The Milk Check https://www.jacoby.com Experienced dairy traders discuss current market trends that affect payments to dairy farmers. Mon, 24 Feb 2020 17:55:57 +0000 en-US hourly 1 https://wordpress.org/?v=5.3.2 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 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.

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, we’re losing that much production, I don’t see it. We are getting so many calls from people talking about building something or opening something new that I don’t feel like the net impact is gonna be what we thought for as long-term.

Ted: If I get a call from a dairyman who wants to know whether he should expand from 100 cows to 150, or even 200, I’m throwing cold water on it. Because now he’s on comingled load, where you’ve got $0.50 to $1.00 a hundred weight into the load before you ever know what the hell you’re gonna do with it. And I think that’s a critical juncture, to make sure that one dairyman ships one load. It also is an issue with companies like Walmart, Meijers, and supermarkets, or even cheese producers when it comes time for traceability. When quality problems rear their head from time to time, recalls are made. And so, they need to trace. And unless you can trace that truck, you’ve got five producers on the truck, now all of a sudden you’re traceability is very much diluted.

Anna: I agree. I just don’t know that people are exiting. I don’t feel like people are exiting at the rates we’re being told that they are.

Toby: Did you guys see that swine fever is in Hong Kong now?

T3: Yeah. It’s in Hong Kong, it’s in Vietnam, it’s in Cambodia, it’s in Thailand.

Ted: A little bit of discussion there, it’s probably in order. The effect of the whey price is on the milk price. What swine fever does is it affects our ability to export whey.

T3: And specifically the permeate, which is the carbohydrates in whey.

Ted: Specifically the permeate, but still, it’s a whey derivative. So, swine fever affects the whey price. There are six pounds of whey in 100 pounds of milk. If the whey price goes down a dime, say from $0.45 to $0.35 the effect on the class 3 price, rough numbers, is about $0.60 cents a hundredweight.

T3: Correct. And that is what’s already happened.

Ted: But the other side of the coin is a reduction in milk supply. The fact that we’re starting to nibble away a little bit at cheese inventories is a much bigger factor than the whey when it comes time to measure. And the only…you know, China, even though we have tariff disputes with China, we don’t sell China a lot of cheese. We do sell South Korea a lot of cheese. So, we’re not really affected in the dairy industry from an export standpoint as far as Southeast Asia is concerned.

T3: In cheese.

Ted: In cheese. The swine fever is maybe $0.90 to $1.00 a hundredweight, but really that doesn’t have much to do with tariffs. There’s been a lot of talk about tariffs, but I would ask you is cheese, how much cheese business have we lost into Mexico because of tariffs?

T3: Almost none.

Ted: Almost none. So, all this conversation about tariffs, I think the conversation is much more important to someone who’s producing soybeans than it is for someone producing milk.

T3: I agree. My experience with tariffs, in particular, and in a similar way, exchange rates, is that you usually see the effect in price much more than you see it in actual volume. Everybody keeps expecting to see big volume changes before they see big price changes, but it tends to happen the other way around, where you actually see the shift in price and then you keep the volume. I don’t think we’ve seen major effects on the volume of products that we’re exporting as a result of tariffs. But I do have a hunch that we’ve seen a negative effect on price, it’s just really hard to perceive it in a complicated marketplace like we have.

Ted: I agree.

Anna: Dairy markets move on an international scale. Buyers and sellers thrive when they think globally. Put T.C. Jacoby & 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. 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.

Now, back to our conversation. T3, you’re the food scientist, I mentioned the Impossible Whopper before, but it’s not stopping at lab-grown meat. Another company, Perfect Day Foods, is using DNA-editing technology to create dairy proteins. Can you tell us more about how that works?

T3: The technology has arrived at the point where it’s becoming cost-effective. You use CRISPR, the DNA technology, to splice DNA strands into microflora, most commonly yeast, but there’s other microbes and bacteria that are used. And those DNA strands cause the yeast bacteria to produce protein. And so, what Perfect Day Foods is working on specifically is splicing DNA strands to produce casein and other dairy proteins into the yeast, and then having the yeast grow casein and whey proteins, and then selling those proteins into the marketplace.

So basically, produce dairy products without needing a cow to do it. And that’s the irony, that what, you know, some of these things that we’ve seen, where you take lactose or permeate streams from different various dairy processes, and then they use those permeate streams as the feed into a microflora that produces, whether it’s ethanol, or produces various proteins, or things like that, it’s the exact same technology. And this technology is becoming relatively ubiquitous. And you’re at that point where you think about it in terms of Moore’s Law, which is the former CEO and founder of Intel. And Moore’s Law was always, “The speed of computer processing doubles every two years.” And what happens is, the more that R&D focuses on these processes, the more efficient you get in making this product, the more inexpensive it is, the faster you can do it, the more you can scale up, until you get to a point where you can literally produce these things in one way or another cheaper than the current product, which, in this case, is milk from a cow.

If Perfect Day Foods and Impossible Foods can scale it, you can imagine a world where you can get milk without a cow. You probably will always have a market for the wholesome milk that these days the organic market is trying to capture, where the farms are smaller and they have red barns and they produce milk, you know, the old-fashioned way. But the real dairy farms that are under threat by this technology are actually the bigger dairy farms. Because the market that is willing to consume milk from large corporate dairy farms is not that different from a market that would be willing to consume milk from a lab.

And when you think about that, and you think about what that means, if it’s milk from a lab, the feed costs are gonna be lower, the waste costs are gonna be lower, you won’t have to be disposing of all the manure. Yes, there will be byproducts they’ll probably have to get rid of, but it’s not gonna be to the extent of manure. And it’s not like, well, you’re still gonna need the meat from the cow, because what Impossible Foods is already doing is going to market with meat that’s not from a cow, and that’s the Impossible Whopper at Burger King.

Ted: I would observe that there’s several questions here that need to be answered before we feel really threatened about this. The question in my mind that needs to be answered with regard to the costs of production. If you convert that lactose to a usable milk protein, or to casein, or albumin, or whatever, you greatly enhance the value of milk. So, we’ll see where this is gonna go. I’m not sure at this point in time that the dairymen should be folding their tents over the threat from this, although the threat is certainly out there. They need to be vigilant as far as how this is gonna…

Anna: Just because of the cost?

Ted: The cost is gonna be the big issue, yeah.

Anna: I don’t think that’s what drives decisions toward something like this. I think you’re more likely to have people driven towards this because of a carbon footprint or an animal welfare issue or something like that.

Ted: You’ll have a lot of people reacting to that, but not as many as who will react because of the cost. The laws of supply and demand are still there.

T3: But I would say this. You’ll start exactly where you’re suggesting, Anna. This will start in the marketplace as something unique and different. To me, the reason that I think this is a very serious threat is because, one of the reasons that the ersatz milk hasn’t really gotten beyond the fluid mountain is because they don’t have a coagulating protein, so you really can’t make cheese. If you can produce casein without a cow, now you have a coagulating protein. I don’t think at this point anybody is gonna argue about whether or not there’s a market for dairy products that don’t come from a cow, and it will start with that market.

From that point forward, it’s all about scaling it. The math says that once the technology is there, it should be cheaper than coming from a cow. And the reason the math says that is because there’s gonna be lower input costs and lower output costs. If you have lower input costs and lower output costs, it’s just about the process. You know, whether it’s feed going into a cow, milk and manure coming out of cow, or it’s whatever this slurry they’ll send it the vat is and whatever comes out of the vat. It’s pretty easy to come to the conclusion that the inputs are gonna be lower in the vat, and the outputs are gonna be more defined in the vat. And then it’s just a matter about Moore’s Law. The more they work on the technology, the more they improve the technology, the more they scale the technology, the cheaper the technology is gonna be. And it’s no longer a question of if it becomes less expensive, it’s a question of when does it get there.

You know, all you have to do is go back in history and look at the example of the horse-drawn carriage versus the car. In 1898, it was an anomaly, it was less than 5% of the market. It was kind of interesting that only doctors and rich people drove around because it was kind of cool. But everybody still had horses and horse-drawn carriages and needed blacksmiths. By 1930, the amount of blacksmiths in New York City had dropped by a hundred fold. It starts small.

But when you’re thinking about dairy farming, or even in a different way you think about our business, You have to start thinking about whether…how possible is this? And when you think about the fact that the dairy market, in general, is a very inelastic market, where a 2% change in demand has a massive shift in price, and now you’re talking about shifts that may be in the 5% range or the 10% range, that’s a big number. And where is it gonna enter the marketplace first? Think about…

Ted: Predominantly as a curiosity.

T3: Yeah. A vegan…

Ted: Eats like the Impossible Burger.

T3: Right. But what’s everybody saying about the Impossible Whopper today? “Man, that tastes a lot better that I thought it would.” And then they’re gonna have a Domino’s, so it’s probably have a vegan pizza with cheese that’s not from a cow. And they’re gonna be, “Well, I bought it as a curiosity. Man, it tastes pretty good.” And then what happens? Then the market goes up, then they can scale it, the price goes down, and it really starts to extrapolate. We don’t know. I mean, this is all in the future, we don’t know if that’s gonna happen, but the scary thing is, we’re getting to the point where the technology says it probably can. Now, does that mean it’s gonna be the end of the dairy industry like it was the end of the horse-drawn carriage? No, I do believe that there will always be a market for milk from a cow. But the transition, if it’s going to happen, is scary.

Ted: As you know, we’ve done a little bit of work on the development of protein from lactose. The big issue with that is that the yield versus the processing cost doesn’t make it work.

T3: Today it does not, I agree.

Ted: It does not. So, you’re gonna have to do a lot better with regard to the costs, which is why I look at lactose as being the prime mover because lactose, basically, is the biggest carbohydrate in milk and the least valuable. If we can convert that into a protein, it makes a big difference on how one would look at this. But the cost of doing that is the issue. If corn syrup, for example, is easier or lower cost, it makes a difference. So, all these costs are gonna have to be evaluated.

T3: It was interesting. I was at an investors conference, the Farm to Market Investors Conference, a couple of weeks ago, and I saw a presentation by the CEO of Impossible Foods, and it was interesting. There were two things he said that really stuck out to me. The first thing he said for meat, the key ingredient in meat that differentiates the old plant meat, soy meats that always tasted like crap, between what Impossible Foods is making today, where people are actually really impressed by how it tastes, is a protein called heme, which is in the hemoglobulins of all mammal blood.

And he said, “Once you discover that that was the key to the flavor, that juiciness in meat that everybody desires, you can start building around it.” And today, they’re able to make that meat and sell it to…I think they’ve got over 20,000 restaurants nationwide that are now buying Impossible beef. And you can start to scale it, and they’re doing it. You know, you go buy the Whopper, you’re not paying that much more than you are for a regular beef Whopper. And so, if you can do it with beef, what’s the difference between milk and beef? A part of me is inclined to say meat might even be more difficult because of the texture, you know? In that case, they figured out how to use microbes to create the heme protein.

