The Milk Check https://www.jacoby.com Experienced dairy traders discuss current market trends that affect payments to dairy farmers. Fri, 23 Jul 2021 21:20:51 +0000 en-US hourly 1 https://wordpress.org/?v=5.7.2 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 Poor premiums (Part 2): Can exports increase competition for milk on the farm? https://www.jacoby.com/poor-premiums-part-2-can-exports-increase-competition-for-milk-on-the-farm/ Thu, 22 Jul 2021 17:35:31 +0000 https://www.jacoby.com/?p=2176 Last year didn't end up being too bad for the dairy industry. Even still, a massive milk supply and reduced processing have caused terrible premiums, and some producers are starting to feel the pain. While strong export numbers show growth for the industry, it's little solace for many farmers. A big reason exports are up is because domestic pricing is so low. Can the industry turn increased exports into healthy competition for milk from the farm or is market volatility too much to reign in? This is the second of a two-part episode. If you haven't listened yet, hear how the labor market is affecting the dairy industry in part one. T3: I think most dairy farmers would agree that 2020 and the pandemic was actually pretty good for the dairy farmer. Not only did a number of farmers have pretty high milk prices, especially in Class III markets, but there was also some government money, whether it's PP money or other money that went directly to the dairy farmer. So, their equity, most of them have pretty good balance sheets. And by the way, the real estate market right now is really hot also. And so, you know, the banks are probably looking at most dairy farmers and are more than happy to lend them money. To me, that's a little bit scary because it means there's no financial pressure right now on dairy farmers to reduce supply. And as much as nobody wants to talk about how dairy farmers going bankrupt would be a good thing, because it never is a good thing, that's usually what needs to be happening for us to reduce our milk supply. And right now I don't think that's happening, which means even if we have a lot of farmers talking about how they're not increasing their herds, it's unlikely that there are a lot of dairy farmers leaving the business, or maybe the best way to put it is cows leaving the business. There may be some dairy farmers selling out, but the cows are probably just moving down the street. Anna: I think it was fair to say that a lot of people were in really good shape. I don't know that that's as true now. I think that the pain is starting to make its way down the pipeline. T3: What are the silver linings? Exports have been good. And I'll be honest, we're recording this podcast on July 7th and just lately, we've made a number of good and high volume export deals, which is good, but there's a downside to that. I believe exports are very, very important for the future of the dairy industry so I want to make sure everybody understands what I'm about to say. Exports are necessary if we want to keep growing our dairy industry, but there is definitely a relationship between lower milk prices, especially futures prices and higher exports. The lower the prices in the U.S. typically, the more competitive we are in the international market. We're really competitive in the international market right now because prices are low. And so, we're exporting a lot. Well, that's great we're exporting a lot, but we're exporting a lot because prices are low, especially relative to other parts of the world. We are pricing our exports delivered to various parts of the world a lot higher relative to U.S. prices than we used to because our freight costs to get it there are a lot higher too. You know, whereas maybe we used to be able to get powder to Asia for 4 cents a pound. Right now we're pricing it at 8 cents or 9 cents a pound. Ultimately, that backs into what the dairy farmer gets for his milk, but that's where we need to be in order to be competitive. And so, even if you priced it differently ultimately, the dairy farmer would receive the same value for his milk. It would just maybe look like a different equation. So, exports are good, that's great, but they're good because prices are low. T2: Well, exports are going to continue to be the driver, and maybe the solution to the problem is for us to do a little better job dealing with the exports. I think we have been, I think particularly the U.S.

Last year didn’t end up being too bad for the dairy industry. Even still, a massive milk supply and reduced processing have caused terrible premiums, and some producers are starting to feel the pain.

While strong export numbers show growth for the industry, it’s little solace for many farmers. A big reason exports are up is because domestic pricing is so low.

Can the industry turn increased exports into healthy competition for milk from the farm or is market volatility too much to reign in?

This is the second of a two-part episode. If you haven’t listened yet, hear how the labor market is affecting the dairy industry in part one.

T3: I think most dairy farmers would agree that 2020 and the pandemic was actually pretty good for the dairy farmer. Not only did a number of farmers have pretty high milk prices, especially in Class III markets, but there was also some government money, whether it’s PP money or other money that went directly to the dairy farmer. So, their equity, most of them have pretty good balance sheets. And by the way, the real estate market right now is really hot also. And so, you know, the banks are probably looking at most dairy farmers and are more than happy to lend them money. To me, that’s a little bit scary because it means there’s no financial pressure right now on dairy farmers to reduce supply. And as much as nobody wants to talk about how dairy farmers going bankrupt would be a good thing, because it never is a good thing, that’s usually what needs to be happening for us to reduce our milk supply. And right now I don’t think that’s happening, which means even if we have a lot of farmers talking about how they’re not increasing their herds, it’s unlikely that there are a lot of dairy farmers leaving the business, or maybe the best way to put it is cows leaving the business. There may be some dairy farmers selling out, but the cows are probably just moving down the street.

Anna: I think it was fair to say that a lot of people were in really good shape. I don’t know that that’s as true now. I think that the pain is starting to make its way down the pipeline.

T3: What are the silver linings? Exports have been good. And I’ll be honest, we’re recording this podcast on July 7th and just lately, we’ve made a number of good and high volume export deals, which is good, but there’s a downside to that. I believe exports are very, very important for the future of the dairy industry so I want to make sure everybody understands what I’m about to say. Exports are necessary if we want to keep growing our dairy industry, but there is definitely a relationship between lower milk prices, especially futures prices and higher exports. The lower the prices in the U.S. typically, the more competitive we are in the international market. We’re really competitive in the international market right now because prices are low. And so, we’re exporting a lot. Well, that’s great we’re exporting a lot, but we’re exporting a lot because prices are low, especially relative to other parts of the world. We are pricing our exports delivered to various parts of the world a lot higher relative to U.S. prices than we used to because our freight costs to get it there are a lot higher too. You know, whereas maybe we used to be able to get powder to Asia for 4 cents a pound. Right now we’re pricing it at 8 cents or 9 cents a pound. Ultimately, that backs into what the dairy farmer gets for his milk, but that’s where we need to be in order to be competitive. And so, even if you priced it differently ultimately, the dairy farmer would receive the same value for his milk. It would just maybe look like a different equation. So, exports are good, that’s great, but they’re good because prices are low.

T2: Well, exports are going to continue to be the driver, and maybe the solution to the problem is for us to do a little better job dealing with the exports. I think we have been, I think particularly the U.S. sec has made a major contribution getting us conversing with the international marketplace, but I also think there’s a lot more that needs to be done. We don’t have the personal relationships in the marketplace that the Europeans do at this point. They’ve been doing it for generations and we’ve been doing it for, what, starting from scratch 20 years ago.

T2: That’s true. I would also say this, there are a number of relationships between importers of dairy, let’s say in Asia, though, it can apply to a lot of different parts of the world, and producers of dairy products in places like New Zealand and Europe and Australia, where they’re able to figure out ways to price those dairy products year-round at a competitive price. One of the things that’s holding U.S. dairy exporters back is the volatility of our markets and the way that we’re set up in terms of the four classes of milk that we have, make it difficult for us to be competitive 12 months a year in international markets. There’s two sides to this argument, and I apologize if it sounds like I’m talking out of both sides of my mouth, but on one side, the argument would be, well yeah, what that means is we’re always going to get the higher price we can get because if the international market is too low, we’ll be able to charge higher prices for our milk by keeping that milk in the U.S., that’s true. But the flip side of it is we have lower exports because we’re not in that market 12 months a year a lot of the times, and that forces us to be players on a commodity level in international markets rather than on a value-added level. And that’s the second part that I think hurts the U.S. dairy farmer, because we are not able to put ourselves in a position to be competitive 12 months a year in the international markets in various dairy products, it’s very hard for us to establish value-added branded opportunities in those markets at the same time.

T2: So, why are we not able to have a consistent export business 12 months of the year? We commented lately on the difference between the cash price and the futures price, and the fact that when we make an export deal two and three months out, it has to be based on the futures price, and the futures price is often at odds with the cash price, sometimes, at least measured in milk pricing, $2 and $3 a hundredweight different than what the milk price would be. Synthetically, what the exports price would be measured against the milk price is often off, I guess, is what I’m trying to say.

T3: That is a loaded question for this reason if due to government regulation or government influence, a company were to sell any product, in this case, we’re talking about dairy products, in another country at a price below the prevailing market price of the manufacturing country, in this case, the U.S., that would be considered dumping. And that is illegal. You know, we’re members of GATT or the WTO, and so that would be something that other countries would cry foul and we’d probably get penalized for it. It’s illegal for a government to influence that. It isn’t illegal for a private organization or company to make a decision to have a flat price for the year of a product in order to ensure a market share 12 months a year. There are cooperatives in Europe that are big enough that when they make international deals, they will commit to a 12-year price, or they will commit to a price that essentially is below the prevailing market price, but they’re doing it because that’s a great way to get rid of dairy products.

And so, they want to make sure it gets moved year-round, and so they’re willing to price that product aggressively to make sure it keeps their plant running at full capacity, to make sure that they’re getting rid of all the milk that they’re taking in in their plants and in their co-op and they’ll do it. And so, there are times where even if the international price says it’s, you know, $1.80 for cheese, we have the EU price everybody’s talking about as $1.80 for cheese, yet we find yourselves competing against $1.60 in certain markets. And the reason is, is because there’s going to be an organization, whether it’s in Europe or it’s in Australia or somewhere where it’s important enough to make sure they have that business, that they get very, very aggressive on price. And they technically end up selling that price below the prevailing market prices in their home manufacturing country. In the U.S., because of our federal order system, it’s very difficult for the U.S. to do that.

