wall eventually with that approach and that, to some extent, might be where a little bit where we are right now. If we look at the cheese market and the way that cheese market is developed and so on, we're continuing to crank out barrels and blocks and mozz. Unless the population is going to continue to grow, our market isn't going to grow to accommodate all the production that these plants can throw out. So, the increase then comes from the smaller specialized, which is more difficult and certainly marketing is more of an issue. T3: And the cost per pound is much higher. Ted: It's higher, but on the other hand, you look at the variations of parmesan now that we see in the dairy case, in the cheese case with horrible marketing, it's just in there, it looks almost like somebody dumped a basket in there and didn't bother to e... In a follow-up from our previous episode, Ted, T3 and Anna discuss the state of dairy product marketing. - Plant-based milk alternatives are on the rise. Fluid milk sales have been in decline for decades. Is dairy falling behind? In a follow-up from our previous episode, Ted, T3 and Anna discuss the state of dairy product marketing.<br /> <br /> Plant-based milk alternatives are on the rise. Fluid milk sales have been in decline for decades. Is dairy falling behind? Does the way the industry markets its products need a makeover? And if it does, what would it look like?<br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. In our last episode, we talked about changing consumer expectations and how those have impacted the dairy industry. But that discussion is incomplete without also talking about the ways dairy products are marketed.<br /> <br /> Before we ended the previous episode, T3 alluded to the difficulty the industry has had in marketing to consumers whose expectations have changed. We'll pick up where we left off.<br /> <br /> T3: Where are the greatest growth opportunities for the dairy industry today? Every single one of them is small and I don't mean that in a negative way. It's more specialty cheese, more unique products, more local products. I think that's where the opportunities are for the dairy industry. Smaller farms, smaller plants, smaller demand for products and things like that. That's where all the growth opportunities are.<br /> <br /> I think there's a ton of opportunities there, but I think our industry, for a couple of reasons, is really struggling with how to access that market, how to successfully meet the consumers' request there, and I think it's because we're so overwhelmed by, you know, we need to clear more milk. We need to clear a lot more milk. Let's build a big plant and that we're focusing on move the big things to solve this problem we've had about dairy demand and oversupply that we're not focusing on where the true opportunity is which is in the smaller opportunities.<br /> <br /> Anna: I would imagine that's harder to do too because with all the government regulation on food safety and everything, that's pretty cost-prohibitive for some of the small plants as well.<br /> <br /> T3: Yes.<br /> <br /> Ted: And if you look at the fact, switching to the demographics, you know, the population is not growing that fast anymore and our consumption has flattened out a little bit. Certainly, we're negative in Class I milk, which is probably a marketing issue more than anything else, but we're negative in Class I milk, but we're still growing in cheese, specialty cheeses and fractionated products and pizza cheese and so on. Yogurt has flattened out. So, the question, then, is building a 10-million-pound plant to produce a small piece of cheese where the industry needs to go? And my answer would be no.<br /> <br /> We need to adopt a different strategy, a strategy where you set up an environment where small producers who produce a highly specialized product can take advantage of the infrastructure that a group might develop, and I think that's where we're probably going to go because we certainly have a limited ability to continue to build 10-million-pound plants that produce one product and chew up that much milk in one product. It isn't going to work. You're going to hit the wall eventually with that approach and that, to some extent, might be where a little bit where we are right now.<br /> <br /> If we look at the cheese market and the way that cheese market is developed and so on, we're continuing to crank out barrels and blocks and mozz. Unless the population is going to continue to grow, our market isn't going to grow to accommodate all the production that these plants can throw out. So, the increase then comes from the smaller specialized, which is more difficult and certainly marketing is more of an issue.<br /> <br /> T3: And the cost per pound is much higher.<br /> <br /> Ted: It's higher, but on the other hand, you look at the variations of parmesan now that... T.C. Jacoby & Co. - Dairy Traders clean 20:25 Consumer expectations are changing. How does dairy fit in? https://www.jacoby.com/consumer-expectations-are-changing-how-does-dairy-fit-in/ Thu, 16 May 2019 13:50:06 +0000 http://www.jacoby.com/?p=1265 Changing consumer expectations pose one of the most dynamic challenges facing today's dairy industry. More and more, consumers seek organic products from smaller farms in pursuit of healthier food. The irony? Newer, larger dairy farms and processing plants are more efficient and are better equipped to deliver "cleaner" products. So what do consumers really want? And how can dairy meet their needs? Ted, T3 and Anna discuss. Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. In this episode, we want to discuss whether the dairy industry has some catching up to do in terms of addressing consumers' attitudes about nutrition. We'll get to that in a few minutes. But first, let's discuss the recent spike in cheese prices over the last few weeks. T3, you've said that you think the rally is "hollow." What do you mean by that? T3: Cheese inventories are still very high. There have been a couple of pieces of data who have indicated that maybe demand has picked up a little bit but when you're sitting on a large amount of inventory, it takes a long time to really change the supply and demand balance. Just because a couple of data points say, "Hey, things might be getting better," doesn't mean you've solved the problem. It just means that maybe if you stay on this course for another six to 12 months, you might get to a point where you've solved the problem. And everybody's reacting to it by saying, "Hallelujah, the cheese price can go up," and I can tell you as a someone who has to go sell cheese every day, in the last three weeks as we've gone from $1.45 cheese to $1.73, more and more buyers have backed off and said, "I don't