Perfect Day Foods is trying to figure out how to use the yeast microflora to produce casein. And casein is the coagulating protein that’s missing in current ersatz milk. Once you have that, the cheese industry is under assault. And, yeah, you’re right, it’s a matter of cost. But the second thing that the CEO of Impossible Foods said that took me by surprise is he said, “Outside of the technology that creates the heme protein, the DNA-level technology is not sophisticated, it’s standard equipment that anybody can buy.”

And it’s basically, and I’m still trying to learn more about this, but it’s basically a vat, and then it’s a matter of how do you extract the protein from the yeast cells without destroying the yield? That technology has been around for over 30 years. If you go back to Chy-Max, which is a microbial rennet that is used in a lot of cheese-making today, Chy-Max was originally developed over 30 years ago, and it became the most commonly used rennet in the industry. And Chy-Max was made by taking, what at that time was E.coli, and then they were able to extract it from these fermentation vats. So, it’s not new technology.

Ted: Well, the timeline will be an issue.

T3: Absolutely.

Ted: Ten, 20 years?

T3: Could be five. I mean, it won’t explode in five, but the path that Perfect Day Foods is on, they will have casein that’s not from a cow in the marketplace within five years. I think that will happen. And then it becomes a cost issue.

Ted: They’ll be able to market it as animal-free, vegan type—

T3: Yes. Yes. Now…

Ted: —which will appeal to a significant percentage.

T3: Right. Now, here is where I think the limitations are gonna be. First, you have standards of identity. If casein is not from a cow, you’re not gonna be able to call it cheddar cheese, you’re not gonna be able to call it mozzarella cheese. But let’s face it, most of the cheese that’s used on a Domino’s Pizza today is not technically standard of identity mozzarella. It’s pizza cheese. It has potato starch in it and things like that. So, for a pizza, that standard of identity isn’t gonna matter. So, that’s where the first limiting factor is gonna be. And that’s why I think it’s really important right now, that battle we fight over, as an industry over labeling becomes extremely important, because you wanna make sure that it is clearly defined that this product is not a dairy product.

Ted: I think the timeline for use, so you’re looking, probably, at five to ten years before it really has a cost-effective input into the dairy industry. The first thing that’s gonna happen is the development of processed cheeses, the artificial cheeses and so on, without mentioning any names, that’ll be the first thing to go. And then the pizzas will be vegan pizzas. As I think about it here in our discussion, I think the acceptance rate of this will probably be rather slow. And I think that getting our labeling squared away so that milk is treated as milk is a critical issue for the dairy industry, and we’d better put that on the front burner.

T3: Most importantly, you know, the message that I wanna get out there is, this bears watching, it bears watching intently. And the more people in the dairy industry who start appreciating the threat that this very well could be and probably is, the better chance we have as an industry of making sure we’re prepared for it.

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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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? 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 even put it on the shelf. I mean it’s horrible.

T3: Dad, that’s—that’s the marketing approach.

Ted: Yeah, well.

T3: They actually have spent a lot of money and decided that that’s the way to do it.

Ted: But how many producers are like me? How many customers are like me who goes in there and knows who these people are to sort through this pile of cheese in order to find just the cheese that I want?

T3: I actually think that’s part of what the buying experience they’re trying to create is.

Ted: Well they’ve done a good job of creating it. I mean you could take a backhoe and stock their shelves the way they’re looking at it. I mean, it really is very poorly handled and I’m thinking that there has to be a better way to do it. I go down Whole Foods, for example, and they have a cheese section which is very good for me because I know what I’m looking at, but think of the poor customer who is not in the business. I mean, how is she supposed to sort out…if I’m looking for aged edam in this pile of cheese and maybe occasionally, they have a mast that says “edam” or “gouda” or whatever. How is she supposed to sort out what she’s looking for or what she might enjoy?

Anna: I love that our grocery shopper is female, just— …I think that is part of the experience though, because you’re discovering other stuff, especially, in Whole Foods there are samples out and everything else, and—

T3: Well, then you go to the Schnucks in Des Peres is the same way. The Schnucks in Des Peres, you’ve got the deli case where you’ve got your piles, you know, which is actually if you, you know, it’s a lot more organized than maybe it appears.

Ted: Marketing is not a treasure hunt. That’s what it’s turning into in the cheese case. If you’re looking, for example, just to pick one, if you’re looking for SarVecchio, okay, the packaging for the SarVecchio is very similar to two or three other variations of the same type of cheese. BellaVitano I think is the name of it and a couple of other award-winning cheeses of the same variation. It’s a great product, fabulous product, both of them are. Can you find them? It’s hard. You know, I find them because I know what I’m looking for and I know how to dig through and shovel to the bottom of the barrel to find the cheese that I want.

Anna: I would say that your average shopper who’s looking for a specialty cheese at Whole Foods is not in as big a rush as the person who’s running to Aldi and just needs to grab some cheddar to make dinner, and they’re willing to go through the experience of sorting through those things.

T3: I would even say…

Ted: We’re not marketing people. I didn’t graduate with a degree at marketing. You’re a food science and I’m dairy manufacturing and you’re I don’t know what. But by the same token, the marketing should be more specific as to what people want. They should be able to find it easily and we don’t.

T3: But I think that experience they’re trying to create is, you know, the cheese sommelier needs to come over and they need to talk to the cheese sommelier and probably not the right term for that, the person behind the deli case.

Anna: Yeah, and your wine.

T3: Yes, but, you know, they have this experience of finding this treasure at the bottom…

Ted: I wouldn’t call the guy at Whole Foods down on Brentwood Boulevard a sommelier. No. No way.

T3: But at the end of the day, the truth is, that very deli case that you’re talking about, that maybe needs to be a little bit better organized, is where the highest cheeses are being sold, where the highest margins are and where the fastest-growing category is. That’s what people want. They want to find that diamond in the rough. They want that unique, “Hey, I’m going to have friends over and show them this wonderful gem of a cheese that I found.”

Ted: So, you’re proposing that we continue the treasure hunt approach.

Anna: I think people…

T3: I’m proposing that we leave it to the cheese marketers to decide how they want to handle that.

Anna: Well, I think too though, especially since so many people are finding that they cannot handle drinking milk, but they can still do cheese. It makes sense that that is the place where you’re going to find the most growth.

T3: You know…

Ted: That’s a good point.

T3: Well, it is a very good point. You can take it a step further. What we learned, you know, watching what happened in Japan, you know, for 50 years after World War II is that if you introduced dairy into the diet and kept dairy in the diet, they wouldn’t become lactose-intolerant. And so whereas only 20% of the population was lactose-intolerant in 1945 and today, something like 80% of the population is lactose-tolerant. Just to be clear, the 20% was lactose tolerant and now 80% is lactose tolerant. Are we going backwards in the U.S.?

Cheese, for the most part, all the lactose has been converted to lactic acid. Milk, it’s still lactose. Most Class II products, it’s still lactose and it seems to me, it sounds like it seems to you, more and more people are finding that they’re lactose-intolerant or that their children are lactose-intolerant than it used to be.

Anna: Absolutely.

T3: And it’s probably because people are getting away from consuming dairy and consuming…

Anna: I don’t know. I always kind of assumed it was the opposite. That people realized that it didn’t make them feel good and then they stopped. I think that was the case for me but I’m going to tell you right now, even if I found out that I couldn’t handle eating cheese, there’s no way I’d stop putting it in food.

Ted: Well, you know, the marketers, for example, don’t tell anybody that there’s very little lactose in an aged cheese or even in a yogurt. I mean, there is a little more in yogurt but they don’t tell you that the lactose comes out with the whey and that if you’re so-called lactose-intolerant, if you’re eating an aged cheese, there’s no lactose in it. Where do you see that? You know, I tell people, you know, that are my age, “Well, I like dairy but I just can’t handle dairy products because I’m lactose intolerant.” They have no clue. They’re 70-odd years old. They have no clue that there’s absolutely no lactose in a three-year-old cheddar.

Anna: I would venture a guess that most of those people are still eating cheese anyways though.

Ted: Well, you know, a lot of people are lactose, who think they’re lactose-intolerant, are actually averse to the protein and again, that problem hasn’t been resolved and that really should be a marketing problem too.

T3: How do we do as an industry, how do we do a better job of educating the public? Because there’s so many issues that we need to do a better job of educating the consumer about. Not only is it that issue, because I agree with you. You have these celebrities that go on these talk shows and say, “I’m so much healthier since I gave up dairy.” But the reality is, it was maybe the lactose or it was maybe…

Anna: Or the fact that they also gave up alcohol and sugar and grains at the same time.

T3: Fair enough. But dairy is not—they tend to take dairy as it’s all or nothing, when in reality there’s so much variation in terms of what ends up in various dairy products that if you want to reduce the sugar levels that you consume, which is today’s big consumer diet trend, you can have a lot of cheese, but probably shouldn’t be drinking whole milk or skim milk. But you could have Fairlife, which has most of the lactose removed but you probably shouldn’t be drinking—you shouldn’t have, you know, yogurt with fruit because there’s so much sugar in the fruit part. But you could have plain yogurt because most of that lactose has been converted to lactic acid. You know, there’s so much more to the issue that doesn’t come out, you know, by the celebrity at the talk show. On the other hand…

Anna: Well, then maybe you have to get that celebrity to understand that so that the next time they’re on that talk show…I mean, honestly a lot of this is not going to be an advertisement that you put on TV. It is going to be social media. It’s going to be people engaging that. But how do you get people listening to or reading a blog about dairy or, I mean, blogs aren’t really the thing anymore. They were for awhile there. That that dates me a little bit but…

Ted: You know, the reality is, as you say, we’re not getting our message out.

Anna: We’re not.

Ted: Now, let me point out that 30 years ago, the dairy industry got their message out through Kraft Foods. Virtually all of the leaders in the dairy industry, particularly in the cheese area, mostly in the cheese, but also Philadelphia cream cheese and cottage cheese and regular cheddar Cracker Barrel type cheeses, aged cheeses and so on, the marketing load was carried almost exclusively by Kraft Foods.

Okay. Now that’s changed. Kraft has basically been split up and sold and absorbed into other companies and so on, and the obligation of marketing, I mean, how many times you see a Kraft advertising anymore? And we’re suffering from that effect. You know, the structure of the industry has changed where most of the milk is not controlled by a retail company who’s going to market the product. The milk is controlled by people who market the milk and the retail is controlled by people who market the product. So, it’s a little bit different. The people who market the product, if they’re going to market it, they’re going to have to spend a lot of money on marketing and then they’re going to need the margin to do it. It’s a little bit of a conundrum as to how this problem is going to be solved.

Anna: Almost every producer has money that comes out of their check every month for state and national promotions and advertising and everything else. If you could use that, not for TV spots, but for something else, to educate, to get people shopping, especially if they can’t have, you know, a liquid drink, something like a cheese that they could have. But you have to choose the right format. It’s not going to be TV. I mean, Facebook’s going away.