T2: Well, I’m not so sure it’s that difficult. You know, we have a private organization that subsidized exports now, and on a voluntary basis, dairy milk are assessed 4 cents a hundredweight, which is a pool of money that national milk accumulates, which is called the CWT program. And they subsidize exports of products, you apply for a subsidy and you get it. In my mind, paying for the buck on that to the subsidy program is huge. You know, I think for our 4 cents a hundredweight, it’s going to affect milk price at certain times, a buck a hundredweight, at other times almost nothing, but it’s inconsistent, they admitted that, but the basic effect of the 4 cents is huge. So, what about 10 cents or 20 cents? If we had that program, we could obviously control the money that’s available depending on market conditions. As long as it’s privately based, I think it could make a huge difference in the ability of the manufacturing facilities to compete for milk supply in order to service the export market.

T3: I think the people who are running the CWT program do a really good job. We’ve been able to take advantage of CWT monies at times for exports, and there are a lot of good organizations in the country that do. And so, I’m not opposed in any way to CWT. CWT, though, doesn’t necessarily lend itself well to the consistency that can come from organizations in some other countries.

T2: That’s true. And the marketplace, in general, is inconsistent, by its very nature it’s inconsistent. What you’re trying to do here is increase the price of the dairy milk. That’s the objective. And we have an export market right now where if we could subsidize at greater extents than we currently do, we could sell one hell of a lot of product on the international market, and we could compete with the Europeans in the kind of programs that they have based on their marketing proclivities, which are admittedly much different than ours. They don’t have a federal order system and they also have multipurpose plants which we don’t have. I think it would be hard for the dairyman to see, but if we increase that CWT allowance with the idea of increasing exports in a major way, that could beat up a lot of inventory and greatly increase the competition for milk on the farm, which is I think what our objective should be.

T3: Well, I wouldn’t be opposed to that. I would argue to a certain extent, not fully, but to a certain extent it’s like pushing against a string. All you’re going to do is move the whole market. But I do think it will have an effect of increasing exports. Believe it or not, right now, the biggest limiting factor we have for exports is the international shipping market is a mess. There’s a shortage of containers. It’s just very difficult to get products from point A to point B. And I do think over time, the market itself will take care of that. More containers will be made. Some of the prices that shipping companies are charging, they’re going to be profitable enough that they’re going to expand, and at some point that will be addressed. I think the same thing is true of our domestic shipping market. It’s just going to take time.

T2: And I think it will too. And I also have to say that if the scenario that I’ve tried to describe isn’t handled properly, it could wind up being a waste of money. The question is, how do you increase prices on the farm? And if it’s handled properly, I think you could do that. But then it could go the other direction in a hurry when we’ve exported everything and all of a sudden the market would collapse around us. Obviously, it could have an adverse effect, but it would create less milk for domestic consumption. It would cement the exports as a major source of sales for the U.S. dairy industry if we did it properly.

T3: I agree with that. I think so too. You know, the good news is on exports is my hunch is exports are going to be really, really good for the next 12 to 24 months. I think international demand for U.S. dairy products is solid. We’re seeing a lot of really strong, solid demand throughout the world for both cheese and powder and that’s exciting. And so, I do feel very good about the U.S.’s prospects for exports in the coming months. But I will also add that one of the reasons that I am very optimistic about exports is I do believe that U.S. prices will remain competitive in the international marketplace for the next 12 to 24 months as well. And those competitive prices you can read between the lines, but it probably means that our milk prices are going to be on the low end of the range. And that is probably not what the dairy farmer wants to hear. And let me be fair, I tend to be the most bearish Jacoby, and so you can take what I have to say with a grain of salt, but I do think we’ll be competitive in the export market, but I also think U.S. dairy prices are going to be a little bit lower than expected over the next 12 months.

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Last year didn't end up being too bad for the dairy industry. Even still, a massive milk supply and reduced processing have caused terrible premiums, and some producers are starting to feel the pain. While strong export numbers show growth for the ... Last year didn't end up being too bad for the dairy industry. Even still, a massive milk supply and reduced processing have caused terrible premiums, and some producers are starting to feel the pain. <br /> <br /> <br /> <br /> While strong export numbers show growth for the industry, it's little solace for many farmers. A big reason exports are up is because domestic pricing is so low.<br /> <br /> <br /> <br /> Can the industry turn increased exports into healthy competition for milk from the farm or is market volatility too much to reign in?<br /> <br /> <br /> <br /> This is the second of a two-part episode. If you haven't listened yet, hear how the labor market is affecting the dairy industry in part one. <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> T3: I think most dairy farmers would agree that 2020 and the pandemic was actually pretty good for the dairy farmer. Not only did a number of farmers have pretty high milk prices, especially in Class III markets, but there was also some government money, whether it's PP money or other money that went directly to the dairy farmer. So, their equity, most of them have pretty good balance sheets. And by the way, the real estate market right now is really hot also. And so, you know, the banks are probably looking at most dairy farmers and are more than happy to lend them money. To me, that's a little bit scary because it means there's no financial pressure right now on dairy farmers to reduce supply. And as much as nobody wants to talk about how dairy farmers going bankrupt would be a good thing, because it never is a good thing, that's usually what needs to be happening for us to reduce our milk supply. And right now I don't think that's happening, which means even if we have a lot of farmers talking about how they're not increasing their herds, it's unlikely that there are a lot of dairy farmers leaving the business, or maybe the best way to put it is cows leaving the business. There may be some dairy farmers selling out, but the cows are probably just moving down the street.<br /> <br /> <br /> <br /> Anna: I think it was fair to say that a lot of people were in really good shape. I don't know that that's as true now. I think that the pain is starting to make its way down the pipeline.<br /> <br /> <br /> <br /> T3: What are the silver linings? Exports have been good. And I'll be honest, we're recording this podcast on July 7th and just lately, we've made a number of good and high volume export deals, which is good, but there's a downside to that. I believe exports are very, very important for the future of the dairy industry so I want to make sure everybody understands what I'm about to say. Exports are necessary if we want to keep growing our dairy industry, but there is definitely a relationship between lower milk prices, especially futures prices and higher exports. The lower the prices in the U.S. typically, the more competitive we are in the international market. We're really competitive in the international market right now because prices are low. And so, we're exporting a lot. Well, that's great we're exporting a lot, but we're exporting a lot because prices are low, especially relative to other parts of the world. We are pricing our exports delivered to various parts of the world a lot higher relative to U.S. prices than we used to because our freight costs to get it there are a lot higher too. You know, whereas maybe we used to be able to get powder to Asia for 4 cents a pound. Right now we're pricing it at 8 cents or 9 cents a pound. Ultimately, that backs into what the dairy farmer gets for his milk, but that's where we need to be in order to be competitive. And so, even if you priced it differently ultimately, the dairy farmer would receive the same value for his milk. It would just maybe look like a different equation. So, exports are good, that's great, but they're good because prices are low.<br /> <br /> <br /> <br /> T.C. Jacoby & Co. - Dairy Traders clean 12:43
Poor premiums (Part 1): Corn is high and labor short on supply https://www.jacoby.com/what-will-dairy-do-about-labor-shortages/ Thu, 22 Jul 2021 17:33:51 +0000 https://www.jacoby.com/?p=2169 The dairy producer feels like they're between a rock and a hard place as premiums remain low while feed and shipping costs keep going up. "So, what do we do about it," T2 asks on this edition of The Milk Check, a two-part deep dive into what the industry can do to get more money on milk checks. In part one, we discuss how the fierce competition for labor in rural areas has reduced hauling and processing capabilities, decreasing the demand for milk while the cost of feeding the nation's large herd remains high. Can rich Class III prices make up for low premiums and high input costs? The conversation continues in part two, where we discuss the effects exports have on competition for milk from the farm. T3: Welcome, everybody to the July podcast. We thought this would be a good time to have a discussion about markets. But not about markets the way that we usually talk about where we're talking about cheese prices, or we're talking about Class III prices or butter prices or powder prices. This time, I think we'll focus on the basis. How we're finding this market right now in the dairy industry throughout the dairy industry, from feed prices to milk prices, to finished product prices like cheese and butter, we're seeing major changes and big differences in the basis prices, the premiums for milk, the overages for cheese. It is just so different, especially in the spot market from what we're used to because it bears discussing because I think that's affecting how people's milk checks look, and I think it would be an interesting thing to discuss. Where should we start? Anna, Dad, do you guys want to start at the milk or should we start maybe with feed costs? T2: Well, if you want to look back at it historically, we're taking the bull by the horns here, six or eight years ago when we delivered milk to a buyer's plant, we delivered it at class price, using Class II as the most obvious example plus a premium. And usually, the premium covered the freight, sometimes covered the freight and then even more in certain times of the year is that they'll be from the dairy or the farm, and the buyer paid the freight. Today, we're not doing that. And I guess the question is, why? Why are we delivering milk at prices considerably under-class? Does that mean that the people who are buying the milk are taking us for a ride and they're making all the money? Well, I do think that the people who are buying the milk and taking it from the processing plant to the converter to the grocery store shelf, I think that's where the margin is. And we're not getting a piece of that margin right now. So, why not? First of all, is the margin really there? In some cases, it is. If we look at 18-month-old cheddar in Costco, $6 a pound, especially cheeses in Whole Foods that I look at, some of them exceed $20 a pound. Now, that doesn't necessarily tell the story in the cheeses that I see often, since we know who makes them, I bet you they are not running more than 100,000 pounds of milk a day, that's 2 truckloads of milk a day into a certain kind of cheese, and maybe they only run that certain kind of cheese once or twice a month. So just saying that there's a big sale price on the cutting rack doesn't necessarily tell the full story. But it would seem to me today that the margin for the industry is in the marketing side. And we'll describe, for the purpose of this conversation, the marketing has been from the plant to the grocery store shelf. If you look at that, the dairyman is lucky to get 20% or 25% of the value on the grocery store shelf. The processor, manufacturer, if you will, he may get another 20% or 25%. It's hard to say to be so categorical depending on whatever product that you're looking at, and what the class price might be for that product. But the marketer may be getting 50% or more of the actual price that shows up on the shelf. T3: Well, let me clarify that, and I can speak to cheese to help with that a little ...

The dairy producer feels like they’re between a rock and a hard place as premiums remain low while feed and shipping costs keep going up.

“So, what do we do about it,” T2 asks on this edition of The Milk Check, a two-part deep dive into what the industry can do to get more money on milk checks.