need this cheese today. I don't need this cheese anymore. I've got more than enough in inventory." I was just in Chicago in an industry meeting and the comment I heard from multiple converters of cheese was, "I'm pretty happy with where my inventory is right now." Because they saw the cheese market go from $1.45 to $1.73 and they're like, "Sweet, my inventory value just went way up." So, now what are they gonna do? They're gonna stop buying, they're gonna run their inventories down into the market. And so, we could easily go the other way. That's why it's hollow. Ted: And I tend to agree with that. Although I do think that most of the cheese inventories are hedged so they really carry the inventory is of nominal concern to them. And that's a change that's occurred over the last few years that will change how quickly this can change. It used to be, all of a sudden you get to a point that like somebody has flipped the light switch and, boom, it would take off one way or the other. It seems like the cycle has flatted out and lengthened because of the risk management, because of the storage ability, because of the flattening of demand and also, it's probably flattened on the dairy side too, on the supply side. People are breeding for beef right now and not for milk. T3: But that'll be—we won't feel the effects of that for another two years. Ted: Well, that's my point. It's gonna be what? Once it turns around… I don't think it'll turn around this summer and go the other way. It may not go as fast as a lot of people like to see but it'll continue for a long time. T3: It could. Ted: That's what I'm sort of thinking it'll turn out to be, which will be a change from what we had before. Anna: Let's move on. We talk about changing consumer expectations all the time. It comes up in pretty much every episode we do. Obviously, the food we buy and the reasons why we buy it always evolve over time. But right now, the dairy industry seems to be struggling with how to get people what they want. T3, start us off. In your opinion, what's going on? T3: We're dealing with a market environment today of rapidly changing... Ted: Expectations? T3: Expectations. That's a good way to put it. Changing consumer expectations pose one of the most dynamic challenges facing today's dairy industry. More and more, consumers seek organic products from smaller farms in pursuit of healthier food. - The irony? Newer, Changing consumer expectations pose one of the most dynamic challenges facing today's dairy industry. More and more, consumers seek organic products from smaller farms in pursuit of healthier food.<br /> <br /> The irony? Newer, larger dairy farms and processing plants are more efficient and are better equipped to deliver "cleaner" products. So what do consumers really want? And how can dairy meet their needs? Ted, T3 and Anna discuss.<br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. In this episode, we want to discuss whether the dairy industry has some catching up to do in terms of addressing consumers' attitudes about nutrition. We'll get to that in a few minutes. But first, let's discuss the recent spike in cheese prices over the last few weeks. T3, you've said that you think the rally is "hollow." What do you mean by that?<br /> <br /> T3: Cheese inventories are still very high. There have been a couple of pieces of data who have indicated that maybe demand has picked up a little bit but when you're sitting on a large amount of inventory, it takes a long time to really change the supply and demand balance. Just because a couple of data points say, "Hey, things might be getting better," doesn't mean you've solved the problem. It just means that maybe if you stay on this course for another six to 12 months, you might get to a point where you've solved the problem. And everybody's reacting to it by saying, "Hallelujah, the cheese price can go up," and I can tell you as a someone who has to go sell cheese every day, in the last three weeks as we've gone from $1.45 cheese to $1.73, more and more buyers have backed off and said, "I don't need this cheese today. I don't need this cheese anymore. I've got more than enough in inventory."<br /> <br /> I was just in Chicago in an industry meeting and the comment I heard from multiple converters of cheese was, "I'm pretty happy with where my inventory is right now." Because they saw the cheese market go from $1.45 to $1.73 and they're like, "Sweet, my inventory value just went way up." So, now what are they gonna do? They're gonna stop buying, they're gonna run their inventories down into the market. And so, we could easily go the other way. That's why it's hollow.<br /> <br /> Ted: And I tend to agree with that. Although I do think that most of the cheese inventories are hedged so they really carry the inventory is of nominal concern to them. And that's a change that's occurred over the last few years that will change how quickly this can change. It used to be, all of a sudden you get to a point that like somebody has flipped the light switch and, boom, it would take off one way or the other. It seems like the cycle has flatted out and lengthened because of the risk management, because of the storage ability, because of the flattening of demand and also, it's probably flattened on the dairy side too, on the supply side. People are breeding for beef right now and not for milk.<br /> <br /> T3: But that'll be—we won't feel the effects of that for another two years.<br /> <br /> Ted: Well, that's my point. It's gonna be what? Once it turns around… I don't think it'll turn around this summer and go the other way. It may not go as fast as a lot of people like to see but it'll continue for a long time.<br /> <br /> T3: It could.<br /> <br /> Ted: That's what I'm sort of thinking it'll turn out to be, which will be a change from what we had before.<br /> <br /> Anna: Let's move on. We talk about changing consumer expectations all the time. It comes up in pretty much every episode we do. Obviously, the food we buy and the reasons why we buy it always evolve over time. But right now, the dairy industry seems to be struggling with how to get people what they want. T3, start us off. In your opinion, what's going on?<br /> <br /> T.C. Jacoby & Co. - Dairy Traders clean 28:01 SPECIAL REPORT: African swine fever virus https://www.jacoby.com/special-report-african-swine-fever/ Mon, 06 May 2019 08:33:43 +0000 http://www.jacoby.com/?p=1263 In this special episode, Ted and T3 enlist the help of Richard Bradfield, General Manager of St. Louis-based International Ingredients Corporation, to discuss the impacts of the African swine fever virus on dairy ingredient export sales to China. Jeff Johnson, T.C. Jacoby & Co.'s Vice President of Dairy Ingredients, also sits in. Nearly half of the hogs in the world are raised in China, but the combination of fatalities from the virus and preventative culling has sent herd numbers plunging down as much as 35%. It's drastically reduced demand for whey permeate, a crucial part of hogs' diets. Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. T3: Welcome to "The Milk Check." Today we have a special guest in Richard Bradfield. Richard runs International Ingredient Corp? Richard: Am part of the team. T3: And part of the team for International Ingredient Corp. International Ingredient Corp is the second largest whey permeate manufacturer in the United States, and with everything that we're hearing about with African Swine Flu and what is going on in Asia, we thought it would be a great topic to talk about. And so, we wanted to find somebody who is an expert who can tell us a little bit about what is going on in Asia, what is African swine flu, and how it's affecting our dairy markets and our whey markets. And so, Richard, thank you for joining us today. Richard: Thank you. T3: Why don't we start, why don't you tell us a little bit about International Ingredient Corporation and what you do, and why you got...why we would think of you as an expert in whey permeates? Richard: I have no idea, but... So, thank you very much. So, again, Richard Bradfield with International Ingredient Corporation based here in St. Louis. We are an animal feed ingredient company, so we have 10 facilities throughout the U.S. About half of our business is in the dairy side of things, so it's an important part of our business. We also export—about half of our production is exported, so the export markets and what's going on in China is obviously very important to us. I've been with the company for about 25 years, and I am currently the General Manager of the group there. T3: About half of your production is exported? Richard: Yes. T3: For the whey permeates that you produce, is that about a 50/50 split as well? Richard: I would say, overall under whey it's about 50% is exported, for the permeates it would be a larger percentage of the production is exported. I would say probably more like two-thirds exported. T3: And of that two-thirds that's exported, what percentage would you say goes to China or Southeast Asia? Or, just...let's just talk about in terms of the general permeate market in terms of your best guess. Richard: Of our business? T3: Mm-hmm. Richard: Our business, basically, we've always felt strongly that you needed to have…you know, be in certain regions, so we're obviously here domestically. We've focused on, you know, Mexico, Latin America, and also then China, Southeast Asia. Of the three components, I would say Southeast Asia is the largest part of our business, followed by domestically, then followed by the Latin American region. T3: When did you guys first start hearing about the African swine flu, and I guess, why don't you just tell us a little bit about what is going on right now in China, and what is going on in Southeast Asia, and what is this virus we're hearing about? Richard: So, it's the African swine fever, because there's also the avian flu to something totally different, and we just recently heard of some cases popping up there as well. So, African swine fever, it's been around for a number of years, predominantly, a lot of problems have been in Russia, Eastern Europe, and we're hearing about cases in the wild boar herd in Europe as well. So, In this special episode, Ted and T3 enlist the help of Richard Bradfield, General Manager of St. Louis-based International Ingredients Corporation, to discuss the impacts of the African swine fever virus on dairy ingredient export sales to China. In this special episode, Ted and T3 enlist the help of Richard Bradfield, General Manager of St. Louis-based International Ingredients Corporation, to discuss the impacts of the African swine fever virus on dairy ingredient export sales to China. Jeff Johnson, T.C. Jacoby & Co.'s Vice President of Dairy Ingredients, also sits in.<br /> <br /> Nearly half of the hogs in the world are raised in China, but the combination of fatalities from the virus and preventative culling has sent herd numbers plunging down as much as 35%. It's drastically reduced demand for whey permeate, a crucial part of hogs' diets.<br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind.<br /> <br /> T3: Welcome to "The Milk Check." Today we have a special guest in Richard Bradfield. Richard runs International Ingredient Corp?<br /> <br /> Richard: Am part of the team.<br /> <br /> T3: And part of the team for International Ingredient Corp. International Ingredient Corp is the second largest whey permeate manufacturer in the United States, and with everything that we're hearing about with African Swine Flu and what is going on in Asia, we thought it would be a great topic to talk about. And so, we wanted to find somebody who is an expert who can tell us a little bit about what is going on in Asia, what is African swine flu, and how it's affecting our dairy markets and our whey markets. And so, Richard, thank you for joining us today.<br /> <br /> Richard: Thank you.<br /> <br /> T3: Why don't we start, why don't you tell us a little bit about International Ingredient Corporation and what you do, and why you got...why we would think of you as an expert in whey permeates?<br /> <br /> Richard: I have no idea, but... So, thank you very much. So, again, Richard Bradfield with International Ingredient Corporation based here in St. Louis. We are an animal feed ingredient company, so we have 10 facilities throughout the U.S. About half of our business is in the dairy side of things, so it's an important part of our business. We also export—about half of our production is exported, so the export markets and what's going on in China is obviously very important to us. I've been with the company for about 25 years, and I am currently the General Manager of the group there.<br /> <br /> T3: About half of your production is exported?<br /> <br /> Richard: Yes.<br /> <br /> T3: For the whey permeates that you produce, is that about a 50/50 split as well?<br /> <br /> Richard: I would say, overall under whey it's about 50% is exported, for the permeates it would be a larger percentage of the production is exported. I would say probably more like two-thirds exported.<br /> <br /> T3: And of that two-thirds that's exported, what percentage would you say goes to China or Southeast Asia? Or, just...let's just talk about in terms of the general permeate market in terms of your best guess.<br /> <br /> Richard: Of our business?<br /> <br /> T3: Mm-hmm.