Ted: Another milk moustache?

T3: There are some things…You don’t want to put the whole, was it five cents? ten cents? What’s the checkoff these days?

Anna: It’s 15 total. Yeah.

Ted: Fifteen.

T3: Fifteen cents. I’m going to say this. Don’t throw the whole 15 cents under the bus. For example, U.S. Dairy Export Council, who has done a phenomenal job of helping us develop our export markets, has been a very good use of part of that 15, that checkoff.

Anna: Oh, absolutely. Yes.

T3: So, there are places…

Anna: Oh, I’m not throwing it under the bus. I’m just saying I think that we may need to update how we are using it on some things.

Ted: Nobody sees that. The dairyman that needs to be educated is to how much money goes from that checkoff into USDEC, for example, and imagine what 2% or 3% in exports would mean to them, dollar-wise. It’s huge, but they don’t see it because they’re not in that section of the industry. We tell them in our annual meetings, we tell them in our newsletters and so on, but I just often think they don’t read them and they don’t really understand the dynamics of how that affects the total picture. One percent is a huge, huge amount of milk.

T3: So, let’s put it this way.

Ted: In dollars.

T3: One percent is a huge amount of milk. I 100% agree with you. Dairy Exports, USDEC was started in ’95? About 1995. In 1995, we exported approximately 3.5% of our dairy solids. Today we export approximately 17% of our dairy solids. Since USDEC started, over the last 25 years, it hasn’t just been 1%. It’s been 15% of, you know, growth, you know, from where it was to where it is today and a lot of that, you know, is on the backs of the work the USDEC has done to support the U.S. dairy industry. Anyway, just a shameless plug for an organization that I think very highly of.

Ted: Well, our offices have felt highly of them for a long time. I know I certainly have.

Ted: But the checkoff goes to other areas too and I can’t itemize them. I don’t know. But they need to somehow get the message out at the producer end. Producer isn’t going to be able to relate to exports, for example. Producers have to relate to the nutritiousness of the product. Somebody’s going to have to step up and take the place of Kraft Foods and if it isn’t DMI, Dairy Management Inc., who’s going to do it? And that’s sort of where I’m looking is that they need to do it. It’s not that they don’t do a good job in what they’re doing, the subsidies that they give to USDEC and other organizations are invaluable, but we need to get it on the marketing side too.

T3: Let me ask you this question and maybe this is a debate for another day. Should the dairy industry start resorting to negative marketing? I have a hunch that one of the most effective dairy ads that we could put out there is an exposé of what’s really in plant milk.

Anna: I’ve thought of…

T3: What really goes into almond milk? It’s not just almonds. What really goes into soy milk? There’s a lot of stabilizers, a lot of other stuff going into those milks. It may be in the dairy industry’s best interest to go on the attack and I know in my gut is that that’s been discussed and the reason they don’t do it is they don’t want to get it back.

Anna: So much of what was done to promote those products was done, you know, by celebrities but in magazines and on blog posts and everything else. The dairy industry doesn’t even have to do that directly. All you have to do is have those people who are putting that message out there for your typical grocery shopper, who is, you know, looking at Facebook, looking at blogs, looking at Instagram or whatever it is at the time, that’s how that message gets out there. That’s how it got out there kind of anti-dairy in the first place.

T3: But I think, I think you could start it and it would—you’d start a war, let’s face it. But you’d start it by having an ad that says, “This is what’s in almond milk. This is what’s in regular milk. Is this what you really want?” It’s that simple.

Ted: That’s probably a discussion for another day.

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.

Dairy cooperative support

We can put our insights to work for your operation. Learn more about dairy cooperative support services from T.C. Jacoby & Co.

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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, 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. We’re in a marketplace today that’s dealing with rapidly changing consumer expectations and the dairy industry appears to be falling behind. And what’s the dairy industry doing about it?

Anna: Do you think that’s true, though?

T3: Yes, I do think it’s true.

Ted: Well, first of all, expectations with regard to what?

T3: With regard to food safety, with regard to local, with regard to big CPG companies versus small local producers and manufacturers. Today’s consumer is, generally speaking, less interested in the big food conglomerates and more interested in buying something unique, buying something local, buying something that’s more tangible. It makes traceability a much bigger issue. Blockchain is not just something that is being driven by the technological industry, it’s being driven by the consumers’ desire to know more about the food that they eat. And what’s happening is dairy is so stuck in the way we’ve done it for so long that we are having trouble as an industry adapting to the new customer expectations. The millennial… Everybody talks about millennials, they talk about how millennials are driving this market and I think that’s true, but I don’t think it’s only millennials. I think as a general population, we’re all looking for more from our food. When I say more which is kinda say…what I’m kinda saying is more information. They want to know more about the food and it comes up sometimes in ways that is anti-dairy. I don’t think it’s anti-dairy as much as it’s why isn’t this dairy product giving me what I want in terms of the information and the traceability behind what I’m asking for?

I think there are dairy companies that are doing a better job of it but the big dairy companies that are the huge drivers of demand where 1% changes in their demand affect us all in a positive way are the ones that are really struggling with it. And I don’t think that issue is dairy alone. You look at what the sales volumes are for most of the major CPG companies in the Fortune 500 index, they are all struggling with this issue, whether it’s Kraft Foods, whether it’s Heinz, whether it’s General Mills, you know, on and on, down to, you can, you know, throw out the top 10, you know, food companies in the United States, you’re probably going to see all of them struggling with the same issue.

Ted: Let’s divide this discussion then into two categories. Let’s, first of all, discuss food safety. All right? And then secondly, let’s discuss food nutrition. Now, with regard to food safety, I don’t think the dairy industry is necessarily behind.

T3: In food safety, I don’t think we are. There’s a difference between traceability and food safety.

Ted: First, a general observation with regard to food safety, having been there 50 years ago, involved in one of the first, the first recall on salmonella. In 1966, people had just figured out how to run salmonella. It was a complicated test. It took two weeks to run it. People had just succeeded in identifying that salmonella was a problem that caused you to have a tummy ache, which in the elderly and the infirm or the babies could be, in some cases actually fatal, but then for most people, it was at worst a tummy ache. And it became an issue of food safety back in 1965 and ’66. But the test was complicated and they couldn’t identify it correctly. You had product produced and on the shelf distributed all over the country and then three or four weeks or even a month later, somebody comes back and say, “Oh, we got a positive.” “And how bad of a positive did you get?” “Well, we ran 10 or 20 samples, and we got one.” So, all of a sudden, you’re scrambling to try to really find from your archives to get this to replete so you knew what you were doing. You had lot numbers and so on, and everything was tested and everything was archived but the complication of the test, when you went back to test it, it was two weeks. And then I found out subsequent to that, that some of the labs that said they knew how to do it didn’t know how.

So, if you look at it today, they can identify this on infrared immediately after. Either listeria or salmonella or E. coli, or for 157, and so on, can be identified almost immediately. Your food today is so much safer than it was 50 years ago and we don’t hear that. We hear about problems because all of a sudden it’s so easy to run a test and identify a problem.

Fifty years ago, people were raised differently. They drank unpasteurized milk. We weren’t as clean as we are now. And they developed immunities or at least resistance to some of the nasties that we’re talking about and, you know, nominal everyday contaminants. A little bit of salmonella won’t hurt you.

T3: Some people might disagree with that but…

Ted: In 1950, you had developed an immunity to some of these things. And today, the food has gotten progressively pure as time went on and people don’t have those immunities anymore. And we continue to move in that direction where the food supply becomes ever more and more pure and contaminant-free and people aren’t developing the natural immunities that they used to develop 50 and 60 years ago to these nasties. So, this is a change that’s occurred in food safety and we need to recognize it and also as it applies to the dairy industry, you know, basically, except for commodity items like cheddar blocks and barrels and powders. All of our plants are old, whether they’re bottling plants or whether they’re little cheese plants, they’re old. They’ve been around a long time. They have storage systems that are old. They have walls that are old, and they have ceilings which have been changed over the years to keep from condensate dripping down into the cheese vat and all the things that you do over the years to conform to these ever more stringent quality expectations. This also is a problem for the dairy industry in keeping up in the food safety issue area is how are we gonna modernize to accommodate this.

T3: We talk about how dairy farms keep getting bigger. The same is true with dairy plants. Dairy plants keep getting bigger. Well, the modern 5,000-head dairy is new. It has the newer processes, it has the newer equipment that from a technological standpoint could be argued are better from a food safety standpoint. Well, the next step is what about the cheese plant or the yogurt plant? Well, it’s the bigger cheese plants that are newer and therefore have built in better food safety technology from an equipment standpoint and from the way the building is built standpoint. And the same is true from the cheese converter standpoint. And so, what you’re getting is this dichotomy. You have your bigger dairies and your bigger cheese plants and your bigger converters. That’s where the modern technology and food safety has been built into the process. At the same time, and this is the irony to me, you have your smaller dairy farms that are not as well equipped from a food safety standpoint. You have smaller cheese plants which have the small size and therefore the flexibility to run organic product. You know, you have the smaller older plants and older farms that are running a lot of the organic products. And so, there’s a very real balance between having product that may be, you know, hormone-free and free of some of the other issues that have become important to today’s consumer. But they’re also running them through older plants that you could probably make a case for, don’t have the same food safety standards as the bigger corporations. Yet, as you look at the consumers’ changes in diet and what they’re wanting, what they’re actually wanting is ultimately coming from smaller plants.

Now, let me be clear, I don’t wanna be saying that this is true for all organic products or things like that. There are a lot of smaller new plants out there as well. But generally speaking, I think your premise about how there’s a lot of infrastructure issues that the dairy industry is dealing with, especially in Class I because it hasn’t been growing, are true. But I think this is one of the things that the dairy industry is really dealing with right now is you have a movement by the consumer towards products that are coming from, that are more local. They want more information. And so, you know, everybody talks about traceability, everybody talks about Blockchain. The irony is you probably have better traceability, better ability to put together Blockchain in terms of the bigger corporations, the bigger organizations, the bigger dairy farms, the bigger manufacturers. That traceability is much easier to put together because there’s fewer parts, everything’s bigger, and when everything’s bigger, it means you’re not talking about 5,000 pounds of milk a day from an 80-cow herd. You’re talking about 100,000 pounds of milk a day from a 5,000-cow herd. I probably don’t have my math right. You can probably tell me what the math is. But what I’m saying is it’s much easier to trace the larger organizations through the supply chain. It becomes more easy to trace that. It becomes more easy to establish proper food safety procedures throughout yet the consumer at the same time is saying, “I want local, I want GMO-free, I want organic, I want smaller.” And that dichotomy, I think the dairy industry is really, really struggling with that dichotomy. And I think that what you’re talking about in terms of all of these old plants that need to be updated is getting significantly even more stressed by the changes in consumer demand right now.