In part one, we discuss how the fierce competition for labor in rural areas has reduced hauling and processing capabilities, decreasing the demand for milk while the cost of feeding the nation’s large herd remains high.

Can rich Class III prices make up for low premiums and high input costs?

The conversation continues in part two, where we discuss the effects exports have on competition for milk from the farm.

T3: Welcome, everybody to the July podcast. We thought this would be a good time to have a discussion about markets. But not about markets the way that we usually talk about where we’re talking about cheese prices, or we’re talking about Class III prices or butter prices or powder prices. This time, I think we’ll focus on the basis. How we’re finding this market right now in the dairy industry throughout the dairy industry, from feed prices to milk prices, to finished product prices like cheese and butter, we’re seeing major changes and big differences in the basis prices, the premiums for milk, the overages for cheese. It is just so different, especially in the spot market from what we’re used to because it bears discussing because I think that’s affecting how people’s milk checks look, and I think it would be an interesting thing to discuss. Where should we start? Anna, Dad, do you guys want to start at the milk or should we start maybe with feed costs?

T2: Well, if you want to look back at it historically, we’re taking the bull by the horns here, six or eight years ago when we delivered milk to a buyer’s plant, we delivered it at class price, using Class II as the most obvious example plus a premium. And usually, the premium covered the freight, sometimes covered the freight and then even more in certain times of the year is that they’ll be from the dairy or the farm, and the buyer paid the freight. Today, we’re not doing that. And I guess the question is, why? Why are we delivering milk at prices considerably under-class? Does that mean that the people who are buying the milk are taking us for a ride and they’re making all the money?

Well, I do think that the people who are buying the milk and taking it from the processing plant to the converter to the grocery store shelf, I think that’s where the margin is. And we’re not getting a piece of that margin right now. So, why not? First of all, is the margin really there? In some cases, it is. If we look at 18-month-old cheddar in Costco, $6 a pound, especially cheeses in Whole Foods that I look at, some of them exceed $20 a pound. Now, that doesn’t necessarily tell the story in the cheeses that I see often, since we know who makes them, I bet you they are not running more than 100,000 pounds of milk a day, that’s 2 truckloads of milk a day into a certain kind of cheese, and maybe they only run that certain kind of cheese once or twice a month.

So just saying that there’s a big sale price on the cutting rack doesn’t necessarily tell the full story. But it would seem to me today that the margin for the industry is in the marketing side. And we’ll describe, for the purpose of this conversation, the marketing has been from the plant to the grocery store shelf. If you look at that, the dairyman is lucky to get 20% or 25% of the value on the grocery store shelf. The processor, manufacturer, if you will, he may get another 20% or 25%. It’s hard to say to be so categorical depending on whatever product that you’re looking at, and what the class price might be for that product. But the marketer may be getting 50% or more of the actual price that shows up on the shelf.

T3: Well, let me clarify that, and I can speak to cheese to help with that a little bit. The typical margin for cheese in the dairy case at a supermarket is approximately 25%. The typical margin for cheese in the deli case, your high-end specialty cheeses, is actually close to 50%. So it’s a lot higher, but the turn on that SKU is a lot slower.

T2: Twenty-five or 50% of what?

T3: So if you go to the store and you buy an 8-ounce package of shreds for $2. The supermarket delivered to that store, if they’re selling it for $4, they would have paid $3. So 25% of that price that the store sold it for, was the supermarket’s markup. And they always do it backwards. They don’t buy it for $3 and then add 25%, they sell it for $4 and back out the 25% so that they bought it for $3. That’s how their math works. And if it’s the deli case, it’s closer to 50%. So the margins in the deli case they’re a lot higher, but they turn those SKUs a lot slower and there’s a lot more of a personal involvement because in the deli case you usually have someone sitting there really cutting the cheese for you and wrapping it up for you and things like that.

There is another 10% to 15% that goes into distribution, getting it from the cheese plant to the store. Now keep this in mind, when I say from the cheese plant, I’m talking about from the plant that packaged the cheese. If it’s a shred, I’m talking about the plant that shredded the cheese and put it in a plastic bag. So the margin for a lot of those converters is probably another 15% to 20%. And so if you kind of just start stacking it, you got 25% at the supermarket, 10% to 15% for distribution, another 20% for the converter, now add another probably 25% to make the cheese, you probably have a small sliver of a percentage to get it from the plant that made the cheese to the plant that converted the cheese. Somewhere in there, you probably had to pay for some marketing to get the product to actually move off the shelf. So you can kind of see how that all stacks up. So, yeah, it’s pretty easy to get to a place where the farmer themselves only makes about 25%.

T2: I think you just made my case. And if we’re going to get back to a premium structure that gives a premium to the dairyman who delivered the processor’s door, how are we going to do it? Milk is going to have to get very tight. And there’s got to be a lot of competition for that milk.

T3: Well, and I think that’s where the issue lies right now. It’s in the competition for that milk.

T2: Let me make that case, and I know I’ve made it before and I don’t want to be labored, but there’s two ways that the industry seems to think about this. The first is, since most of our milk is cooperative, and under the Capper-Volstead Act, collective bargaining is allowed to dairymen as members of co-ops. Collective bargaining, obviously, isn’t getting it done, not as far as getting the share of the marketing premium is concerned. And how can it if you’ve got 4% increase in production every year and only a 1% to 2% increase in disappearance?

But the other way to think about it is you’ve got to have demand for the milk and people competing for it, which means that there’s got to be a hell of a lot less milk around. And the industry has changed over the last 10 years where if the numbers for producing milk are profitable, it doesn’t take very long for people to be filled up the end of the barn with cows. And that’s what’s going on right now. So our class pricing is basically turning into benchmarks.

We’re measuring what the dairyman gets or doesn’t get based on classified pricing, or market pricing, or futures pricing, or whatever price indices you want to compare it to. But as long as we don’t have any competition for the milk, it’s pretty hard to see how this is ever going to change. And one of the things this obviously leads to is quotas, supply controls. And, you know, that had never worked when we tried it. But a lot of people are starting to think that well, maybe we ought to give it another try.

T3: So I’m going to push back on you a little bit on this one. Because I think what’s happening today is different than what we’ve been experiencing over the last 20 years. I think as we’ve come out of COVID, and the way the economy is working right now, there’s a couple of things going on that we really haven’t had to deal with as an industry, at least in my career, that’s causing some real convolutions in terms of overages and premiums for milk and even basis prices for feed costs like corn. And the issue is really labor. Most dairy plants, especially cheese plants, are in rural areas. And rural areas, pretty much throughout the country right now, have unemployment rates at 3%, they’re very low.

And the competition for labor right now is fierce. I know a number of cheese plants in the upper Midwest that have raised their wages as much as $4 an hour just to keep the people they have so they don’t lose them to the plant down the street. We have 50,000 fewer truckers on the road today than we did when the pandemic started over a year ago. For our company, I can tell you, our hauling costs have gone up, in some cases, 90% in less than 6 months. We used to be able to ship cheese 20 years ago from Idaho to Wisconsin and pay 6 cents. Three years ago, we shipped from Idaho to Wisconsin and we pay 10 cents, maybe 11 cents. Today, we’re paying as much as 18 cents.

The prices have really gone up. And so when you really think about labor costs have gone up, hauling costs have gone up, you were having inflation and because inflation seems to be happening very differently in rural America than in urban America, it’s not showing up in our overall economic statistics at the moment. But you can talk to just about any dairy farmer who’s trying to hire people for his farm, you can talk to just about any dairy plant, you can talk to just about any hauling company, they’re all going to tell you the same thing. They are turning down business because they can’t get the people.

We know multiple cheese plants that have had to reduce shifts because they don’t have the people to run the plant. So instead of running three shifts a day, seven days a week, they’re running two shifts a day, six days a week. Well, what’s that really doing? That’s decreasing the demand for milk. And so by decreasing the demand for milk, now you got to find new places to go with the milk. Well, where are you going to go with the milk if every dairy plant is having part of the same problem? They can’t get the labor, so they can’t run at full capacity.

To me right now, I feel like we are stacking this problem on top of each other all the way from the feed supplier to the dairy farmer, all the way to the supermarket or the restaurant. The usual basis price for corn, depending on where you are in the country, is usually somewhere between 50 cents under a bushel, to 50 cents over a bushel. Currently, on average, I think most people would say it’s about 80 cents over a bushel. So not only is the price of corn high, but the basis price is high too. Now, it’s hard to say exactly why that basis price is high. But I’m going to argue some of it is the cost of hauling has gone up, which means moving in between different regions of the country has increased.

So you get the feed to the farm, it costs you more to get there already, now you got people in the milking parlor, you’re having trouble fully staffing the milking parlor. But the cows got to give milk, so the milk still comes out. You probably pay more to get that milk from the farm to the plant because those hauling costs have gone up. But you got a cheese plant that’s not running full because it can’t find the people. So now you’ve got co-ops that have to spot-sell that milk, at what, $2, $3, $4 under a hundred-weight because…

Anna: Sometimes only if you’re lucky.

T3: Yeah, exactly, you know. And so you’ve got premiums for milk that are going down, it’s easy to understand why the dairy farmer right now feels like they’re getting squeezed from both sides, their input costs have gone up, they can’t find the labor, and it feels like they’re getting a discount for the milk. But it doesn’t stop there. The cheese plant costs, they’re highly fixed costs because they have to build the plant, they got a big loan for that, they got to buy the equipment, they got a big loan for that. So, many cheese plants, especially your biggest ones, over 50% of the cost of running the plant is actually the debt service, you know, and they’re not running at full capacity because they can’t get the labor. So the cheese companies, a lot of them are hurting. Now you got to get the product from the cheese plant to the converter. The converters…and that’s even more labor intensive than the cheese plants. I know they’re having problems.

You’re kind of stalking this problem all the way to the supermarkets, your restaurants are having trouble getting staffed, it’s going all the way down through the system, and it’s causing some real big distortions on pricing. You know, you look at the futures board right now, and you look at Class III prices, and you look at cheese prices or even butter prices, your initial reaction is they’re not too bad. But if you’re at $17 a hundred-weight for a Class III price, $15 a hundred-weight for a Class IV price, let’s just round the blend and say the blend is somewhere around $16, but everybody’s getting $1 or $2 under, you’re at $14, and your hauling costs are higher, it’s easy to see why dairy farmers are really frustrated at the moment.