<br /> <br /> Richard: Our business, basically, we've always felt strongly that you needed to have…you know, be in certain regions, so we're obviously here domestically. We've focused on, you know, Mexico, Latin America, and also then China, Southeast Asia. Of the three components, I would say Southeast Asia is the largest part of our business, followed by domestically, then followed by the Latin American region.<br /> <br /> T3: When did you guys first start hearing about the African swine flu, and I guess, why don't you just tell us a little bit about what is going on right now in China, and what is going on in Southeast Asia, and what is this virus we're hearing about?<br /> <br /> Richard: So, it's the African swine fever, because there's also the avian flu to something totally different, and we just recently heard of some cases popping up there as well. So, T.C. Jacoby & Co. - Dairy Traders clean 32:27 Caution: Optimism ahead https://www.jacoby.com/caution-optimism-ahead/ Fri, 01 Mar 2019 16:47:00 +0000 http://www.jacoby.com/?p=1140 So far, milk production across the eastern U.S. is trending downward. Cheese prices are strengthening. The pieces are in place for an industry-wide recovery. Will it happen? Also, Ted, T3 and Anna answer some questions submitted by a listener. Anna: Welcome to "The Milk Check," a podcast from TC Jacoby and Company where we share market insights and analysis with dairy farmers in mind. We've seen an increase in the cheese price and the Class III price is looking up for March. Do either of you think that's sustainable, and has that changed your forecast for the end of the year? T3: It looks like the Class III price in December and January are both gonna be somewhere right around $13.96, $13.95. You're probably gonna have two months in a row where your Class III price is within 10 cents of each other. Last couple of weeks we've seen a bit of a pop in the cheese market. So we've seen the cheese market go from... Ted: Why did we see the pop? T3: A couple of factors. One, I think December and January were pretty good months for export orders. Mostly...not necessarily a traditional market like Mexico. More, you know, Asia, the Middle East. I think we saw a pickup in demand for U.S. cheese in those markets because, one, Europe's milk production continues to struggle and the U.S. cheese market in December and January was lower than the world price. I should qualify, the spot market was lower than the world price, but the futures market was actually higher than the world price. So you saw a lot of spot buying that was going into the international markets, but that kind of kept the U.S. cheese market cleaned up a little bit. And I think what happened is we got into February, that started to become a little bit more apparent to the buy side of the equation domestically. Now there's a warning embedded in this as we've gotten into a price and the $1.50s for blocks and the $1.40s for barrels, we've taken ourselves out of the international market. And so we've lost a nice chunk of demand that we were getting 15 cents ago when we were in the $1.30s. Ted: But the futures market hasn't really changed that much. T3: No, it hasn't. And we've had a lot of discussions about that in our office as to why. And I have two beliefs about that. The first is I don't think that our cheese markets are ready for a big rally. I do think they're coming back, in other words, I don't think a $1.58, $1.59 block price is sustainable in the middle of February. I don't think a $1.42, $1.43 barrel price is sustainable in the middle of February. And so I suspect that sometime in the next three to four weeks, we may be up here for a few weeks, but at some point in the next three to four weeks, I expect those prices will come back down. However, I'm also gonna say it this way, bull markets aren’t straight linear lines that go from a low price to a high price. They evolve over time and they evolve within volatility. And usually the way it works is you start out with a really low price, you go to a higher price, then you'll pull back to another low price. But that low price is a higher low and then you ended up with a higher high and then a higher low. And so the market's still cycling from high prices to low prices, but every low price is a little bit higher than the last low price and every high price is a little bit higher than the last high price. And so the way I expect that this cheese market's probably gonna play out over the next, let's call it 12 to 24 months, is we're still going to see volatility. You know, maybe we peak this cycle around $1.59 in blocks and maybe $1.42 in barrels. And then we pull back maybe to $1.45 in blocks and $1.32 in barrels, which is...maybe even $1.25 in barrels. That's still higher than the low a month ago. And then the next cycle through, which maybe happens in late March, early April, just before Easter, Easter is late this year, maybe you go a little bit higher, So far, milk production across the eastern U.S. is trending downward. Cheese prices are strengthening. The pieces are in place for an industry-wide recovery. Will it happen? - Also, Ted, T3 and Anna answer some questions submitted by a listener. - So far, milk production across the eastern U.S. is trending downward. Cheese prices are strengthening. The pieces are in place for an industry-wide recovery. Will it happen?<br /> <br /> Also, Ted, T3 and Anna answer some questions submitted by a listener.<br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to "The Milk Check," a podcast from TC Jacoby and Company where we share market insights and analysis with dairy farmers in mind. We've seen an increase in the cheese price and the Class III price is looking up for March. Do either of you think that's sustainable, and has that changed your forecast for the end of the year?<br /> <br /> T3: It looks like the Class III price in December and January are both gonna be somewhere right around $13.96, $13.95. You're probably gonna have two months in a row where your Class III price is within 10 cents of each other. Last couple of weeks we've seen a bit of a pop in the cheese market. So we've seen the cheese market go from...<br /> <br /> Ted: Why did we see the pop?<br /> <br /> T3: A couple of factors. One, I think December and January were pretty good months for export orders. Mostly...not necessarily a traditional market like Mexico. More, you know, Asia, the Middle East. I think we saw a pickup in demand for U.S. cheese in those markets because, one, Europe's milk production continues to struggle and the U.S. cheese market in December and January was lower than the world price. I should qualify, the spot market was lower than the world price, but the futures market was actually higher than the world price. So you saw a lot of spot buying that was going into the international markets, but that kind of kept the U.S. cheese market cleaned up a little bit.