Anna: I wouldn’t say that consumers are less concerned about food safety. So, that’s not what I’m trying to say here. But I do think, you know, you talk about them wanting traceability and that’s not what I hear from most consumers. I would say they want local, they want all those things but that’s because they want less environmental impact, not because they wanna know exactly who it’s coming from.

T3: At the end of the day, it becomes kind of an interesting math question when you phrase it that way. What has a worse environmental impact, 100 small farms and 100 small plants where any one single plant will argue, “Well, my environmental impact is way smaller than this really big dairy farm down the street. Look at all of the manure they’re producing versus the small amount of manure I’m producing.” But to fill that demand need, you don’t need one of those farms, you need 100 of those farms. And I would say it’s very possible that the actual environmental impact of pulling from the smaller farms and the smaller plants, may be more than the bigger. And I’m not trying to defend the bigger farms or the bigger plants in this case. I’m just saying that I think it’s interesting that I don’t know if the consumer is really looking at the problem in the right way.

Anna: I don’t know that they are but I also think that when you are looking at purchasing food for your own home, if you want something that you feel like is the most sustainable, the smallest footprint, it makes sense that it should be the best option for you to find a local farm that’s going to a plant that’s very close, not necessarily because of the manure or anything else, but because of fuel and transportation, everything as well, to support someone who’s local to your community. It’s not just a, you know, carbon footprint issue, it’s also where do you want to put your dollars, where do you want to… You know what I mean? It doesn’t mean it’s right but in theory, it should be.

T3: I think you’re right. What the consumer wants is something tangible and they see small as more tangible. You know, they see local as more tangible. They can lock into that and be proud of that.

Anna: And we have a very emotional connection to our food. That’s more like we would rather purchase from someone that makes us feel good rather than just go to the grocery store and buy something in a box.

T3: Absolutely. I think you’re absolutely right. But at the same time, what’s happening is this brand new big plant is going to give us much better food safety. We need better traceability. This brand new big farm and this brand new big plant is going to give us better, you know, traceability, but it’s not what the consumer is actually asking for. But the flip side of it is, even though they’re not going to talk about it, every consumer is gonna say, “I want my food to be safe.”

Ted: Well, perception is reality. You know, you put your milk into a 10 million pound a day plant and what happens? It’s turned into mozzarella that is distributed worldwide into the pizza trade. It’s turned into sticks, cheese sticks for snack purposes, it’s turned into ingredients and various products. So, you have to sort of separate those applications from the small plant that produces a specific kind of cheese or a multitude of cheese. And we know who they are. We don’t wanna name them by name but you’ve got some quality plants up in Wisconsin that produce multiple cheeses that win awards every year.

T3: You have plants in Ohio that do it too, like they won this year.

Ted: That do the same thing, or even in California. But those kinds of specialty products are, you know, hard to market. If you go into the grocery store, you find a jumble of different cheeses and cuts and packages and so on of the different… I always look for an aged Edam because I’ve developed a taste over the years for aged Edam, hard to find. You can hardly find it anywhere. And this marketing of those types of products, marketing the safety, marketing the non-GMO, marketing organic, marketing the fact that it’s safe, it’s got a good background becomes increasingly difficult for a small producer.

Anna: Is it really safer? I mean, I don’t know that you can go backwards but is it really safer to have everything be this clean when we also see that there’s all these health complications from people not being able to tolerate any of that stuff.

Ted: Okay, I think it’s supremely safer but you have to distinguish because people’s resistance is lower and your testing is so much better. You can identify so many more problems today that you couldn’t identify even 20 or 30 years ago or even ten years ago.

Anna: But you look at children’s health now and how many more kids have asthma and allergies and everything else and is it because we’re making everything too clean and too safe? You know what I mean? Again, I don’t know that you can go backwards without hurting a whole lot of people.

T3: You’re making my point that we have done such a good job of making our food so clean that people don’t develop the immunities.

Anna: But I wouldn’t say that’s safer because then you keep having to escalate to make it more safe and more safe and more safe.

T3: Well, that’s exactly the environment we’re in.

Ted: That’s sort of where we are.

T3: What’s the solution? The solution is not to go backwards. It’s not to say, “Time to make our food less safe.”

Anna: Yeah.

T3: But let me throw this out there just, you know, that might be one of the underlying things of what the organic movement is, you know, is bring back, you know, the stuff that makes your body develop those immunities.

Ted: So, you’re gonna go on record as saying…

T3: No, I’m not gonna go…

Anna: That’s a little bit of survival of the fittest which is…

T3: As a scientist by training, I’ve always struggled with organic foods for that very reason. It defied what science said was safer. I understood why. I understood the more natural part, “Let’s go back to our roots,” part and I couldn’t deny that part of the thinking. But the science didn’t say it was better for you.

Ted: You know, the premise that all large dairies are better quality and all small dairies are worse quality is obviously false. But as a general rule because of the technological advances of the industry, the large dairies, bacteria counts if you want to use that as a standard to measure, you know, 2,000 per mil is a bad day on a truckload dairy. And some truckload dairies are considerably higher than that and some are also much lower. And if you look at, say, a dairy that’s producing 10,000 pounds a day, it’s going to mingle with a bunch of other dairies on a truck, you know, 20,000 per mil can be a normal day. Does that make it bad? No. Grade A, 100,000. But just the same, if you want to use the standard of blood counts as a criteria for measuring quality, the large high-tech dairy is more capable of producing low bacteria counts than the small dairy. And that isn’t a criteria to judge by because bacteria count maybe isn’t the criteria you should be using. But at the same time, it’s there and it’s a technological advancement that’s occurred over the last 20, 25 years.

Anna: But no consumer has access to what those bacteria results were for every load of milk yet.

T3: Yet.

Anna: Yet, that’s true.

Ted: Nor would it be particularly valuable if they did.

Anna: No, it wouldn’t.

T3: Well, and I agree with that. I agree with that. But there’s a lot of consumer groups that might disagree with that statement.

Anna: But most consumers who are choosing organic, they may have no idea that in general, yes, it’s dirtier, right? But, that doesn’t change the fact that if they’re trying to avoid chemicals, which is really probably what they’re trying to avoid more than anything else…

T3: Chemicals and hormones, I agree.

Anna: …who cares if the bacteria is a little bit higher as long as it’s still safe?

T3: Well, we might get a couple of emails on this comment but I’ll say this beforehand. My belief has always been this, you may have fewer chemicals, you may have fewer hormones, and the argument is always along the lines of, “Well, these things are causing cancer and I’m lessening the chance that me or my children will get cancer by going organic.” Well, the flip side of it is also is the more bacteria counts are in your milk, the more free radicals because bacteria, there’s a relationship between higher levels of bacteria, higher levels of mutations and potential for radicals that are the things that would cause the mutations that might cause cancer. It is not… Scientifically speaking, there’s two sides to that argument, both of which can be…you know, can affect what people really want.

Anna: But I wonder how much of people’s decision, say, for organic really is about worrying that they’re gonna get cancer and worrying about the overall health of our planet. Really, ultimately. And I know that sounds idealistic and high-minded, but quite frankly, I don’t know that that’s really something that we can ignore, either. I mean, there’s…

T3: I agree. I agree. Allow me to pivot this conversation a little bit and move it more towards marketing. 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.

Anna: I think for food in general.

T3: Smaller farms, smaller plants, smaller demand for products and things like that. That’s where 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’ requests there.

Anna: I know both of you will have plenty of opinions on the subject of marketing in the dairy industry. There’s more to it than I think most people realize. Let’s save that discussion for our next episode, which we’ll publish in a couple weeks. 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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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. 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, the first we heard of it showing up in Asia or in China was probably last August. It kind of popped up from nowhere, I think there was maybe three cases initially reported, then it just seemed to balloon from there.

How it got into the country, there’s different theories. One of the theories is it came in some of the meat because it is quite hardy, can survive, and in some of the practices in China where you’ve got the backyard production system. So, that’s where someone’s eating their…the family are eating their meals and then the food scraps may get fed back to the pigs. That’s how the fever kind of got into the country, it’s come maybe through some of the meat coming in from other regions, maybe Eastern Europe. You know, if you think about it with the tariff situation, China did certainly start looking around the world for alternative sources of raw materials and meats, etc.

There were procedures put in place to try and control that by putting, you know, cleaning in the…clean out the herds that did pop up in a three-mile radius, liquidating the pigs in that region. As happens, it was not well controlled, and from late August, really it hit the northern part of China the hardest. That’s the most densely populated region. From that, then we started seeing cases where pork prices in some of those states were really, really low, because there was restricted movement. Other regions prices were very, very high, so we saw in the China market some extreme prices, based on region, based on cases of the fever.

We’ve seen a huge reduction in hog numbers, and if you think about, why was that caused? It was caused for a number of reasons. The disease obviously caused a huge reduction just from mortality, and also the trying to control it by eliminating pigs within regions. But also, we had the problem of farmers being concerned when they had healthy pigs. They were concerned that they were next to get the disease, so they also rushed hogs to market. So, that was also took other pigs out. And then, you had a situation where you’ve got different types of production systems where you might have farrow to finish, kind of, fully integrated, or you’ve got groups that maybe raise pigs and then sell those weanling pigs on to grower-finisher. Well, for those baby pig guys, there was no market for those pigs for a period of time because people were not restocking, because the prices were horrible. You might not have a home for your pig at the end of the day. So, we saw a number of factors all caused by the disease or the panic that disease caused to the marketplace. But, as a result of that, we’ve seen huge liquidation in hog numbers in China.

T3: When you say huge, what is your best guess as to, in terms of a number?

Richard: Well, first of all, China has got about 48% of the world’s hog population, so when we start talking about numbers in China, the numbers are really…on a global scale, they are certainly multiplied. Again, the numbers coming out from different sources, official sources, I take with a grain of salt. What we’re hearing is anywhere from 30% as much as 50% reduction since last August.

T3: So, on a worldwide level of that 48%, you’re talking about somewhere between 20% and 25% of the world population of hogs?

Richard: Easy math, we just round it off. Say they’re 50% of the world’s pigs, and if they’re down by 30% to 50%, that’s anywhere from 15% to 25% of the worlds pigs gone in less than a year. So, that gap cannot be filled elsewhere. First of all, we won’t make up these numbers short term.

Ted: How does the disease manifest itself? What are the symptoms and how long does it take to progress and to be fatal to the pig?

Richard: From my understanding, it’s a virus. It gets into the herd. It is quite rapid from getting to the herd and then from mortalities. Also, my understanding is, mortality rates can be close to 100%, and I was asking our guy, does it affect the baby pig more so than the adult pig, etc.? And, the comment was that they typically see the first pigs getting sick maybe in the grower-finisher, and that’s maybe because of exposure, but the mortality rates are high with all ages of a pig, or from the young to the more mature pig.

Ted: What does it look like? Is it a case of the sniffles or… What is it exactly, how does the pig…how is it affected?