But it’s happening throughout the supply chain. And that, to me, is what’s really frustrating. We’re seeing it in our business, and we’ve got a lot of contracts where we promised people we’d be able to deliver at these prices, and we haven’t been able to because freight has been so difficult. We’ve got people cutting orders because they don’t have the people, they can’t run the cheese, they can’t convert the cheese. It’s a real mess at the moment. And I’m really concerned about it, and it’s causing some real distortions between what these market prices say the returns should be to the dairy farmer and what they actually are.

T2: So what are we going to do about it?

T3: Talk to your local congressman. I think first and foremost, let’s get the additional unemployment premiums lifted so that you get more people to work. I think that’s first and foremost.

T2: I agree that those things are impediments. And I also agree that getting people to work would increase the competition for the milk, which is a major price issue. So whatever it takes to get that done would be useful. We need to shorten the supply as opposed to the available markets. If exports are running at full tilt, and if we didn’t have the logistical problems or the labor problems, would we have a surplus right now? I expect we probably would.

T3: Yes, we would.

Anna: I agree.

T2: Anna, you agree with that?

Anna: Yes, I do. Do we have any idea when that will end? When does that get better? I know that many states actually terminated their additional unemployment benefits in June. And I know some places around here in Missouri are starting to see the benefit of that. But in terms of premium impact, do we have a timeline that we think that will improve on or what are you thinking?

T3: Oh, boy, that’s a loaded question.

T2: You would think our politicians could come up with a guest worker program that would work, and yet they’ve been struggling with it now for how many years?

T3: No offense, Dad, I don’t have a lot of faith in our politicians’ ability to get along in Washington and therefore accomplish much these days.

T2: Obviously, that’s the case but something as simple as a guest worker program ought to be doable. I had dinner with a very knowledgeable dairyT30 years ago, and he was of the same opinion, and yet here we are. I guess these days immigration is a major political football and makes it impossible to solve this particular problem. On the other hand, here we are giving away food stamps and subsidies in the city for unemployment purposes, and we can’t get help out in the countryside. Maybe just a Greyhound bus to go from the city to the countryside every morning and night would be the answer to the problem. But somehow, I don’t think that’s going to work very well, either.

T3: Anna, I think to more directly answer your question, my gut feeling is that it’s going to take a couple of years for this to really feed fully through the system. And I say that because the answer is a combination of getting more people back to work and better technology to create better efficiencies, whether it’s at the hauling level, things like driverless trucks, whether it’s at the plant level, more automation to decrease the number of workers needed per pound of cheese, let’s say, to be made. I think there’s a lot of investments like that that need to be made in order to resolve this problem. I don’t think it’s going to go away quickly because you’re dealing with…in many rural counties throughout the country, you’re dealing with unemployment rates as low as 2.9%, you’re not going to just suddenly invent workers. So it’s going to take a while.

Anna: I agree. That’s why I was kind of curious. Even if we terminate all these extra benefits, I don’t know that that helps where we need it to help.

T3: It was interesting, just yesterday I was looking at unemployment rates state by state, and in certain states, county by county, I was curious. It was very interesting. So the unemployment rate, for example, right now in Wisconsin is 3.9%. In Illinois, just across, you know, the border to the south is 7.1%. California, it’s, I think, also 7.1%. And Idaho, I think it’s like 4%, or 3.9%. But if you actually go and look, even in California, at rural counties that are big dairy counties, almost every unemployment rate I see is below 4%. And so throughout the dairy industry, that’s a big issue.

I’m not sure how you’re going to solve it, even if you really open up the borders, and a lot of guest workers come in and whatnot, it’s just going to take a long time for all of that to stabilize. You know, one thing to keep in mind is I think most dairy farmers would agree, if we ended up with high Class III milk prices, they don’t have a problem with the premiums being lower. And so some of this, I think, is a tradeoff. I think inflation, I think the shortage of labor, I think a lot of these things that are kind of adding a lot of costs to the system at the moment are also creating an inflationary environment that are driving higher milk prices.

So if the answer is, hey, you’re going to have to get used to $18 milk, but you’re only going to get a 25 cent premium for your milk, or even if you’re 25 cents to $1 under for your milk, I think most dairy farmers probably would take that. And when you’re talking about inflationary pressures, a lot of times that’s what happens. And so these issues that we’re dealing with, as frustrating as they are, if the milk prices stay high enough, there’s survivable issues. So I do think there’s a lot of hope for the industry.

T2: I think you have a little bit of an optimistic view of how the dairy farmer’s gonna react. Anything negative on his milk jack, if it’s a check-off, or hauling costs, or whatever is going to be ill-received, even if he’s getting $30 a hundred-weight. The only way the dairyman is going to be happy is if it’s $30 a hundred-weight plus, and no negatives, nothing coming out of it. And I know they’ll all laugh up the sleeve with that, but they’ll all admit it’s true.

They’re going to have to get rid of the check-offs and the expenses for this or that or the hauling costs or whatever in order for it to be happy. I know we used to have a milk program that said “free hauling.” I used to say, you’d have to be an idiot to think that there’s going to be free hauling. It’s going to be paid for by the dairyman no matter what. But you know what, it’s the way the mind works. If you think it’s not on your check, it’s out of sight, out of mind. So there’s no such thing as free hauling, but theoretically, your thought would be correct. That’s not the way they’re going to want to look at it.

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The dairy producer feels like they're between a rock and a hard place as premiums remain low while feed and shipping costs keep going up. "So, what do we do about it," T2 asks on this edition of The Milk Check, The dairy producer feels like they're between a rock and a hard place as premiums remain low while feed and shipping costs keep going up.<br /> <br /> <br /> <br /> "So, what do we do about it," T2 asks on this edition of The Milk Check, a two-part deep dive into what the industry can do to get more money on milk checks. <br /> <br /> <br /> <br /> In part one, we discuss how the fierce competition for labor in rural areas has reduced hauling and processing capabilities, decreasing the demand for milk while the cost of feeding the nation's large herd remains high.<br /> <br /> <br /> <br /> Can rich Class III prices make up for low premiums and high input costs?<br /> <br /> <br /> <br /> The conversation continues in part two, where we discuss the effects exports have on competition for milk from the farm.<br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> T3: Welcome, everybody to the July podcast. We thought this would be a good time to have a discussion about markets. But not about markets the way that we usually talk about where we're talking about cheese prices, or we're talking about Class III prices or butter prices or powder prices. This time, I think we'll focus on the basis. How we're finding this market right now in the dairy industry throughout the dairy industry, from feed prices to milk prices, to finished product prices like cheese and butter, we're seeing major changes and big differences in the basis prices, the premiums for milk, the overages for cheese. It is just so different, especially in the spot market from what we're used to because it bears discussing because I think that's affecting how people's milk checks look, and I think it would be an interesting thing to discuss. Where should we start? Anna, Dad, do you guys want to start at the milk or should we start maybe with feed costs?<br /> <br /> <br /> <br /> T2: Well, if you want to look back at it historically, we're taking the bull by the horns here, six or eight years ago when we delivered milk to a buyer's plant, we delivered it at class price, using Class II as the most obvious example plus a premium. And usually, the premium covered the freight, sometimes covered the freight and then even more in certain times of the year is that they'll be from the dairy or the farm, and the buyer paid the freight. Today, we're not doing that. And I guess the question is, why? Why are we delivering milk at prices considerably under-class? Does that mean that the people who are buying the milk are taking us for a ride and they're making all the money?<br /> <br /> <br /> <br /> Well, I do think that the people who are buying the milk and taking it from the processing plant to the converter to the grocery store shelf, I think that's where the margin is. And we're not getting a piece of that margin right now. So, why not? First of all, is the margin really there? In some cases, it is. If we look at 18-month-old cheddar in Costco, $6 a pound, especially cheeses in Whole Foods that I look at, some of them exceed $20 a pound. Now, that doesn't necessarily tell the story in the cheeses that I see often, since we know who makes them, I bet you they are not running more than 100,000 pounds of milk a day, that's 2 truckloads of milk a day into a certain kind of cheese, and maybe they only run that certain kind of cheese once or twice a month.<br /> <br /> <br /> <br /> So just saying that there's a big sale price on the cutting rack doesn't necessarily tell the full story. But it would seem to me today that the margin for the industry is in the marketing side. And we'll describe, for the purpose of this conversation, the marketing has been from the plant to the grocery store shelf. If you look at that, the dairyman is lucky to get 20% or 25% of the value on the grocery store shelf. The processor, manufacturer, if you will, he may get another 20% or 25%. It's hard to say to be so categorical depending on whatever product that you're loo... T.C. Jacoby & Co. - Dairy Traders clean 19:34
Consequences of the drought, demand and shortages https://www.jacoby.com/consequences-of-the-drought-demand-and-shortages/ Wed, 23 Jun 2021 20:52:11 +0000 http://www.jacoby.com/?p=2133 Market analyst Sarina Sharp, of Dairy Business News, joins The Milk Check crew to talk about the lacking rain in the West, labor shortages and demand expectations for the second half of the year. While the drought won't drastically affect overall milk production, it will put Western dairy producers in a bind as feed prices and hauling rates increase. California producers also have to weigh the rising cost of scarce labor. The crew also discusses issues like the accuracy of Class III price forecasts and how freight uncertainties continue to challenge exporting efforts. T3: Welcome, everybody. Today's June 10th. And welcome to our June podcast recording. Today, we have a special guest and great friend, Sarina Sharp, who is the market analyst for The Daily Dairy Report. She also writes the Jacoby Weekly Market Report. And we spend a lot of time, you know, talking to Sarina about markets and getting her insight and what she thinks, and we thought it would be a great time to have her join us today. One of the things that we've been reading a lot about, I woke up this morning and I read an article in "The Wall Street Journal" about the Western drought and how low Lake Mead is. It's like the lowest it's been since 1933, I believe. And it made me wonder how much this drought was going to affect the dairy industry. So I think my first question for you, Sarina, and I know my dad has a bunch of questions for you, but how serious should the dairy industry be taking this drought that everybody's talking about? Sarina: Well, like most weather issues, it's gonna be localized, but it will also have a national and an international impact. The thing to remember is that the drought is severe in the West and it will impact feed costs for dairy producers in the West, there are certainly some key dairy states there. But we've actually had really good rains in the Southern Plains, including in some large dairy states like Texas. And then we have had good rains up until a few weeks ago in most of the Corn Belt. The Northern Plains are very dry as well. And it is just starting to get dry to an extent that it's a concern for farmers in Iowa, which has obviously a very big corn state. And then in the Northern tier of the Corn Belt, so Minnesota, Wisconsin, Michigan. Those latter three, those are not where you get your big, big crops. Minnesota is a very significant corn state, but Michigan much less so. So the weather impact on feed prices, I think right now is actually less significant than the demand impact on feed prices. We just had the USDA crop report today and they estimate that we will use more than 15 billion bushels of corn in the current crop year, which ends September 1. That's by far a record high. We are planting a lot of corn acres this year, but feed costs are going up because of demand. Getting back to the drought and its impact on dairy producers and to milk production, we will see feed costs rise because of the drought, but I don't think that the immediate impact will be less milk production. In fact, in the Southwest where a lot of cows are on dry lot pens, they're very comfortable. The heat would be a greater concern for their immediate impact on milk yield. T2: Sarina, this is Ted. You know, for 50 years, we've been hearing about droughts in Western California, low water supplies, and the effect that it has on a dairy and feed for dairy and so on. So you have to almost excuse us for not being very concerned, but is there a real concern this time as opposed to the other times we've seen the reservoirs in California and in the Sierras go down a little bit at this time of the year and everybody has their heart in their throat? Sarina: So this is a very significant drought. We've seen severe back-to-back drought in California as recently as I think four years ago, but the impact on farmland is gonna be more significant this time around because California has enacted a long-term water manageme...