<br /> <br /> And I think what happened is we got into February, that started to become a little bit more apparent to the buy side of the equation domestically. Now there's a warning embedded in this as we've gotten into a price and the $1.50s for blocks and the $1.40s for barrels, we've taken ourselves out of the international market. And so we've lost a nice chunk of demand that we were getting 15 cents ago when we were in the $1.30s.<br /> <br /> Ted: But the futures market hasn't really changed that much.<br /> <br /> T3: No, it hasn't. And we've had a lot of discussions about that in our office as to why. And I have two beliefs about that. The first is I don't think that our cheese markets are ready for a big rally. I do think they're coming back, in other words, I don't think a $1.58, $1.59 block price is sustainable in the middle of February. I don't think a $1.42, $1.43 barrel price is sustainable in the middle of February. And so I suspect that sometime in the next three to four weeks, we may be up here for a few weeks, but at some point in the next three to four weeks, I expect those prices will come back down.<br /> <br /> However, I'm also gonna say it this way, bull markets aren’t straight linear lines that go from a low price to a high price. They evolve over time and they evolve within volatility. And usually the way it works is you start out with a really low price, you go to a higher price, then you'll pull back to another low price. But that low price is a higher low and then you ended up with a higher high and then a higher low. And so the market's still cycling from high prices to low prices, but every low price is a little bit higher than the last low price and every high price is a little bit higher than the last high price.<br /> <br /> And so the way I expect that this cheese market's probably gonna play out over the next, let's call it 12 to 24 months, is we're still going to see volatility. You know, maybe we peak this cycle around $1.59 in blocks and maybe $1.42 in barrels. And then we pull back maybe to $1.45 in blocks and $1.32 in barrels, which is...maybe even $1.25 in barrels. That's still higher than the low a month ago. And then the next cycle through, T.C. Jacoby & Co. - Dairy Traders clean 30:14 Can a minimum milk price work? https://www.jacoby.com/can-a-minimum-milk-price-work/ Wed, 30 Jan 2019 20:25:40 +0000 http://www.jacoby.com/?p=1124 In this episode of The Milk Check, Ted, T3 and Anna tackle a persistent question in the dairy industry: Would it be feasible to set a minimum milk price for producers? We want to know what you think, too: Can a minimum milk price work? Why or why not? Email us at podcast@jacoby.com. Anna: Welcome to The Milk Check, a podcast from T.C Jacoby & Co. where we share market insights and analysis with dairy farmers in mind. Today is January 25 and we'll start with Ted's impressions coming out of Dairy Forum. Then, as we hoped, we'll dive into the discussion about minimum pricing that we've been planning to have. Before we get started on the minimum pricing discussion we want to say that we know that some of what you'll hear may be unpopular. We're not trying to tear down any of the ideas we discuss but rather further the dialogue. T3: So we just got back from the Dairy Forum. And usually, the Dairy Forum is a gathering where it's put on by the IDFA, the International Dairy Foods Association which is more processor-based than farmer co-op based though admittedly there's a lot of co-ops and a lot of farmers that attended, most or all the processors are there. Sometimes there's a lot of exciting things to talk about in the marketplace and sometimes the market has already digested, you know, what's gonna happen next by the time you arrive. I would put this year's Dairy Forum in the latter category. There were no surprises coming out of the Dairy Forum. Ted: Well, the Dairy Forum was not that big of an event this year. T3: Not this year. But it was nice to be in Florida with 60, 70-degree weather when it was -8 in northern Wisconsin. Ted: All right, shall we move into the issue of minimum prices? Guaranteed minimum prices? T3: Why don't you lead us off, Anna, with the questions. Anna: Well, there's two of them. Two proposals that we're sitting looking at right now. And the first is just a call for a minimum price that sustains a farm. And the second is for minimum prices, but set in a tier system so that you have, you know, some baseline set. And I think most people who have thrown this out there have set a pretty low volume to that baseline, it's basically to support a family farm. And then anything above that production gets paid a discounted rate, basically by the co-ops. You would have a set price for that first tier of volume, and then you would have whatever's left gets divided out among all the remaining volume and paid out. T3: You want to attack it first? Ted: I think I can attack it as well as any. So repealing the laws of supply and demand are probably not gonna work. T3: Why? Ted: I believe that we have had a cultural aspect to the dairy industry for 100 years that generations were raised with the dairy industry and we can remember when 200 cows was a large dairy. Bear in mind that a truckload is about 350 cows to produce roughly a load of milk every other day. So we had back in the 50s and 60s, you know, you would have six or eight producers on a truck of milk. And those producers basically probably were second or third generation. And they would take their milk check and often go to the grocery store and spend it and they didn't really have an aspect as to whether they were doing poorly or great, it depended on how much money they had left when they bought tractors and when they bought groceries, and so on. And so, that was a cultural way of life. And it continues even to some extent today, but it's diminished. And the people who are proposing these two-tiered systems and minimum prices basically are, I hate to use this word but basically the remnants of that. And of course, our heart goes out to them. But the reality of it is that their cost of production in that environment are much higher than the norm. Basically what that two-tier proposal does is ask the large dairies, the large efficient dairies to subsidize the smaller culturally correct dairies. In this episode of The Milk Check, Ted, T3 and Anna tackle a persistent question in the dairy industry: Would it be feasible to set a minimum milk price for producers? - We want to know what you think, too: Can a minimum milk price work? In this episode of The Milk Check, Ted, T3 and Anna tackle a persistent question in the dairy industry: Would it be feasible to set a minimum milk price for producers?