Richard: I’m not sure the exact details, but I think from first symptoms they get is, I think the first thing you see is they start going off their feed, they start getting temperatures, lethargic, and very quickly from there on you get mortalities within 10 days. So, it is…it’s a potent…and I mean, it can survive in meat as well. So, that’s one of the concerns is that, you know, not all pigs that have been affected are being removed from the food chain, so the feeling that it could be in the meat as well. So, as that gets eaten, consumed, it’s out there. A few very important things to remember, this is highly deadly to pigs; there is no symptoms or it has no impact on humans, so it is safe for us to eat. That’s important for us to remember, it is safe to eat.

Jeff: So really, it’s just controlling the spread, really?

Richard: It’s controlling the spread. Also, you do not eliminate African swine fever from a region once it’s engraved, they’re not going to eliminate this disease from the region, they’re going to have to manage it. And by managing, we’re talking about biosecurity, biosecurity, biosecurity.

T3: It sounds to me though, if they’re going to be going towards biosecurity, then the small family that’s raising a few pigs in their backyard, that’s going to be gone, and it’s mostly going to be much bigger hog farms?

Richard: That was kind of our initial feeling, that basically for this kind of security we’re talking about here where it’s going to be, you know, all in all out, like the biosecurity, it would be the larger, more sophisticated producers would be the ones to grow here. I remember, that’s been, kind of, a trend we’ve seen for a number of years from the last 10 or 15 years is… So, I would think that would be the long-term trend, and that should benefit us as an industry because that way, when you feed lactose or permeate or whey, you can see the benefits, you can see the performance, and at the sites, make the decisions as you gather the feeding practices. What we’ve heard here, short-term is that the profitability of pork in China is going to just to gangbusters here. So, you will see some of the—

T3: It’s so long as you have healthy…

Richard: If you have a healthy pig. And, it’s all risk-reward. Up until recently, there was a whole bunch of risk and there was no reward because prices were poor, now the first steps of recovery would be that economic incentive. Because guys, we might be talking about pork here today, but when you take out 15% or 20% or whatever that number is that we want to talk about, and it’s not known, out of global pork production that has ramifications for every other kind of meat protein source out there. I believe pork is the number one meat in the world, so there’s not enough additional pork capacity in the world to fill this gap, and I don’t think there’s enough beef or even poultry here short term to fill that meat void. So, we’re talking here today about pork etc., and dairy, but you can see beef prices, you can see cull cow prices here in the next 12 months benefiting from this because there’s going to be a void of protein.

Ted: I’ve read somewhere that we’re already starting to ship pork to China?

Richard: Yes, indeed.

Ted: Is there a difference in the method of feeding pork…feeding swine in the U.S. as opposed to China? Wouldn’t the increased exports in the United States at least partially make up some of the deficits to China?

Richard: Yeah, so, you know, whereas this deficit gets filled, and good point, Ted. U.S. pork was—first of all, a little background here. U.S. pork production also got hit with tariffs to China. So, it was something like 70%, that’s seven-zero percent tariffs on U.S. pork. So, we saw tariffs drop off dramatically in the second-half of last year, our exports to China. Just last week we saw a record export of U.S. pork to China. I think we exported 171 million pounds in one week. That was the biggest week we’ve ever had, even with tariffs. So, China is going to be shopping around the world for pork, and if you’re a pork producer, let’s face it, corn and bean prices are cheap right now, and they’re going to get a big boost in pork prices.

I would say a month ago, guys, the average U.S. pork producer was losing about $20 per pig, today they’re making about $20 per pig. And, that’s just the beginning of it, it’s going to go higher. Supply and demand, you take that much out of the supply side of things, pork prices are going to ramp up, there’s no doubt about that.

T3: When the U.S. exports pork to China, are we exporting live pigs, are we exporting…or do we slaughter the pigs here in the U.S. and then just export the meat?

Richard: It would be exporting meat…

T3: Okay.

Richard: …certainly there is, you know, they can export frozen meat, but I think the China market prefers fresh meat if possible. There’s obviously different parts involved as well as, so you look at the U.S. pork industry exports today, about 25% of production is exported. You can think about dairy, it’s about 15%, so exports even more important for the U.S. pork industry. The largest markets today would be Mexico, they like the ham, and then also a big market would be Japan, where they like the loins, etc.

Now remember, the largest pork producer in the U.S. the Smithfield Group, there’s about 6.2 million sows in the U.S., the Smithfield Group would manage north of 900,000 sows, so they’re the dominant group. And, the Smithfield Group are owned by…they’re owned by a Chinese group.

T3: And they’re—so, the expectation is Smithfield is probably going to be exporting a lot of pigs to China or pork…

Richard: I can’t say Smithfield but overall, U.S. exports even with the tariffs today and if they come down, the China market is going to have to export from everyone that has something to export. That’s going to benefit pork prices around the world, and also other meats.

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T3: So, how is this disease affecting permeate sales? What percentage of whey permeate do you think is used in feed?

Richard: Oh, I’d say about 80%.

T3: Okay, and almost all of it that’s used in feed probably goes into pork production?

Richard: That would be the main application. Yes, you feel like lactose, so pretty much feed, we’re talking pigs, yes.

T3: And so, if you’ve lost 35% of the Chinese market, you’re looking at demand for whey permeate down as much as what, 10%, 20% worldwide?

Richard: Well, you’re looking at…and remember what a U.S. pig is fed, as Ted said, is a little different to what a Chinese pig would get fed, so, in U.S., Europe, even Latin America, the producer tends to feed higher levels of lactose in that baby pig’s diet, so it’s all different. But, some numbers I had, I believe China imported about 230,000 metric tons of permeate from the U.S. last year. That’s about 500 million pounds, so that’s not far off half of U.S. permeate went to China. We’re expecting—and then also, from a timing point of view, because they were still buying Q4 to Q1, maybe when the demand wasn’t there, so we are seeing inventories building up in China. Right now in Q2, China is really not buying a whole bunch of permeate right now, it’s a trickle. You’re looking at China demand in 2019 could be off anywhere from 150,000, closer to 100,000 metric tons before it’s all said and done.

T3: So, half?

Richard: It’s a big number guys, it’s a big number. Because they overbought in ’18; their consumption would be better than that, but I mean, they’re working through their inventories right now, so there’s nowhere this product can go right now. So, if you’re talking about 150,000 metric ton and that’s a realistic number that will not be bought from China in 2019, there’s nowhere in the world to go with that. That means…and I think we saw just from Q1 to Q2 permeate prices have come down dramatically. That has a knock-on effect for things like whey, because whey is also fed and lactose.

So, if you look at the dairy market news, you see some of those ranges and some of these product categories, look at the low end of the range, they’re going for a pig feed somewhere, and that’s a tough market to be, so that’s…that pulls it back because in Q1 of ’18, China used a lot of food grade lactose, a lot of food grade whey, kind of cleared us off the market, etc. But, you know, with tariffs last year coming in July, China was buying elsewhere, and which was bad, but not as bad as African swine fever. You just don’t have the mouths to consume it.

You know, from a producer point of view, a dairy producer, decisions will have to be made as regards, do you dry whey or do you fractionate it. The protein markets are strong, maybe you have a good market there. But, if you’re fractionating protein and you have to dry permeates, you’re going to be in the warehouse business. So then, do you dry more whey? And if you dry more whey, that’s going to affect the Class III prices, etc. But overall, there’s downward pressure in that area as regards your part of the mix. If people have a choice to not dry all of their permeate…I mean, you can feed a lot of permeate for dairy cattle, or beef feedlots, liquid form, and that molasses type market, but otherwise inventory is going to be building up, short term.

I would think there’s also opportunities with this, though, guys. Because if you’re looking at how a U.S. pig is fed and a Chinese pig is fed, a China pig, and a lot of countries in Asia, maybe except Korea but in Vietnam, some of these other regions, they consume about half the amount of lactose that a U.S. pig will consume. So, as an industry working together, how are we going to make these markets recover? It takes time to rebuild a herd, because you have to get the baby, you have to breed them, etc, etc. The fastest way for recovery here, if you look at…if we’ve lost half our business in China, but if a Chinese pig is consuming half the amount of lactose, what’s the fastest way to get it back up to demand we saw in the past? Get those baby pigs eating like a U.S. pig, and the good thing about that is we have the science to prove it. So, we’ve done a lot of…there’s a… Our company personally and also we worked with ADPI, some industry funded research which was just published in March. So our goal is to get that message out, because a live pig in China or any in the world right now is going to be a profitable pig. What you want to do with that pig, you want to feed that baby pig as well as possible, get them off to a good start. Remember you’re only feeding this lactose or the permeates to a baby pig for about three weeks of his life, that’s it.

T3: Is it like the first three weeks of its life?

Richard: Yes. When you remove it from its mother or while it’s still with the mother, but just from that post-weaning about three weeks of its life, and we’re talking about a pig consuming about two pounds of lactose, you know, or about a kg of permeate.

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Ted: Let’s try to quantify it a little bit, because the people who listen to us basically are dairy farmers, and the impact of this on the milk price is what they’re going to want to try to get their head around. And Jeff, you can chime in any way that you would like, but the way I’m seeing is that, we’re probably looking at about a 20 cent per pound reduction in the whey price. Is that about as good of a ballpark number as…

Jeff: I would say, the highs for whey permeate were between…depending on the manufacturer, between 24 and probably 28 or 29 cents per pound.

T3: For permeate?

Jeff: For permeate.

Ted: Okay, remember that the whey price is in the Class III formula not the permeate price.

Jeff: Mm-hmm, that’d be the solids.

Ted: So we need to translate it into the whey price.

T3: Well, I would…but I’m looking at this way, at the end of the day, the way it’s going to affect the Class III price is by pressure…by increased production of whey powder, sweet whey powder, because if you’re going to fractionate and produce whey protein and lactose or whey permeate, it’s the blend of those two prices has to be a better return to the manufacturer than just producing sweet whey powder. And, one of the things that’s going on right now that’s kind of interesting is, even though the whey permeate market has… You know, you’ve dropped from about 29 cents to about 12 right now…

Richard: Teens, yeah, teens.

T3: In the teens somewhere. So, you’ve lost at least 50% of the price, if not 70% of the permeate price. But the protein price has continued to be strong, and so there’s not necessarily a huge move, and because the protein price tends to capture a greater percentage of the overall whey price, and you guys know the powder market better than me, but I haven’t necessarily started seeing people shut off their protein dryers in order to make sweet whey powder because of the permeate price.

Jeff: Not yet.

T3: So…

Ted: But, the way the futures market has gone from what, 50 cents down to 30?

T3: About 48 down to about 38. So, we did lose about ten cents off the whey price. And, I think some of the reason was because of the…what’s going on in the whey permeate market, but I don’t think that’s 100% of the reason. And I think more importantly, Jeff, do you think the whey market is going to fall much lower than 38 cents?

Jeff: Hard to tell at this point, the prognostication I’ve kind of given is between 33 and 36.

T3: So, maybe we’ve got another 5 cents?