Market analyst Sarina Sharp, of Dairy Business News, joins The Milk Check crew to talk about the lacking rain in the West, labor shortages and demand expectations for the second half of the year.

While the drought won’t drastically affect overall milk production, it will put Western dairy producers in a bind as feed prices and hauling rates increase. California producers also have to weigh the rising cost of scarce labor.

The crew also discusses issues like the accuracy of Class III price forecasts and how freight uncertainties continue to challenge exporting efforts.

T3: Welcome, everybody. Today’s June 10th. And welcome to our June podcast recording. Today, we have a special guest and great friend, Sarina Sharp, who is the market analyst for The Daily Dairy Report. She also writes the Jacoby Weekly Market Report. And we spend a lot of time, you know, talking to Sarina about markets and getting her insight and what she thinks, and we thought it would be a great time to have her join us today.

One of the things that we’ve been reading a lot about, I woke up this morning and I read an article in “The Wall Street Journal” about the Western drought and how low Lake Mead is. It’s like the lowest it’s been since 1933, I believe. And it made me wonder how much this drought was going to affect the dairy industry.

So I think my first question for you, Sarina, and I know my dad has a bunch of questions for you, but how serious should the dairy industry be taking this drought that everybody’s talking about?

Sarina: Well, like most weather issues, it’s gonna be localized, but it will also have a national and an international impact. The thing to remember is that the drought is severe in the West and it will impact feed costs for dairy producers in the West, there are certainly some key dairy states there. But we’ve actually had really good rains in the Southern Plains, including in some large dairy states like Texas.

And then we have had good rains up until a few weeks ago in most of the Corn Belt. The Northern Plains are very dry as well. And it is just starting to get dry to an extent that it’s a concern for farmers in Iowa, which has obviously a very big corn state. And then in the Northern tier of the Corn Belt, so Minnesota, Wisconsin, Michigan. Those latter three, those are not where you get your big, big crops. Minnesota is a very significant corn state, but Michigan much less so.

So the weather impact on feed prices, I think right now is actually less significant than the demand impact on feed prices. We just had the USDA crop report today and they estimate that we will use more than 15 billion bushels of corn in the current crop year, which ends September 1. That’s by far a record high. We are planting a lot of corn acres this year, but feed costs are going up because of demand.

Getting back to the drought and its impact on dairy producers and to milk production, we will see feed costs rise because of the drought, but I don’t think that the immediate impact will be less milk production. In fact, in the Southwest where a lot of cows are on dry lot pens, they’re very comfortable. The heat would be a greater concern for their immediate impact on milk yield.

T2: Sarina, this is Ted. You know, for 50 years, we’ve been hearing about droughts in Western California, low water supplies, and the effect that it has on a dairy and feed for dairy and so on. So you have to almost excuse us for not being very concerned, but is there a real concern this time as opposed to the other times we’ve seen the reservoirs in California and in the Sierras go down a little bit at this time of the year and everybody has their heart in their throat?

Sarina: So this is a very significant drought. We’ve seen severe back-to-back drought in California as recently as I think four years ago, but the impact on farmland is gonna be more significant this time around because California has enacted a long-term water management plan called SGMA. They divide the state into water districts and every five years, those districts have to report on their progress in conserving water. And if they do not meet their targets, then the state will pass down some more heavy-handed you have to take these steps in order to meet your targets.

So there are agricultural producers in California who are fallowing land because they have lower access to water than they did in the past, even than they did in the past during drought years. So water allocations have gone down as a result of this long-term water management and the acreage that is gonna be fallowed is primarily feed for livestock and especially dairy cows. Forage production in California will be down as a result of this drought. They’ll preserve the water for the higher value cash crops. The fruit and nut trees, the vineyards, the vegetable crops that they can sell to people rather than growing haylage and corn silage.

So those California dairy producers are going to have to import more of their feed. And today, there’s a trucking shortage and they’re gonna have to haul it from greater distances because of drought throughout the West. So it’s not going to mean that dairy cows in California will go hungry, but dairy producers in California and throughout the West will have to pay a significant markup on their feeds. So when you look at July corn futures that almost $7 per bushel, that actually understates the cost of cash feed for dairy producers in the West.

T2: So what’s the timeline of this? I mean, is it short now or are we intending it to be short come August through September, and then how long will it last?

Sarina: So I don’t think that we can say we’ll be short of milk by any means just because we have so many cows and some of those cows have been added on very modern facilities, which accommodate greater milk yields. And we always see improvement in milk yields year over year. However, I think that these higher feed costs are starting to bite.

So, usually, there’s a six-month lag between when on-farm economics turn bad and they have to be sustained for six months negative margins, and then we will see a decline in milk production. But these high feed costs that are not accompanied by super high milk prices, do force dairy producers to take a critical look at their ration. And I do know of dairy producers who are scaling things back in their ration to cut costs, and that’s probably gonna come at the expense of some milk production. So higher feed costs are trimming milk production growth at the margins, but with the number of cows that we have, I expect we’ll have plenty of milk.

T2: That’s sort of my impression also, and with a six-month lag, then, in order for us to see any major bites, it almost puts it out to October, November, right?

Sarina: You are. At least with the future of those paying right now, we probably won’t be seeing $7 corn at harvest, but December corn futures are $6.15 today. So that’s still a historically high feed price and soybean meal is up towards $400 per ton. There are no cheap feeds out there, no cheap byproducts, and the forage is getting very tight.

T3: But it sounds like one thing that will not be an issue, the cows themselves will get enough water. Isn’t that safe to say?

Sarina: Yes, dairy producers will prioritize cow care. It’s going to be more expensive than it would have been in a normal year.

T3: So if California enacts allocations, obviously, the cities will get the water they need for the people. The farmers will get the water they need for their livestock. And so the first outside of whether it’s the golf courses or the people’s lawns, it’s the crops themselves and the irrigated crops that will start feeling the brunt of it first.

Sarina: That’s correct. So California is enacting allocations in most of the state. It depends on the water district, but most of the key crop areas are under sort of rein in your water use. But that’s going to come down to the individual farmers. Some farmers have historic water rights to groundwater like water that just runs through the canals, they can pump off of that. What’s gonna be limited is irrigation. So it’s gonna be a farmer by farmer, field by field basis, whether or not it’s going to be limited, but farmers will choose to prioritize using water for those high-value crops.

T3: OK.

T2: Interesting.

Sarina: And keeping your cows watered is not irrigation so there’s no limits on that.

T3: Got it.

T2: So the almonds are gonna get preference over alfalfa from the sound of it, right?

Sarina: Yes. Economically they will. And because you can let your alfalfa go, you know, not water it for a year and then just plant something new the next year but your trees are a long-term investment.

T3: Do we know, is there a correlation between how severe a drought is and temperature?

Sarina: I would guess that there is a correlation. The U.S. Weather Service is calling for above-normal temperatures in the Western United States and the Eastern United States and somewhat normal in the Central, I believe. And then a normal rainfall this year actually in the Corn Belt, but lower than normal rainfall in the West.

T2: Got it. How long are we gonna see 3% milk increases under this kind of a scenario, Sarina?

Sarina: Our 3% milk increases are compared to April and May of 2020, which were obviously unusual years with severe supply management restrictions in a lot of places due to the pandemic. In some areas, those supply management restrictions are still in place, but there’s not as much threat of dumped milk.

We’ve expanded processing capacity and we’ve somewhat normalized our supply chain. So, the year-over-year comparisons are gonna get a little bit tougher. I don’t think that we should necessarily expect 3% growth every month going forward, but given the number of cows we have, I think we should still expect significant year-over-year growth for a while.

T2: By significant, you’re probably talking 2.5%, right?

Sarina: Yeah. Two percent, 2.5%, I think would be pretty safe.

T2: But do you think that the numbers that we’re getting with regard to demand and consumption are actually accurate? It looks like exports are very strong and really strong in fact, but I’m sort of suspecting that we’re understating consumption a little bit.