<br /> <br /> We want to know what you think, too: Can a minimum milk price work? Why or why not? Email us at podcast@jacoby.com.<br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to The Milk Check, a podcast from T.C Jacoby & Co. where we share market insights and analysis with dairy farmers in mind.<br /> <br /> Today is January 25 and we'll start with Ted's impressions coming out of Dairy Forum. Then, as we hoped, we'll dive into the discussion about minimum pricing that we've been planning to have. Before we get started on the minimum pricing discussion we want to say that we know that some of what you'll hear may be unpopular. We're not trying to tear down any of the ideas we discuss but rather further the dialogue.<br /> <br /> T3: So we just got back from the Dairy Forum. And usually, the Dairy Forum is a gathering where it's put on by the IDFA, the International Dairy Foods Association which is more processor-based than farmer co-op based though admittedly there's a lot of co-ops and a lot of farmers that attended, most or all the processors are there. Sometimes there's a lot of exciting things to talk about in the marketplace and sometimes the market has already digested, you know, what's gonna happen next by the time you arrive. I would put this year's Dairy Forum in the latter category. There were no surprises coming out of the Dairy Forum.<br /> <br /> Ted: Well, the Dairy Forum was not that big of an event this year.<br /> <br /> T3: Not this year. But it was nice to be in Florida with 60, 70-degree weather when it was -8 in northern Wisconsin.<br /> <br /> Ted: All right, shall we move into the issue of minimum prices? Guaranteed minimum prices?<br /> <br /> T3: Why don't you lead us off, Anna, with the questions.<br /> <br /> Anna: Well, there's two of them. Two proposals that we're sitting looking at right now. And the first is just a call for a minimum price that sustains a farm. And the second is for minimum prices, but set in a tier system so that you have, you know, some baseline set. And I think most people who have thrown this out there have set a pretty low volume to that baseline, it's basically to support a family farm. And then anything above that production gets paid a discounted rate, basically by the co-ops. You would have a set price for that first tier of volume, and then you would have whatever's left gets divided out among all the remaining volume and paid out.<br /> <br /> T3: You want to attack it first?<br /> <br /> Ted: I think I can attack it as well as any. So repealing the laws of supply and demand are probably not gonna work.<br /> <br /> T3: Why?<br /> <br /> Ted: I believe that we have had a cultural aspect to the dairy industry for 100 years that generations were raised with the dairy industry and we can remember when 200 cows was a large dairy. Bear in mind that a truckload is about 350 cows to produce roughly a load of milk every other day. So we had back in the 50s and 60s, you know, you would have six or eight producers on a truck of milk. And those producers basically probably were second or third generation. And they would take their milk check and often go to the grocery store and spend it and they didn't really have an aspect as to whether they were doing poorly or great, it depended on how much money they had left when they bought tractors and when they bought groceries, and so on.<br /> <br /> And so, that was a cultural way of life. And it continues even to some extent today, but it's diminished. And the people who are proposing these two-tiered systems and minimum prices basically are, I hate to use this word but basically the remnants of that. And of course, our heart goes out to them. But the reality of it is that their cost of production in that environment are much... T.C. Jacoby & Co. - Dairy Traders clean 25:26 Where has all the milk gone? https://www.jacoby.com/where-has-all-the-milk-gone/ Fri, 18 Jan 2019 19:16:31 +0000 http://www.jacoby.com/?p=1117 Milk production is down in the eastern half of the U.S., tightening markets nationwide as surplus milk is pulled eastward from western dairies. Ted, T3 and Anna discuss what it could mean for stressed dairy farmers. Also, we observe a surging nonfat market that is sending Class IV milk prices upward. How high will Class IV get? And what will that mean for Class I prices? Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby and Company, where we share market insights and analysis with dairy farmers in mind. Today is January 10and we want to talk about where the milk has gone as we've noticed a decline in production and a shift in distribution, particularly in the Northeast. So let's jump in right there. Ted: Yeah. Well, where is all the milk? The milk is alive and kicking because we're not seeing any great reduction in the cows. We're listing dairymen who are we're going out of business in every publication you read. Large and small are going out of business. Small more than large but still are giving it up, but the cows aren't disappearing. They're going to the neighbors for the most part. There is a slight increase in slaughter. I'll give the point, okay. But basically most dairymen are using up the silage they've got by keeping the additional cows. T3: That is going on. And the reason it's going on is because the cattle market is crap. You can't get anything for your cows right now. It's about as low as it's been in probably two decades. Ted: That's right. So when it comes time to talk about what the prices are going to be, you know, it's going to involve a lot of ex-cows. Until we see less cows, you know, it's not going to be changed much. T3: Adding from a milk production standpoint, you're right. Well, I think it's clear that one of the big problems right now that dairy farmers who want to exit the business have is the cattle market is so bad that there's no value for your cows. And as a result, it's actually forcing farmers who want to go out of the business to stay in the business or it's forcing banks who want to foreclose to not foreclose because there's no value there, if they do it. But one thing that is going on is you're getting an increasing percentage of farmers who are breeding their Holstein cows with Angus cows and literally breeding for beef cows. You may be struggling to sell cows out of the business, milking cows out of the business. But there's an active reduction in the heifer pipeline going on. Now, we're three years away from that affecting this market. But maybe there's some long-term hope there that because of this market is so bad, they don't even want to invest in future Holstein cows. They're literally breeding the Holstein cows with Angus cows for beef and not making dairy cows. Ted: I wonder if there isn't sex semen to go for male instead of female. Interesting question. But