Jeff: Maybe not at all. Maybe we’ve kind of held steady at 37 to 38 cents on the board, and now it seems to be in a slight recovery mode.

Ted: Okay, so you’re settling in more at 15 cents rather than 20? Okay, 15 cents is 75, 90 cents a hundredweight of milk?

T3: Yes.

Ted: Six percent of the…6 pounds of whey in 100 pounds of milk.

T3: I always look at it this way…

Ted: So, in the formula rough numbers, we’re looking at 15 cents per 100 whey, 15 cents per pound whey, which translates into 90 cents a hundredweight in the milk price.

T3: That’s correct. I will say this though, I do believe that one of the side effects is you’ve killed the upward momentum. If African swine fever wasn’t happening, you probably could have continued to have a strong whey permeate price. A continued strong whey protein market would have probably started pulling whey streams away from sweet whey powder, and instead of seeing a whey price drop from about 48 cents to, let’s call it 35, I think we probably would be talking about whey markets in the 50s, at this point.

Jeff: Yeah, I’d agree. I’d agree…

T3: And so, even though we can say maybe it was 15 cents a negative effect on the whey price, I think the real effect was probably in the 20 plus. And so, you’re at least a dollar a hundredweight, if not a $1.50 a hundredweight is how much this is affecting the dairy farmers milk check.

Ted: I agree with that. You know, it’s got to put a little bit of a damper on the upward swing. I still think that there’s going to be a significant upward swing in milk prices this fall, but this will put a little bit of a damper on it. I think we’ll probably see a little bit more milk migrate towards powder, which also is a damper on the powder price.

Jeff: Yeah, I think it all depends on pricing for sure.

Ted: Yeah.

Jeff: But, one question I have for Richard though is, is this done? Is it…have they contained it, because we’re hearing reports that it’s moving to other Southeast Asian countries?

Richard: Yup, very good point, Jeff. No, it’s not done. There’s no vaccine for this, they’re still working on methods to try and control it by high temperature pelleting, etc. But, no one’s saying that they have this under control. It is in Vietnam, which is the second largest pork producer in Asia. It’s in Cambodia, I mean, with the human movement, etc. We’re not done, no.

Jeff: So, how long does it take…if it stopped today, how long would it take to repopulate?

Richard: Okay. A pig is born today, that pig will be bred around 10 months of age. So you have to wait that length of time…

Jeff: Okay.

Richard: And then, the pregnancy is for three months, three weeks, and three days, so you have another 112, 114 days on top of that before she’s got her first litter. So there’s an in built…

Jeff: At least over a year?

Richard: It takes time. Now, what you will see happening is that, for example, in the U.S. sows, you’re constantly culling to try and keep your productivity as high as possible. So, what you’ll do in China is, you’re not going to be culling sows right now, if a pig is walking around, she’s going to be…you want to have her producing as soon as possible. And, you know, heard all things, you know, could recover the second half this year, that’s too optimistic. I’ve heard the second half of next year. It’ll take many steps, you know, for feeding more lactose to keeping sows around longer so you can breed them back. They’re even pulling gilts that should be going to slaughter. They’re going to be breeding those gilts as well.

Ted: So, we’re talking two or three years?

Richard: Hopefully, not that long, but I mean, it’s well into 2020.

Ted: Okay, another impact on the dairy industry and particularly at the farm level will be the inclination to sell…to cull. The slaughter rates have been up in the record numbers here for the last several weeks, a month or six weeks. If the beef prices move up, and this is probably going to cause beef prices to move up, whether it’s pork or whether it’s beef, it sounds like beef is going to move up also, which is going to increase the slaughter rates, which…

T3: Up to a point.

Ted: Sure, up to a point. But it will increase it nonetheless, which will mean, higher milk prices offsetting the damper put on by the lower whey return in the Class III.

T3: Theoretically I would agree with you, but the one reason I hesitate to agree with you is because I’m personally operating on the assumption that slaughterhouses for beef right now are already at max capacity. And so, I’m not sure you can increase the slaughter rates much more than you already have.

Ted: You’re probably right, but that won’t make any difference if they continue at this level.

T3: True. I mean…

Ted: Yeah. They’re at a record level now, and they’ve been at a record level now for, what, two or three months, several months?

T3: Probably a little bit longer than that, but yeah.

Ted: So, if they continue. If the beef prices continue up high through August, say, of this year, then there is going to be a lot of slaughter, there’s going to be a major reduction in the milk herd going into the last part of this year. So, it probably, perversely, it could wind up being quite bullish for milk prices rather than the opposite…

T3: Longer term.

Ted: …depending on how you want to bet. It’s a bit of a coin toss, isn’t it?

T3: Well, let’s dive into it this way, pork is one of the cheaper meats, so obviously, when you’re talking about beef, you’ve got various grades of meat and dairy cows are at the lower end of that…

Ted: The hamburger market.

T3: Right. So, the result is there’ll be a greater… If I’m reading this market properly, there’s going to be a greater demand for lower-grade meat. Is probably the way it’ll play out, is that…would you say that’s fair, Richard?

Richard: Well, there’s going to be a greater demand for meat, and then, you know, who will benefit? You know, poultry, for example, will benefit, because that is… Well, even in China, it’s part of the diet already, so it’s accepted. But, I would agree, I think, you know, burgers, etc. ground beef, it’ll do well here. There’ll be less sales in pork in the store and it’s going to rise all ships in the harbor.

Ted: And this is at the same time that people are ramping up with veggie burgers and so on, which is another contrary effect on this situation. However, my inclination is to feel that a high beef price will cause the slaughter to continue at record levels for a protracted period of time.

T3: I think it depends on how long that those pork prices stay up as high as they are.

Ted: Well, if the recovery is, let’s just say, a year, two years.

T3: Then that’s about… Yeah.

Richard: Yup.

Ted: It’d be through the end of next year at the minimum.

T3: And if it continues to be a problem and they can’t get it under control that would be longer.

Ted: Yeah. You sort of have to worry or wonder where this digresses a little bit, but you wonder where in the hell this came from, strictly out of the blue.

Richard: Well, I mean, there have been cases around for a number of years, and like I said, it has been in Eastern Europe, Russia. I mean, let’s face it, there’s been a lot of importing of grains, etc. from that region of the world since July of 2018.

T3: Oh, it came with the grains, almost?

Richard: I don’t know, but ingredients have been tested positive for African swine fever. How it popped up in different regions, they were quite far apart, so you… I mean, there’s different reasons given for it.

T3: So, import…but imported feed would make a lot of sense.

Richard: That’s a possibility.

T3: And, I did hear about, that this virus lasts for a very long time outside the host. It’s a very…it’s not like most of the viruses we know, where once the host dies, the virus dies quickly, this one has a tendency to last, which is why it tends…one of the reasons it tends to be so…

Jeff: It could be in the slaughtered meat for sure, yeah.

Richard: It can be in slaughtered meat, for sure or something. That’s another vector for spreading it. It can survive in some of the ingredients as well, for example, protein plasma, the ingredient for baby pigs. That was—fingers were pointed at that as well, so they stopped feeding that to them. That goes for agriculture anymore. Whereas, you know, if there’s more ground beef being sold, that’s more, you know, cheese singles for the cheese burger, you know? You might not order a bacon cheese burger, but you can certainly order a cheese burger.

Ted: Okay.

T3:Okay.