Sarina: I have been concerned that particularly when we look at cheese and butter consumption that we might be double counting a little bit of the demand as restaurants are restocking, and as retailers have a hard time anticipating how long they can expect people to shop more at grocery stores and less at restaurants.

So I think that we’ve truly moved this cheese and butter away from the processor and into sort of the middleman, either a restaurant or the grocery store, but not truly turned every pound of those cheese and butter sales into consumption.

But those sales have been strong for long enough that I’m a little less concerned about that than I was a couple of months ago. I do think that’s probably still going on to some extent, but we’ve had enough time where that should even out a little bit. It does seem like both domestic and export demand are quite good.

T2: So you think the numbers that we’re getting with regard to demand are probably pretty accurate?

Sarina: I think, well, the export numbers are quite accurate. And then I think the domestic demand numbers are accurate in terms of stocks moving out of processors’ hands and into retailers and restaurants, but some of that might be a little bit of pipeline restocking. And we’ve seen quite a bit of fresh cheese come to the CME this week and last week. So there’s still plenty around even with that big demand.

T3: And that’s what we’re seeing as well, dad, it’s just in the last, I’d say two to three weeks, the cheese market, in particular, seems to have gotten a little weaker. And some of that I think is just seasonally, but some of it is I think the pipelines become filled and now it’s just a matter of seeing where we go from here.

T2: Well, if we look at the international pricing, we ought to be really in a position to really blow through the exports.

T3: I will say something that I’ve brought up a few times in the last couple of months and that’s that we’ve got export opportunities that we are turning down because we can’t get the freight worked out. I was just talking to one of our traders today about an opportunity to ship some cheese to a customer and they need it by August, and we’re probably gonna have to pass on the sale because we’re not going to be able to get the cheese there in time. There’s just no way.

Sarina: So, Ted, does the United States lose that business, or our competitors would have similar shipping issues as well? So does the buyer just have to not accept delivery by August?

T3: So I would say this, let’s say it depends on what part of the world you’re in. If it’s Asia, you could be losing the business to New Zealand, possibly. If it’s the Middle East, you could be losing the business to Europe. And so, in those cases, the answer would be yes, because they’re probably able to get the product there a little bit quicker than we are.

But in some cases, Mexico might be a good example. Mexico’s freight costs have gone up, but the availability is still there. We can still get the product to Mexico. It’s really containers, it’s ocean freight to Asia, ocean freight to the Middle East that really is where the biggest problem has been.

And everything’s just delayed. Everything’s more expensive and everything’s delayed. And lately, the big issue has been there’s a lot of concern now. COVID rates in China are going up again and it’s particularly bad around one of the ports in Southern China. And if that port has to close down because of COVID, that’s just gonna delay everything even further. That’s where the problems are.

T2: So what do you think the second half of the year is gonna bring, Sarina? What’s your feel for the Class III prices as I guess the best barometer?

Sarina: I think that say, the whole second half, I think those prices are a little rich right now. I’m particularly looking at October at $18.88 and November at $18.81. Those prices just seem high given the expansion in cheese production capacity. The fact that we are starting to see fresh cheese pile up a little bit, and just the sheer number of cows we have in the United States.

On the other hand, we have price cheese at a level where we should be gaining some export business and we saw excellent exports in April. Net cheese exports in April were the second-highest on record. So we do have a bit of a release valve there, but if those exports start to dry up for any reason, I think that Class III futures are probably a little too high.

T2: Given the price juxtaposition that we have, it’s hard to see the exports suddenly grinding to a halt.

Sarina: True. And the cheese that we’re selling via export today isn’t going to move for a couple of months. So maybe I’m talking myself in circles on September and October Class III. But $18, almost $19 milk still seems a little high, you know, we export roughly 5% of our cheese so we could boost those exports considerably and still have too much cheese.

T2: We’re torn by the same conflict basically, or a conundrum is that we’re looking at basically flush level production increases. And we’re looking at all the problems with the supply and demand because of heat, because of transportation and how that affects pricing, and so on. It’s really very difficult to try to project how this thing is gonna go.

I guess my own feeling is that yeah, $19 might be a little rich, but on the other end historically, $19 is a pretty good price even in the face of inflation. So that’s probably gonna continue to pull a lot of milk out of the woodwork.

T3: I will say this though, dad, I agree with Sarina. I think the prices may be a little bit too high, but I don’t think there’s near as much downside as there normally would be with supply getting as long as I think it could get in the second half of this year.

But one thing I do think is really true is that the costs have gone up everywhere. There are problems with staffing and hiring the people that whether it’s a cheese plant or its dairy farm need to run at full capacity. There’s some serious issues in the industry right now about that. Calling costs have gone way up, and so there’s so many places where costs have gone up that I think you’re gonna have higher prices that aren’t necessarily gonna feel that high because you’ve lost so much of that profit margin into places where you normally haven’t historically.

T2: Yeah. There’s no question. That’s correct. I guess we’ll have to see.

T3: I think so. Anna, you’ve been pretty quiet. Do you have any questions?

Anna: Well, I was about to chime in because you started to hit on something that I wanted to ask about and if this is out of your wheelhouse, that’s fine, but I wanted to get, Sarina, take on labor, especially.

Sarina: Labor is going to be a bigger issue on the West Coast right now than anywhere else, simply because both California and Washington have recently passed both minimum wage increases and some pretty strict overtime rules that make it hard for dairy producers to run 12-hour shifts, for example, which is often a milking shift.

So they have to pay a lot more for overtime than they did in the past, and it’s mandated to kick in, I think right after eight hours. And so that’s raised labor costs considerably. And then, of course, there’s the question of the availability of labor. There is certainly a mismatch in the United States of skills to positions and that’s creating a lot of headaches in a lot of industries.

I would say for agriculture, the fact that immigration has gotten a little more friendly provides some people that dairy producers are also competing with local warehouses. They are short of truckers. They are competing in the Southwest with the energy industry. There’s a lot of lower-skilled entry-level positions available. So I think the solution to labor is gonna be the same as the solution to everything else. And it’s you’re going to have to pay more in order to make sure you get what you need.

T3: I would have to agree with that. Anybody else have any other questions?

T2: No, I think we’ve done quite a bit of damage. Sarina, we very much appreciate your participation.

Sarina: Thanks very much for having me.

T3: Sarina, for me as well, thank you so much for joining us. We really appreciate it.

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Market analyst Sarina Sharp, of Dairy Business News, joins The Milk Check crew to talk about the lacking rain in the West, labor shortages and demand expectations for the second half of the year. While the drought won't drastically affect overall mi... Market analyst Sarina Sharp, of Dairy Business News, joins The Milk Check crew to talk about the lacking rain in the West, labor shortages and demand expectations for the second half of the year.<br /> <br /> <br /> <br /> While the drought won't drastically affect overall milk production, it will put Western dairy producers in a bind as feed prices and hauling rates increase. California producers also have to weigh the rising cost of scarce labor.<br /> <br /> <br /> <br /> The crew also discusses issues like the accuracy of Class III price forecasts and how freight uncertainties continue to challenge exporting efforts.<br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> T3: Welcome, everybody. Today's June 10th. And welcome to our June podcast recording. Today, we have a special guest and great friend, Sarina Sharp, who is the market analyst for The Daily Dairy Report. She also writes the Jacoby Weekly Market Report. And we spend a lot of time, you know, talking to Sarina about markets and getting her insight and what she thinks, and we thought it would be a great time to have her join us today.<br /> <br /> <br /> <br /> One of the things that we've been reading a lot about, I woke up this morning and I read an article in "The Wall Street Journal" about the Western drought and how low Lake Mead is. It's like the lowest it's been since 1933, I believe. And it made me wonder how much this drought was going to affect the dairy industry.<br /> <br /> <br /> <br /> So I think my first question for you, Sarina, and I know my dad has a bunch of questions for you, but how serious should the dairy industry be taking this drought that everybody's talking about?<br /> <br /> <br /> <br /> Sarina: Well, like most weather issues, it's gonna be localized, but it will also have a national and an international impact. The thing to remember is that the drought is severe in the West and it will impact feed costs for dairy producers in the West, there are certainly some key dairy states there. But we've actually had really good rains in the Southern Plains, including in some large dairy states like Texas.<br /> <br /> <br /> <br /> And then we have had good rains up until a few weeks ago in most of the Corn Belt. The Northern Plains are very dry as well. And it is just starting to get dry to an extent that it's a concern for farmers in Iowa, which has obviously a very big corn state. And then in the Northern tier of the Corn Belt, so Minnesota, Wisconsin, Michigan. Those latter three, those are not where you get your big, big crops. Minnesota is a very significant corn state, but Michigan much less so.<br /> <br /> <br /> <br /> So the weather impact on feed prices, I think right now is actually less significant than the demand impact on feed prices. We just had the USDA crop report today and they estimate that we will use more than 15 billion bushels of corn in the current crop year, which ends September 1. That's by far a record high. We are planting a lot of corn acres this year, but feed costs are going up because of demand.<br /> <br /> <br /> <br /> Getting back to the drought and its impact on dairy producers and to milk production, we will see feed costs rise because of the drought, but I don't think that the immediate impact will be less milk production. In fact, in the Southwest where a lot of cows are on dry lot pens, they're very comfortable. The heat would be a greater concern for their immediate impact on milk yield.<br /> <br /> <br /> <br /> T2: Sarina, this is Ted. You know, for 50 years, we've been hearing about droughts in Western California, low water supplies, and the effect that it has on a dairy and feed for dairy and so on. So you have to almost excuse us for not being very concerned, but is there a real concern this time as opposed to the other times we've seen the reservoirs in California and in the Sierras go down a little bit at this time of the year and everybody has their heart i... T.C. Jacoby & Co. - Dairy Traders clean 17:17
Milk production straps in for a rollercoaster ride https://www.jacoby.com/milk-production-straps-in-for-a-rollercoaster-ride/ Wed, 19 May 2021 17:47:37 +0000 http://www.jacoby.com/?p=2093 We welcome our Jacoby trading team back to discuss the rapid increase in milk production so far in 2021, compared to 2020 in which the national herd decreased by 30,000 cows.  Don Street, our director of global strategy, explores production issues like the hefty 3% increase in cheese as compared to last year, driven by American and cheddar.  Jacob Menge, future and options trader, leads a discussion about what inflation could mean for dairy as foreshadowed by the increasing cost of many commodities, from lumber to diapers.  T3: Welcome, everybody to our monthly mass balanced discussion. Today, we've got my father, Ted Jacoby. We've got Joe Maxtor, who's our butter trader. We've got Don Street who tends to lead the mass balance discussion and heads our powder group. We've got Diego Carvallo, also from our powder group. We've got Gus Jacoby, who heads our milk and fluid team. We've got Greg Scheer from our milk team. We've got Jacob Menge, who's gonna lead the charting discussion who also heads up our risk management group. We've got Anna Donze who handles pooling for the milk group. Welcome, everybody. Don, why don't you take it away? Don: I think we have a real roller coaster that's getting ready to happen, certainly on milk production. And I'll just get right into this, we’ve seen a very tight protein market in the last 10 days. Cheese has been a bit more sideways but price-wise hanging in there. When you just kind of look where we've been for Q1 we had 2% more milk, and we were running 90-some-thousand cows more than a year ago. The roller coaster starts because in Q2 of last year, the cowherd shrunk by over 30,000 head. When you look at when we start in April, instead of being 90,000 head higher than a year ago, April is going to be 110,000, let’s say, it's going to be a significant jump up. That number only grows to when we get to June, we could be 150,000 cows ahead of one year ago. T3: Don, has that jumped because we shrunk the herd at this time last year because of the pandemic? Are we expecting the herd to grow over the next three to four months, or is it a combination of two? Don: I think mostly the drop of Q2 last year when the pandemic really began because we had from 5,000, 13,000, 9,000 cows every month. Take that times 12, you have 8,000 on average, you get 96,000 more cows every year. So most of this is simply the drop that took place a year ago. Plus, milk per cow a year ago was also pulled back as more co-ops instituted base programs. So my milk gross projection for Q2, it’s a really solid 3% out, which is 50% more than the growth we had in Q1. To me, that's the biggest change that's coming down the dairy road in this Q2. T3: Is it fair to say, Don, that the number is going to be twice as big in Q2 and Q1, but the real trend from Q1 to Q2 isn't more increased milk, it really reflects what happened last year because the pandemic hit and we shrunk the milk supply? Don: That is correct. If I look month-on-month, you're clearly going to have more cows. Productivity growth seems to be pretty reasonable. Ignoring the seasonal trend on milk, Q2's gonna be just a really quarter for milk. Try to think about this in terms of what we do with the milk that's produced. In Class I, bottled milk, same old story, for the two months that we've reported in 2021, were down about 2.5% over the prior year. Last two has been really strong with the exception of cottage cheese, sour cream, ice cream, yogurt has just been on a tear production-wise, 8% to 10% up, which even on a small class of milk is significant. Total cheese production was negative in January. February was really up strong. And when you look at the two months together, we're up about 3.5% over January, February of '20. It's a big change and it's all driven by American and cheddar cheese. Q2 of 2020 was up 2.1% on total cheese while Q1 was flat. So I think the growth in cheese will pull back a little bit but will still be up a ...