you have to ask somebody who knows. T3: I would agree. I wouldn't even try to answer that. But I do think that one of the reasons that this trend has started is because of sex semen. I mean, once you got to the point where, you know, 65%, 70% of all the calves are female, it was inevitable that you had a problem with too many cows coming into the marketplace and you really have to do something, too many heifers. You're going to have to do something about it by breeding for beef cows that counteracts that problem. Ted: It'll be down the road where we could see a real spike, if we run out of heifers. I think it's just, what, two years to bring heifer into the... T3: About 24 months. Ted: Yeah, and right now you're looking at 2021 before you're going to look at any efforts coming in. 2022, really. So we could be looking at some big numbers between now and then sometime, if we run short of cows. However, today that's not the problem. The only way we're going to see this change is for fewer cows in the milk herd. T3: I agree. Milk production is down in the eastern half of the U.S., tightening markets nationwide as surplus milk is pulled eastward from western dairies. Ted, T3 and Anna discuss what it could mean for stressed dairy farmers. - Also, Milk production is down in the eastern half of the U.S., tightening markets nationwide as surplus milk is pulled eastward from western dairies. Ted, T3 and Anna discuss what it could mean for stressed dairy farmers.<br /> <br /> Also, we observe a surging nonfat market that is sending Class IV milk prices upward. How high will Class IV get? And what will that mean for Class I prices?<br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby and Company, where we share market insights and analysis with dairy farmers in mind. Today is January 10and we want to talk about where the milk has gone as we've noticed a decline in production and a shift in distribution, particularly in the Northeast. So let's jump in right there.<br /> <br /> Ted: Yeah. Well, where is all the milk? The milk is alive and kicking because we're not seeing any great reduction in the cows. We're listing dairymen who are we're going out of business in every publication you read. Large and small are going out of business. Small more than large but still are giving it up, but the cows aren't disappearing. They're going to the neighbors for the most part. There is a slight increase in slaughter. I'll give the point, okay. But basically most dairymen are using up the silage they've got by keeping the additional cows.<br /> <br /> T3: That is going on. And the reason it's going on is because the cattle market is crap. You can't get anything for your cows right now. It's about as low as it's been in probably two decades.<br /> <br /> Ted: That's right. So when it comes time to talk about what the prices are going to be, you know, it's going to involve a lot of ex-cows. Until we see less cows, you know, it's not going to be changed much.<br /> <br /> T3: Adding from a milk production standpoint, you're right. Well, I think it's clear that one of the big problems right now that dairy farmers who want to exit the business have is the cattle market is so bad that there's no value for your cows. And as a result, it's actually forcing farmers who want to go out of the business to stay in the business or it's forcing banks who want to foreclose to not foreclose because there's no value there, if they do it. But one thing that is going on is you're getting an increasing percentage of farmers who are breeding their Holstein cows with Angus cows and literally breeding for beef cows.<br /> <br /> You may be struggling to sell cows out of the business, milking cows out of the business. But there's an active reduction in the heifer pipeline going on. Now, we're three years away from that affecting this market. But maybe there's some long-term hope there that because of this market is so bad, they don't even want to invest in future Holstein cows. They're literally breeding the Holstein cows with Angus cows for beef and not making dairy cows.<br /> <br /> Ted: I wonder if there isn't sex semen to go for male instead of female. Interesting question. But you have to ask somebody who knows.<br /> <br /> T3: I would agree. I wouldn't even try to answer that. But I do think that one of the reasons that this trend has started is because of sex semen. I mean, once you got to the point where, you know, 65%, 70% of all the calves are female, it was inevitable that you had a problem with too many cows coming into the marketplace and you really have to do something, too many heifers. You're going to have to do something about it by breeding for beef cows that counteracts that problem.<br /> <br /> Ted: It'll be down the road where we could see a real spike, if we run out of heifers. I think it's just, what, two years to bring heifer into the...<br /> <br /> T3: About 24 months.<br /> <br /> Ted: Yeah, and right now you're looking at 2021 before you're going to look at any efforts coming in. 2022, really. So we could be looking at some big numbers between now and then sometime, if we run short of cows. However, T.C. Jacoby & Co. - Dairy Traders clean 20:57 Why you should care about the block-barrel spread https://www.jacoby.com/why-you-should-care-about-the-block-barrel-spread-the-milk-check-011/ Thu, 01 Nov 2018 14:52:10 +0000 http://www.jacoby.com/?p=1033 Ted, T3 and Anna talk through the problems caused by chronically high milk supplies before diving into a discussion on why the widening block-barrel spread hurts dairy farmers. Anna: Welcome to "The Milk Check," a podcast from T.C. Jacoby & Company, where we share market insights and analysis with dairy farmers in mind. Today is November 1st. We've still got too much milk, Class III prices aren't doing what we would generally expect for this time of year, even though demand seems okay. Ted, why don't we start off with your impressions on what's going on right now? Ted: Well, we're in a very unique situation where 75% or 80% of the time, in the second half of the year, the prices for milk and dairy products go up. I guess as late as three or four months ago, we thought that that cycle was gonna continue for 2018. Obviously, it hasn't. And we find ourselves in actually a pretty desperate situation with the Class III price nudging the $14 range. The PPDs are at a lower level than we've seen in my memory. And Class I sales are bad. However, in spite of all that other sales, other than fluid milk sales are pretty good. Exports are still very good on an annualized basis, but the price of milk is low. The question is, how is this problem going to be solved anytime soon? We're going to need to see a reduction in the amount of milk out there in order for these prices