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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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 The California FMMO https://www.jacoby.com/the-california-fmmo-the-milk-check-010-part-2/ Wed, 24 Oct 2018 18:58:48 +0000 http://www.jacoby.com/?p=1019 Things are changing in California, where around one-fifth of the milk in the U.S. is produced. Starting Nov. 1, the state's independent milk marketing order will cease, giving over to the country's newest Federal Milk Marketing Order. In the second part of this month's two-part conversation, Ted, T3, Anna and industry expert Mike McCully discuss the changes and predict whether the implementation of a Federal Order in California will have the affect dairy farmers have been hoping for. 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. Welcome back to Part 2 of our October 1 discussion with Mike McCully. In Part I, we discussed the new trade agreement between the U.S., Canada and Mexico. Today, in this Part 2, we discuss the new California Milk Marketing Order. Ted: Mike, Anna printed off a copy of the order here last week, and I took a quick look at it. And you know, in my layman's view, I don't see a hell of a lot of difference between the California order and the other orders. We use Richie McKenna here as a consultant on Federal Order issues, and I asked Richie to see if anything jumped out on the pooling provisions and unit pooling and so on. Nothing jumped out to me. You know, we've always worked very closely with the MAs, and we've had a nice relationship with the MAs representing smaller and independent factors in the order. We know that the big boys get, sometimes, a little overly aggressive and manage to aggravate the federal order officials. So our relationship has been quite good in that area. So a couple of things I think will determine whether how the Federal Order in California plays out. The first thing is who are the handlers, and how is it structured for pooling purposes? You know, there's still enough handlers in the Midwest, for example, to be able to cobble together a unit to keep little guys pooled. Even though the big boys sometimes work diligently to try to thwart that effort, we still do it. Do it in California, I don't really have a good sense of who the Class I handlers are, who the pool distributing plants would be in order to know whether or not there might be the ability to handle unit pooling for people of an independent nature there, of a non-cooperative nature or a proprietary nature is the better way to say it. What's your view of how that looks from that perspective? If you're an independent manufacturer of cheese, for example, and you want to maintain your own milk supply, you know, and of course, minimum price under the order provisions do apply. How is that gonna work out? Mike: I think there's...first, the order language is very similar to other orders. And the reason is...MAs have actually told me that a lot of that...not all of it was basically copied over from other orders. The language is very, very similar on those things. And to my knowledge also, I've been through it a number of times with the MAs in seminars and so forth, I don't really think there's anything that would jump out that would be different. Really, the main issue is what you've already brought up is around pooling. And when I went through the Federal Order hearing process, the co-ops and the farmers pushed for mandatory pooling like it is today in the CDFA system and it has been forever, really, in the CDFA system. However, as you know, the market in California is very different than other orders in the U.S. that would have mandatory pooling. And it looks a lot more like the upper Midwest where you've got a high percentage of milk that goes into manufacturing. Eighty-plus percent of the milk in California is Class III or Class IV under Federal Order. So in that case, you'll see the high manufacturing of milk utilization. You're gonna have more liberal pooling to be pooling tools, which is what they've adopted. And the farmers and the cooperatives do not necessarily like that; that wasn't their option,... Things are changing in California, where around one-fifth of the milk in the U.S. is produced. Starting Nov. 1, the state's independent milk marketing order will cease, giving over to the country's newest Federal Milk Marketing Order. Things are changing in California, where around one-fifth of the milk in the U.S. is produced. Starting Nov. 1, the state's independent milk marketing order will cease, giving over to the country's newest Federal Milk Marketing Order. In the second part of this month's two-part conversation, Ted, T3, Anna and industry expert Mike McCully discuss the changes and predict whether the implementation of a Federal Order in California will have the affect dairy farmers have been hoping for.<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. Welcome back to Part 2 of our October 1 discussion with Mike McCully. In Part I, we discussed the new trade agreement between the U.S., Canada and Mexico. Today, in this Part 2, we discuss the new California Milk Marketing Order.<br /> <br /> Ted: Mike, Anna printed off a copy of the order here last week, and I took a quick look at it. And you know, in my layman's view, I don't see a hell of a lot of difference between the California order and the other orders. We use Richie McKenna here as a consultant on Federal Order issues, and I asked Richie to see if anything jumped out on the pooling provisions and unit pooling and so on. Nothing jumped out to me. You know, we've always worked very closely with the MAs, and we've had a nice relationship with the MAs representing smaller and independent factors in the order. We know that the big boys get, sometimes, a little overly aggressive and manage to aggravate the federal order officials. So our relationship has been quite good in that area.<br /> <br /> So a couple of things I think will determine whether how the Federal Order in California plays out. The first thing is who are the handlers, and how is it structured for pooling purposes? You know, there's still enough handlers in the Midwest, for example, to be able to cobble together a unit to keep little guys pooled. Even though the big boys sometimes work diligently to try to thwart that effort, we still do it. Do it in California, I don't really have a good sense of who the Class I handlers are, who the pool distributing plants would be in order to know whether or not there might be the ability to handle unit pooling for people of an independent nature there, of a non-cooperative nature or a proprietary nature is the better way to say it.<br /> <br /> What's your view of how that looks from that perspective? If you're an independent manufacturer of cheese, for example, and you want to maintain your own milk supply, you know, and of course, minimum price under the order provisions do apply. How is that gonna work out?<br /> <br /> Mike: I think there's...first, the order language is very similar to other orders. And the reason is...MAs have actually told me that a lot of that...not all of it was basically copied over from other orders. The language is very, very similar on those things. And to my knowledge also, I've been through it a number of times with the MAs in seminars and so forth, I don't really think there's anything that would jump out that would be different. Really, the main issue is what you've already brought up is around pooling. And when I went through the Federal Order hearing process, the co-ops and the farmers pushed for mandatory pooling like it is today in the CDFA system and it has been forever, really, in the CDFA system. However, as you know, the market in California is very different than other orders in the U.S. that would have mandatory pooling. And it looks a lot more like the upper Midwest where you've got a high percentage of milk that goes into manufacturing. Eighty-plus percent of the milk in California is Class III or Class IV under Federal Order.<br /> <br /> So in that case, you'll see the high manufacturing of milk utilization. You're gonna have more liberal pooling to be pooling tools, T.C. Jacoby & Co. - Dairy Traders clean First look: USMCA https://www.jacoby.com/first-look-usmca-the-milk-check-010-part-1/ Thu, 18 Oct 2018 18:21:26 +0000 http://www.jacoby.com/?p=1000 Late last month, trade authorities of the U.S., Mexico and Canada have finally agreed to an updated trade deal dubbed the U.S.-Mexico-Canada Act. In Part 1 of a two-part episode, we enlist the help of dairy industry expert Mike McCully as we analyze what's new and what's not under the USMCA. Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby and Co., where we share market insights and analysis with dairy farmers in mind. Today is October 1, and with us we have industry expert Mike McCully to talk about two timely topics. They will be coming to you in two separate episodes. Up first will be the new agreement between the U.S., Canada and Mexico that will replace NAFTA. The second topic, which will come to you in about a week, will be the new California federal milk marketing order due to start on November 1. Ted: Are you updated, up to speed, on what the changes are, Mike? Can you give us a little bit of a preview as to how this is gonna effect our UF and blend sales? Mike: I think on just the initial...well, the initial reaction is I think positive overall that they're gonna eliminate the Class 7 pricing. The actual impact is gonna take a little while to come into effect. What they've said is it's gonna be six months after the new agreement goes into force, and when they're gonna change that. So, you know, if you figure it's not gonna get officially done here until later this year, you're really looking out into middle of 2019 before being able to eliminate that, and we can get back to maybe where it was before. I think then the next question is, you know, they've increased milk production in Canada a fair bit since then, and whether they're gonna really have that much of a need for U.S. milk out of the U.S. at that time, I think it's directionally positive that there could be some imports starting second half of next year. But I think it's partly still a little too soon to tell whether that's gonna happen or not. Ted: So how's Canada gonna handle it internally? Now, if they don't have the Class 7, so what are they gonna do? Take a hit on selling powder in the world market? Mike: That I think that's probably gonna be the early impact of it, and what...they're going to implement to minimum price for the solids nonfat in Canada that will correspond to the U.S. nonfat dry milk price, minus the margin for what they called the Canadian margin. So they have been pegging that class seven price at what they call the world price, which was essentially, you know, I think arguable not compliant with WTO. But this is one of the concessions they made, is they would change the peg to the U.S. NFDM price, which is, you know, to kind of get it back on more of an even footing than what the U.S. price is. T3: That Canadian margin, Mike, is that kind of like our make allowance? Or what is that, exactly? Mike: I think that's what they're referring to. There wasn't a lot of elaboration on the notes that I got, but I'm gonna assume that's what it is. Ted: Okay. Let me see if I got this straight. They're gonna adjust the Class 7, by whatever name, to conform to international indices for milk powder and butter? T3: No, that's the way it is now. They're going to make it conform to U.S. pricing. Mike: Yeah. Instead of pegging the class seven SNF price to this, quote, "global" price or world price, they're going to now take it to U.S. nonfat dry milk price. T3: The reason that it wasn't working before, from the U.S.'s point of view, was because, basically, by dumping powder onto the world market, Canada was actually driving down the world price, and then using that price they were driving down to lower their own milk price. Ted: Right. T3: Now they're gonna use the U.S. price, which is, you know, given the breadth of nonfat production that we have...and skim milk, powder production we have in the U.S., it's gonna be a little bit harder to move that dial. Mike: Right. Late last month, trade authorities of the U.S., Mexico and Canada have finally agreed to an updated trade deal dubbed the U.S.-Mexico-Canada Act. In Part 1 of a two-part episode, we enlist the help of dairy industry expert Mike McCully as we analyze wh... Late last month, trade authorities of the U.S., Mexico and Canada have finally agreed to an updated trade deal dubbed the U.S.-Mexico-Canada Act. In Part 1 of a two-part episode, we enlist the help of dairy industry expert Mike McCully as we analyze what's new and what's not under the USMCA.<br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby and Co., where we share market insights and analysis with dairy farmers in mind. Today is October 1, and with us we have industry expert Mike McCully to talk about two timely topics. They will be coming to you in two separate episodes. Up first will be the new agreement between the U.S., Canada and Mexico that will replace NAFTA. The second topic, which will come to you in about a week, will be the new California federal milk marketing order due to start on November 1.<br /> <br /> Ted: Are you updated, up to speed, on what the changes are, Mike? Can you give us a little bit of a preview as to how this is gonna effect our UF and blend sales?<br /> <br /> Mike: I think on just the initial...well, the initial reaction is I think positive overall that they're gonna eliminate the Class 7 pricing. The actual impact is gonna take a little while to come into effect. What they've said is it's gonna be six months after the new agreement goes into force, and when they're gonna change that. So, you know, if you figure it's not gonna get officially done here until later this year, you're really looking out into middle of 2019 before being able to eliminate that, and we can get back to maybe where it was before.<br /> <br /> I think then the next question is, you know, they've increased milk production in Canada a fair bit since then, and whether they're gonna really have that much of a need for U.S. milk out of the U.S. at that time, I think it's directionally positive that there could be some imports starting second half of next year. But I think it's partly still a little too soon to tell whether that's gonna happen or not.<br /> <br /> Ted: So how's Canada gonna handle it internally? Now, if they don't have the Class 7, so what are they gonna do? Take a hit on selling powder in the world market?<br /> <br /> Mike: That I think that's probably gonna be the early impact of it, and what...they're going to implement to minimum price for the solids nonfat in Canada that will correspond to the U.S. nonfat dry milk price, minus the margin for what they called the Canadian margin. So they have been pegging that class seven price at what they call the world price, which was essentially, you know, I think arguable not compliant with WTO. But this is one of the concessions they made, is they would change the peg to the U.S. NFDM price, which is, you know, to kind of get it back on more of an even footing than what the U.S. price is.<br /> <br /> T3: That Canadian margin, Mike, is that kind of like our make allowance? Or what is that, exactly?<br /> <br /> Mike: I think that's what they're referring to. There wasn't a lot of elaboration on the notes that I got, but I'm gonna assume that's what it is.<br /> <br /> Ted: Okay. Let me see if I got this straight. They're gonna adjust the Class 7, by whatever name, to conform to international indices for milk powder and butter?<br /> <br /> T3: No, that's the way it is now. They're going to make it conform to U.S. pricing.<br /> <br /> Mike: Yeah. Instead of pegging the class seven SNF price to this, quote, "global" price or world price, they're going to now take it to U.S. nonfat dry milk price.<br /> <br /> T3: The reason that it wasn't working before, from the U.S.'s point of view, was because, basically, by dumping powder onto the world market, Canada was actually driving down the world price, and then using that price they were driving down to lower their own milk price.