We welcome our Jacoby trading team back to discuss the rapid increase in milk production so far in 2021, compared to 2020 in which the national herd decreased by 30,000 cows. 

Don Street, our director of global strategy, explores production issues like the hefty 3% increase in cheese as compared to last year, driven by American and cheddar. 

Jacob Menge, future and options trader, leads a discussion about what inflation could mean for dairy as foreshadowed by the increasing cost of many commodities, from lumber to diapers. 

T3: Welcome, everybody to our monthly mass balanced discussion. Today, we’ve got my father, Ted Jacoby. We’ve got Joe Maxtor, who’s our butter trader. We’ve got Don Street who tends to lead the mass balance discussion and heads our powder group. We’ve got Diego Carvallo, also from our powder group. We’ve got Gus Jacoby, who heads our milk and fluid team. We’ve got Greg Scheer from our milk team. We’ve got Jacob Menge, who’s gonna lead the charting discussion who also heads up our risk management group.

We’ve got Anna Donze who handles pooling for the milk group. Welcome, everybody. Don, why don’t you take it away?

Don: I think we have a real roller coaster that’s getting ready to happen, certainly on milk production. And I’ll just get right into this, we’ve seen a very tight protein market in the last 10 days. Cheese has been a bit more sideways but price-wise hanging in there. When you just kind of look where we’ve been for Q1 we had 2% more milk, and we were running 90-some-thousand cows more than a year ago. The roller coaster starts because in Q2 of last year, the cowherd shrunk by over 30,000 head. When you look at when we start in April, instead of being 90,000 head higher than a year ago, April is going to be 110,000, let’s say, it’s going to be a significant jump up. That number only grows to when we get to June, we could be 150,000 cows ahead of one year ago.

T3: Don, has that jumped because we shrunk the herd at this time last year because of the pandemic? Are we expecting the herd to grow over the next three to four months, or is it a combination of two?

Don: I think mostly the drop of Q2 last year when the pandemic really began because we had from 5,000, 13,000, 9,000 cows every month. Take that times 12, you have 8,000 on average, you get 96,000 more cows every year. So most of this is simply the drop that took place a year ago. Plus, milk per cow a year ago was also pulled back as more co-ops instituted base programs. So my milk gross projection for Q2, it’s a really solid 3% out, which is 50% more than the growth we had in Q1. To me, that’s the biggest change that’s coming down the dairy road in this Q2.

T3: Is it fair to say, Don, that the number is going to be twice as big in Q2 and Q1, but the real trend from Q1 to Q2 isn’t more increased milk, it really reflects what happened last year because the pandemic hit and we shrunk the milk supply?

Don: That is correct. If I look month-on-month, you’re clearly going to have more cows. Productivity growth seems to be pretty reasonable. Ignoring the seasonal trend on milk, Q2’s gonna be just a really quarter for milk. Try to think about this in terms of what we do with the milk that’s produced. In Class I, bottled milk, same old story, for the two months that we’ve reported in 2021, were down about 2.5% over the prior year. Last two has been really strong with the exception of cottage cheese, sour cream, ice cream, yogurt has just been on a tear production-wise, 8% to 10% up, which even on a small class of milk is significant.

Total cheese production was negative in January. February was really up strong. And when you look at the two months together, we’re up about 3.5% over January, February of ’20. It’s a big change and it’s all driven by American and cheddar cheese. Q2 of 2020 was up 2.1% on total cheese while Q1 was flat. So I think the growth in cheese will pull back a little bit but will still be up a really solid 3% in Q2.

On Class IV, butter up pretty strongly 5% for the 2 months. Nonfat and skim up almost 11%. And just hold that number in your head because I’m going to try to turn that upside down in a little bit. At this point, I think nonfat and skim can be up 4% to 5% in Q2, which would be similar for butter. So where does this lead us as a summary? Milk production will be up strongly in Q2 over Q1. Cheese production will clearly be up because of the new plant in Michigan. And we believe for a better food service demand that we’ll finally see some increases in mozzarella cheese on a prior year basis. Fluid milk just in the tank, I don’t see any recovery on that at all. And just note that Q2 of last year on fluid milk was only up 1%. So it’s not like it was up 4% or 5% and we’ll have a big drawback. It was modestly up 1% and it’ll likely be negative compared to that this year in Q2.

With higher cheese/lower milk in Q1, one lower meaning 2%. We’ve seen this rally in protein prices, part of that is the pull of higher international prices than what we had in the U.S. But it’s also a question of, has there been less nonfat production and skim milk powder production than we thought? Butter, to my way of thinking, seems to be adequately supplied, except for the disruptions in the free market caused by the new cheese plant in Michigan.

I asked you to remember that we had nonfat and skim up 11% year-to-date for months, and butter up 5.4%. But if I just plug in what we have measured for January, February, last one down 2%, last two up 6%, last three up 3.5%. And we had a milk production increase of 2% for the quarter means that we should have expected lower Class IV production, which obviously was not the case because we know butter’s up, we know nonfat skim combined are up. And I don’t believe March will be negative year-on-year for either of those product groups. But it’s just a reflection in a very broad sense of why the protein market, in particular, is tighter. Reflecting Q2, I have fluid milk down 1%, Class II up 2.5%, so a bit more modest, but by any measure, a solid performance for that product category, and cheese up 2%. And again, against a 3% expected increase in milk production now that a negative Class IV products seen up almost 7% in Q2.

Does this mean we’re overly enthusiastic on our price rise and protein prices that we get a bit of pullback as this quarter plays itself through? Or is international pricing simply too strong a force that will keep our prices higher in any event? I’m going to suggest at least that we will see a correction on the U.S. market in Q2 before we get into what I think is the period of real strength, which is the second half of the year. That’s my projection.

T3: How do we think increases in milk solids manifests itself in this?

Don: Generally speaking, you’re picking up at least a half a percent more solids genetically every year and that will vary a bit between fat and protein, but it is the equivalent of more milk. It’s rare to see those solid components decrease on a year-on-year basis. They certainly have a seasonal trend to them, but the long-term trend is higher every year.

T3: A half a percent is a lot different than a 5% difference between Class IV utilization and how much nonfat seems to be being produced.

Don: Correct. Sort of the fallacy of flying at 50,000 feet when cows walk on the ground. So there’s no way that regardless of how March production gets reported would turn negative on Class IV utilization for Q1. But it’s a big flag seen sticking out there that supports, you know, why we saw the powder market run 15 cents up.

T3: I’m having trouble getting past the idea that nonfat and skim milk production is up 11% and yet Class IV utilization is supposedly negative.

Don: Part of it would be what’s up and what’s not up, mozzarella being flat to even down a little bit. It always kicks off cream but now it’s enough for protein solids as well.

So, Ted, even if you say that there was a small increase in Class IV, whether it’s fill-over reporting as you go from month to month, milk comes into the plant, it’s processed tomorrow, which is in the next month, to me still the biggest thing that I’m trying to project here is in Q2, we’re going to have even more milk flowing to a Class IV status.