to go up. We've heard a lot of conversation about it. Everybody talks about it. There's sales. There's talks about record number of dairymen in Wisconsin and New York, and so on going out of business, but the production goes up and not down. And our production numbers have reflected that for the last six months. T3: The feeling that I get is that in the last month with the price of cheese dropping instead of going up as we get into the holiday buying season, if you're a dairy farmer who's been on the fence trying to decide whether to stay in this business, it's almost like the last month has been that final nail in the coffin that's made you decide maybe this isn't worth it. And it takes three, four, five, six months for those decisions to play out. But I wonder if the latest price decrease was that final nail into the coffin that that maybe has changed the landscape a little bit. Maybe we're finally going to see some of the negative production numbers that we need to see if we're going to hope for a turnaround in dairy prices. Ted: We all would like to see a little light at the end of the tunnel other than the train coming at us. I'm sure the dairymen even more than us would like to see that. However, we don't want to paint a false picture. We got to see some production reductions. T3: Our current situation reminds me a lot of the mid-1980s. The '70s was a period of high volatility. Milk prices, corn prices, oil prices all significantly increased. There was a period of significant inflation, but more importantly, there was a period of significant increases in commodity prices and significant volatility. And then in the '80s, inflation subsided. The economy as a whole started to grow strongly, but it didn't really pull the agricultural commodity business with it. The '80s was a great time to be an investment banker in the stock market. It was not a great time to be a dairy farmer. The mid to late '80s was a period of relative stability in dairy prices at the low end of the spectrum. Ted: Let me take a little bit of an issue with that just for the sake of the discussion, to point out what's different. It wasn't the '80s necessarily, but in 1974, we had a huge price increase going on for two or three years in dairy prices. And the psychology at that time was that it would never end. It's like every increase in pricing, anytime that market's going up, whether stock market, dairy prices, milk prices, cheese prices, the people in the trade always think it's going to go on forever. They never really gets through their head that these cycles, Ted, T3 and Anna talk through the problems caused by chronically high milk supplies before diving into a discussion on why the widening block-barrel spread hurts dairy farmers. - Anna: Welcome to "The Milk Check," a podcast from T.C. Ted, T3 and Anna talk through the problems caused by chronically high milk supplies before diving into a discussion on why the widening block-barrel spread hurts dairy farmers.<br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to "The Milk Check," a podcast from T.C. Jacoby & Company, where we share market insights and analysis with dairy farmers in mind. Today is November 1st. We've still got too much milk, Class III prices aren't doing what we would generally expect for this time of year, even though demand seems okay. Ted, why don't we start off with your impressions on what's going on right now?<br /> <br /> Ted: Well, we're in a very unique situation where 75% or 80% of the time, in the second half of the year, the prices for milk and dairy products go up. I guess as late as three or four months ago, we thought that that cycle was gonna continue for 2018. Obviously, it hasn't. And we find ourselves in actually a pretty desperate situation with the Class III price nudging the $14 range. The PPDs are at a lower level than we've seen in my memory. And Class I sales are bad. However, in spite of all that other sales, other than fluid milk sales are pretty good. Exports are still very good on an annualized basis, but the price of milk is low. The question is, how is this problem going to be solved anytime soon? We're going to need to see a reduction in the amount of milk out there in order for these prices to go up.<br /> <br /> We've heard a lot of conversation about it. Everybody talks about it. There's sales. There's talks about record number of dairymen in Wisconsin and New York, and so on going out of business, but the production goes up and not down. And our production numbers have reflected that for the last six months.<br /> <br /> T3: The feeling that I get is that in the last month with the price of cheese dropping instead of going up as we get into the holiday buying season, if you're a dairy farmer who's been on the fence trying to decide whether to stay in this business, it's almost like the last month has been that final nail in the coffin that's made you decide maybe this isn't worth it. And it takes three, four, five, six months for those decisions to play out. But I wonder if the latest price decrease was that final nail into the coffin that that maybe has changed the landscape a little bit. Maybe we're finally going to see some of the negative production numbers that we need to see if we're going to hope for a turnaround in dairy prices.<br /> <br /> Ted: We all would like to see a little light at the end of the tunnel other than the train coming at us. I'm sure the dairymen even more than us would like to see that. However, we don't want to paint a false picture. We got to see some production reductions.<br /> <br /> T3: Our current situation reminds me a lot of the mid-1980s. The '70s was a period of high volatility. Milk prices, corn prices, oil prices all significantly increased. There was a period of significant inflation, but more importantly, there was a period of significant increases in commodity prices and significant volatility. And then in the '80s, inflation subsided. The economy as a whole started to grow strongly, but it didn't really pull the agricultural commodity business with it. The '80s was a great time to be an investment banker in the stock market. It was not a great time to be a dairy farmer. The mid to late '80s was a period of relative stability in dairy prices at the low end of the spectrum.<br /> <br /> Ted: Let me take a little bit of an issue with that just for the sake of the discussion, to point out what's different. It wasn't the '80s necessarily, but in 1974, we had a huge price increase going on for two or three years in dairy prices. And the psychology at that time was that it would never end. It's like every increase in pricing, anytime that market's going up, whether stock market, dairy prices, milk prices, cheese prices, T.C. Jacoby & Co. - Dairy Traders clean