<br /> <br /> Ted: Right.<br /> <br /> T3: Now they're gonna use the U.S. price, which is, you know, T.C. Jacoby & Co. - Dairy Traders clean “Here’s what scares me.” https://www.jacoby.com/heres-what-scares-me-the-milk-check-009/ Thu, 23 Aug 2018 14:16:45 +0000 http://www.jacoby.com/?p=891 Is there a structural problem plaguing the dairy industry? In this discussion, Ted, T3 and Anna dig into some fundamental changes in the way Americans are eating that spell bad news for the supply side of the industry, which seems unable to shut off the spigot. 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. As we'll discuss in a moment, markets haven't changed much since last month, but we plan on having a wide-ranging conversation about a few market dynamics that have us worried, and it has nothing to do with tariffs. T3, get us started. T3: We're sitting here in the first week in August, the markets, at the moment, are very similar to the markets of July. Not a lot has changed in terms of tone in the last month or two. Cream multiples have been better, so maybe on the butterfat side things have been a little bit better. But probably not enough to create a material difference in a farmers' milk check. My guess is that the August milk check isn't going to be that much different than the July milk check. As you get into late August, schools are getting back in session, the Class I plants will be pulling some milk away from the cheese plants and the Class IV plants. And so, you may see a small increase in cheese prices, you may see a small increase in powder prices, which may mean the Class III and Class IV prices go up a little bit. But the way I look at the market right now, if you look at the current spot prices for cheese and whey and non-fat dry milk and butter, and you look in what that calculates out from a Class III, Class IV perspective, and you compare it to the futures. You'll see there's about a 75 cent to a dollar gap between where we are now and where the futures are predicting, September, October, November are gonna be. We certainly have a different attitude about the strength of dairy markets in the fall today than we did four or five months ago. We're definitely not as confident about better demand and higher prices today than we were. And as a result, we've kind of gone off into a different kind of path in our discussion on the podcast today. Ted: I'm troubled by the fact that everything I read is trade and tariffs. T3: Right. Anna: Yeah. Ted: Everything. We're obsessed with it, and we have record trading, okay, right now. And everybody says, "Well, this is the source of the low prices." It's not. T3: Well, it's a timing issue though. Most of the tariffs... Ted: I will grant you that if all of a sudden we have embargoes and a full-fledged trade war, it will happen, but we haven't got that at this point. T3: Right. Most of the tariffs didn't go into effect until the first week in July. And so far, our trade data is through June. And so, we won't know the effect of the tariffs until they start producing the July data. Ted: Well, why doesn't the world know that? You know, this has reached the point of the most disingenuous thing in the face of the Earth. It's not. It may be one day, but it's not right now. What we got right now is too much milk and not enough sales. T3: And not enough domestic sales. Ted: Yeah. Domestic sales are the issue. T3: The first question is gonna be, "Why are sales down?" The second question is gonna be, "Where did the sales go?" You know, and so, that's what we don't know, is where the sales went. Now, I suspect, you know, the vague answer to that is there's a lot of little privately-held food companies out there that are grabbing a lot of these new sales. I know part of it is also they keep saying they've lost a lot to private label. But we see the private label side of it with Schreiber and Great Lakes and those guys. And even Deans. I mean, the dairy industry is actually probably more advanced on the private label side of things than most food industries. But we're not seeing it there either, you know. I would say this. Is there a structural problem plaguing the dairy industry? - In this discussion, Ted, T3 and Anna dig into some fundamental changes in the way Americans are eating that spell bad news for the supply side of the industry, Is there a structural problem plaguing the dairy industry?<br /> <br /> In this discussion, Ted, T3 and Anna dig into some fundamental changes in the way Americans are eating that spell bad news for the supply side of the industry, which seems unable to shut off the spigot.<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. As we'll discuss in a moment, markets haven't changed much since last month, but we plan on having a wide-ranging conversation about a few market dynamics that have us worried, and it has nothing to do with tariffs. T3, get us started.<br /> <br /> T3: We're sitting here in the first week in August, the markets, at the moment, are very similar to the markets of July. Not a lot has changed in terms of tone in the last month or two. Cream multiples have been better, so maybe on the butterfat side things have been a little bit better. But probably not enough to create a material difference in a farmers' milk check. My guess is that the August milk check isn't going to be that much different than the July milk check.<br /> <br /> As you get into late August, schools are getting back in session, the Class I plants will be pulling some milk away from the cheese plants and the Class IV plants. And so, you may see a small increase in cheese prices, you may see a small increase in powder prices, which may mean the Class III and Class IV prices go up a little bit. But the way I look at the market right now, if you look at the current spot prices for cheese and whey and non-fat dry milk and butter, and you look in what that calculates out from a Class III, Class IV perspective, and you compare it to the futures. You'll see there's about a 75 cent to a dollar gap between where we are now and where the futures are predicting, September, October, November are gonna be.<br /> <br /> We certainly have a different attitude about the strength of dairy markets in the fall today than we did four or five months ago. We're definitely not as confident about better demand and higher prices today than we were. And as a result, we've kind of gone off into a different kind of path in our discussion on the podcast today.<br /> <br /> Ted: I'm troubled by the fact that everything I read is trade and tariffs.<br /> <br /> T3: Right.<br /> <br /> Anna: Yeah.<br /> <br /> Ted: Everything. We're obsessed with it, and we have record trading, okay, right now. And everybody says, "Well, this is the source of the low prices." It's not.<br /> <br /> T3: Well, it's a timing issue though. Most of the tariffs...<br /> <br /> Ted: I will grant you that if all of a sudden we have embargoes and a full-fledged trade war, it will happen, but we haven't got that at this point.<br /> <br /> T3: Right. Most of the tariffs didn't go into effect until the first week in July. And so far, our trade data is through June. And so, we won't know the effect of the tariffs until they start producing the July data.<br /> <br /> Ted: Well, why doesn't the world know that? You know, this has reached the point of the most disingenuous thing in the face of the Earth. It's not. It may be one day, but it's not right now. What we got right now is too much milk and not enough sales.<br /> <br /> T3: And not enough domestic sales.<br /> <br /> Ted: Yeah. Domestic sales are the issue.<br /> <br /> T3: The first question is gonna be, "Why are sales down?" The second question is gonna be, "Where did the sales go?" You know, and so, that's what we don't know, is where the sales went. Now, I suspect, you know, the vague answer to that is there's a lot of little privately-held food companies out there that are grabbing a lot of these new sales. I know part of it is also they keep saying they've lost a lot to private label. But we see the private label side of it with Schreiber and Great Lakes and those guys. T.C. Jacoby & Co. - Dairy Traders clean Dairy’s biggest challenge isn’t what you think https://www.jacoby.com/dairy-biggest-challenge-isnt-what-you-think/ Mon, 23 Jul 2018 17:35:41 +0000 http://www.jacoby.com/?p=874 While the American dairy industry is collectively obsessed with trade wars and tariffs, that's not the biggest elephant in the room. Ted and T3 look past the headlines to discuss the trend that could have a far greater impact on markets over the long term. 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. Toby: We welcome you back to The Milk Check. It's July 17th, 2018. I'm Toby Wall, I'm in for Anna Donze, she is out today. And with me today is Ted and T3. And we're here to talk about what we think is the biggest problem or at least the biggest challenge right now, in the dairy industry, and it's not what you think it might be. So the conversation about tariffs has occupied everybody's mind lately, but it's not necessarily the biggest issue, right? Since these have been announced, prices have come down in dairy markets. They've come down significantly. But is that the result of tariffs? Or is there something else going on here? T3: The first thing that we need to keep in mind when it comes to price is markets are not just a matter of math, they can be emotional as well. And I think that one of the things that's happened in the last month and a half is that, as we kept hearing over and over again, about the retaliatory tariffs and how China and Mexico have put tariffs on cheese, and China's put tariffs on whey and other dairy products, the emotional side of the market has really come to bear. Fear. People are afraid that those markets, we're gonna be...our demand is gonna be reduced because we're going to be exporting less to those markets when prices come down. To me, there's an underlying issue that is a bigger issue than the tariffs. But the talk and what everybody's talking about is what's going on with the tariffs. What concerns me though, is milk production over the last three months has only been up about 0.8%. That is below the natural growth rate in demand in this country. The assumption has been over the last 30 years, the demand for dairy products tends to grow at an annualized rate of somewhere between, 1.5 to 2%. That correlates very closely with increases in population in this country. But it also correlates with a slow and steady increase in dairy consumption on a per capita basis. So if we're only up about 0.8% in terms of milk production, we should start seeing our inventory numbers stagnate, if not go down a little bit, as we are continuing to consume at an increasing rate, but we're supplying less milk. That's not happening. We've seen our cheese inventories continue to increase this year at a faster rate than they did last year, and at a faster rate than they did before. Inventories are up, for cheese are up this year, relative to last year, even though milk production is down. And the fact of the matter is, even though right now, that all the discussion is about the tariffs, the truth is, for the first five months of the year, January through May, exports have actually been excellent. They've been way better than last year, way better than the year before. So why is our cold storage...why are inventory numbers going up? That's what has me concerned. Somewhere, whether it's we're producing more cheese or we're producing less of other dairy products because they're not being consumed, somewhere in the domestic demand data, and we haven't been able to pinpoint exactly where it is, we suspect there's been some decreases in domestic demand for dairy products that really isn't coming to the forefront, that's not obvious to people who really studied the numbers. Ted: I tend to believe that only the most isolated segments of the industry attribute the current problem to trade and exports. Demand goes up 2% a year and milk production goes up 2% a year. Up until the last year or so, that's been the case. And now all of a sudden that paradigm is changing, where the demand seems to be lagging. While the American dairy industry is collectively obsessed with trade wars and tariffs, that's not the biggest elephant in the room. Ted and T3 look past the headlines to discuss the trend that could have a far greater impact on markets over the long t... While the American dairy industry is collectively obsessed with trade wars and tariffs, that's not the biggest elephant in the room. Ted and T3 look past the headlines to discuss the trend that could have a far greater impact on markets over the long term.<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.<br /> <br /> Toby: We welcome you back to The Milk Check. It's July 17th, 2018. I'm Toby Wall, I'm in for Anna Donze, she is out today. And with me today is Ted and T3. And we're here to talk about what we think is the biggest problem or at least the biggest challenge right now, in the dairy industry, and it's not what you think it might be. So the conversation about tariffs has occupied everybody's mind lately, but it's not necessarily the biggest issue, right? Since these have been announced, prices have come down in dairy markets. They've come down significantly. But is that the result of tariffs? Or is there something else going on here?<br /> <br /> T3: The first thing that we need to keep in mind when it comes to price is markets are not just a matter of math, they can be emotional as well. And I think that one of the things that's happened in the last month and a half is that, as we kept hearing over and over again, about the retaliatory tariffs and how China and Mexico have put tariffs on cheese, and China's put tariffs on whey and other dairy products, the emotional side of the market has really come to bear. Fear. People are afraid that those markets, we're gonna be...our demand is gonna be reduced because we're going to be exporting less to those markets when prices come down.<br /> <br /> To me, there's an underlying issue that is a bigger issue than the tariffs. But the talk and what everybody's talking about is what's going on with the tariffs. What concerns me though, is milk production over the last three months has only been up about 0.8%. That is below the natural growth rate in demand in this country. The assumption has been over the last 30 years, the demand for dairy products tends to grow at an annualized rate of somewhere between, 1.5 to 2%. That correlates very closely with increases in population in this country. But it also correlates with a slow and steady increase in dairy consumption on a per capita basis.<br /> <br /> So if we're only up about 0.8% in terms of milk production, we should start seeing our inventory numbers stagnate, if not go down a little bit, as we are continuing to consume at an increasing rate, but we're supplying less milk. That's not happening. We've seen our cheese inventories continue to increase this year at a faster rate than they did last year, and at a faster rate than they did before. Inventories are up, for cheese are up this year, relative to last year, even though milk production is down. And the fact of the matter is, even though right now, that all the discussion is about the tariffs, the truth is, for the first five months of the year, January through May, exports have actually been excellent. They've been way better than last year, way better than the year before. So why is our cold storage...why are inventory numbers going up?<br /> <br /> That's what has me concerned. Somewhere, whether it's we're producing more cheese or we're producing less of other dairy products because they're not being consumed, somewhere in the domestic demand data, and we haven't been able to pinpoint exactly where it is, we suspect there's been some decreases in domestic demand for dairy products that really isn't coming to the forefront, that's not obvious to people who really studied the numbers.<br /> <br /> Ted: I tend to believe that only the most isolated segments of the industry attribute the current problem to trade and exports. Demand goes up 2% a year and milk production goes up 2% a year. Up until the last year or so, T.C. Jacoby & Co. - Dairy Traders clean