T3: One of the things that I think is going to be hard to predict, you know, we’re talking about measuring milk production year-over-year. We know milk production went negative in Q2 of last year because of the pandemic. Intuitively, we also know that mozzarella production, in particular, went negative significantly in Q2 because we know there were a lot of mozzarella plants that had to really push back their milk supply, which contributed to the decrease in milk production. We’re up 3.5% in the first quarter. We will probably need to be up 5% or 6% minimum in the second quarter in Class III. But it’s for the same reason, we’re measuring against weakness.

Don: So Q1 of 2020 on cheese was right at zero change and Q2 was up 2.1%. That would argue that Q2 changes in 2021 will be a bit more tempered, except for the fact that you have an 8-million-pound-a-day plant that is presumably now nearing full capacity.

T3: Anybody else have any thoughts?

Don: Three percent more milk in Q2. That’s my story, and I’m sticking to it.

T2: I’m gonna take the under on that, Don.

Don: All right. All right, Ted. You’re on. I like your attitude here.

T3: Gus, what do you think?

Gus: I think we might underestimate what the West is doing from a Class IV production standpoint. I would also guess that there probably is some unreported things that some of this Class IV production is going into as well. But still, I struggled trying to figure out where the gap is, what is being considered production, and what is actually being utilized on the spreadsheet in Class IV.

T3: Meaning you think maybe we’re not actually producing as much nonfat as the dairy products report?

Gus: That’s possible. To me, it seems like milk has been long enough over the last few months. And I’m talking about all over, not just areas like the MidEast that we really tend to focus on. And that there is a fair amount of Class IV production going on, and there’s a need to balance a lot because not just your typical balancing marketplace, but as the economy opens up here, doesn’t open up here, closes back up, those types of things, that milk is in and out of Class IV a lot more than we might think. And we’re not as sensitive to it, perhaps, the normal because of the exportability, you know, we’ve got so much going out of the country right now, we’re a lot higher than we have in a while.

My point being is that those numbers may not completely align. But it doesn’t surprise me that we’re making a whole bunch. And I would expect that we will continue to make a whole bunch of Class IV for the next couple months as we get through the flush and as the economy fully opens up toward the end of Q2. At some point, going to be an issue and it makes me wonder if we’re going to hit probably in June, I would think, where demand exceeds supply on pretty much every level.

T2: Let me ask Greg a question. You’ve got $7 corn, but how are you gonna feed your cows?

Greg: I do think there’s a lag effect. Some of these producers have feed coverage locked in. And some of them aren’t going to cut back yet because they see higher milk prices. But it is going to affect your ration. It is gonna affect how many cows you’re milking and moving forward. But I don’t know that you’d see the $7 corn and all of a sudden cut back right away. I think it’s, kind of, a gradual thing for most producers. And as they work through the feed that they already have coverage on.

T2: Right, so you’re looking at maybe the $7 corn being a factor in the third and fourth quarter?

Greg: Yeah, I think so. I think as you hit that, it will be a much bigger factor, currently.

T2: You know, you’re already shipping less a smidgen milk to the Southeast. Obviously, not necessarily for Class I, more for political reasons. But the simple fact that you’re shipping it.

Greg: That seems to be the one spot, you know, where you can ship milk. Every other area is very full so that’s about the one spot. And then we’ll probably really be the one in need this fall when we get there.

T2: So Don, I’m still taking the under.

Don: Okay. Well, Ted, I appreciate the challenge, and we’ll settle this up in July.

T3: All right, Jake. Let’s talk about what the technical aspects of our markets are telling us to expect going forward from here.

Jake: You bet we’ll dive into that. We’re gonna start in the obvious place first, though, and that is talking about diapers. Actually, a quick follow-up on our last podcast where we, kind of, dove into inflation. And I, kind of, posited that maybe we were seeing inflation right now today, or rather inflation’s happening right now today, but we’re not necessarily seeing it. Well, we’re seeing it. I think a very, very good example is diapers.

Kimberly Clark and Procter and Gamble both came out two days ago, and said they’re going to increase the price of diapers about 10%. That’s a perfect example of something that factors into the CPI, which is what we had discussed last time, that is going to be something that will be reflected and is no doubt inflationary. And a 10% jump on something like diapers is just huge and that’s never going back, that’s inflationary. They are not selling diapers like crazy or anything like that. This is truly due to logistics and material issues.

T3: Just to add to your inflation comment, just in the last couple of weeks, I’ve had four separate conversations with dairy plants that have talked about significant increases in hourly wages. Raising their starting wage, $1, $2 an hour just because that’s how badly they are in need of people and they’re at the point where they have no choice but to increase wages to fill their plant. And that ultimately becomes very inflationary. And wage inflation is really, I think, one of the biggest CPI drivers.

Jake: Yeah, absolutely. I mean, you mentioned the CPI, it’s still very muted. I mean, it’s at, like, 2.6%, I think, which has been a level we’ve hovered around since 2013, maybe 2012. But I don’t have it up in front of me. But you still aren’t seeing that crazy jump in the CPI that everyone’s screaming inflation, inflation, myself included, would really, kind of, expect to see. But things like diapers, lumber, which we’ll touch on a little bit, it’s really hinting that the CPI jump is around.

T3: Jumping the CPI, they measure the CPI at the supermarket level at that sales level. So when the price of cheese goes up, if supermarkets are not passing along that increased cheese price to the consumer, you’re not going to see an increase in the CPI. And it usually takes a sustained price increase at the CME level to cause supermarkets to increase their cheese price. And so it doesn’t surprise me that we could go 6, 8, 10 months with some pretty high cheese prices without seeing increases in price at the supermarket level. But ultimately, we’re at $1.90, $2.00 or higher, and we’re there for 12 to 18 months, that’s when we start seeing food prices, at least in terms of dairy, really start to affect the CPI. And I should add, dairy as a percentage of total food purchases is big enough that if we do see Class III prices high for 18 months, it will have a material effect on the CPI.

Jake: All good points. One other thing in the news this past week that I think is actually kind of important to note for our dairy markets is all the rumors flying around about tax increases. And specifically, I’m going to touch on the capital gains tax increase, the rumored capital gains taxes are going to double from 23%, 24% to 38%, 40%, 43%, I think I saw. And it caused the market selloff on either Wednesday or Thursday last week. And I think the market was very reactionary on it. It’s nothing that’s going to impact us tomorrow. But as we know, markets are anticipatory. And I think if this capital gains tax increase comes to fruition, I think, it’s gonna have really interesting implications on dairy markets.

So our dairy markets trade a lot on what are called section 1256 contracts. And they have a special tax treatment where 60% of capital gains are treated as long-term gain. You could enter a trade today and sell it tomorrow. And normally that would be a short-term gain, which has a higher tax rate. But these section 1256 contracts, 60%, no matter what, is treated as long-term capital gains tax. If we start getting into this high capital gains tax environment, you might see money move to these section 1256 contracts, which dairy is a part of. Just again, kind of a side note, but all things to keep in the back of our mind here as we were talking inflation driving prices higher, things like tax increases might driver our prices higher.

Now the final thing before we really touch on dairy itself is just going to be the dollar index. We’ve had a really interesting reversal on the dollar index over the course of April. We hit this 90 level at the end of March and now we’re falling insistently almost every day in April back down to that 90 to 90-and-a-half level on the index. I don’t have as good of an explanation for that. The coronavirus situation in the U.S. still is outperforming, if you will, Europe and the rest of the world, especially if you look at places like India. India has had a really, really bad last week here. I’m interested why the market is, kind of, off the dollar at this point. I think one explanation could be that the market thinks inflation will be worse in the U.S. than other places in the world. I’m not sure that I’m buying that if that’s the reason the dollar has sold off. I would disagree with the market.

Now, I am not a currency trader, any currency trader listening, you’d be laughing right now. I’m sure there’s an obvious explanation. But I’m surprised to say the least to see the dollar being as weak as it has been over the past month. Now, if you’re a product trader, somebody trying to get exports done, it’s been a welcome sight, this weakness. I really don’t have a great guess where we go from here. If I had to pick a direction, I would say the dollar is going to strengthen again, but we’ll see.

Let’s go ahead and move over to Class III, just talk about milk for a moment. We’ve had a really interesting milk trade, then cheese trade for the past two to three weeks, or maybe even a month. We can’t talk about Class III right now without also talking about corn. So back on March 31st, Class III was at $17.60. And we had a limit update, when basically nothing happened in our cheese stock market or any other stock market for that matter. If you’re just looking at our Class III market, you’d be left scratching your head. And it all comes down to corn. Corn had a limit update on March 31. And if that doesn’t show the correlation that is in our Class III ag markets right now, I don’t know what would. There is a tight correlation, I think.

So ever since late March, early April, corn has basically been on a tear. We went from $5.22, and today, we’re at, I think, $6.80 in the front month. But yeah, ag is just nonstop for the past month. And we’ve had some breathers, I’ll call them, in Class III where maybe we didn’t go up quite as nonstop like corn did, but we are still pretty strong here in the mid-$19s. And I think a lot of cheese traders out there is, kind of, scratching their heads saying, “We’ve got a product out there, demand is okay. But that foodservice pipeline is probably filled. So there isn’t the foodservice demand that we had been seeing filled. So what the heck are we doing up here?” I think all signs point to outside both in the form of managed money, kind of, playing around in our markets as well as just ag in the background, s, so strong, kind of, pulling the markets that are related to ag but not necessarily ag itself pulling those higher as well.

Let’s look at our Class III carry. We’re going to look at a theory from May to September and we are dead flat. It’s showing that it’s at a 6-cent carry from May to September. That is the lowest it’s been besides 2014. 2014, it converted quite a bit. But this thing sticks out like a sore thumb. We’ve got every other year from 2008 until today had a better carry besides 2014, as I said, with almost all the years winding up somewhere between a 30-cent carry to a $1.80 carry, somewhere in that range. Almost every year is in that range. So really, kind of, a notable flatness, the curve in Class III right now.

Diego: Well, basically, do you think the market is telling us that we’re going to be pretty well supplied the rest of the year more in line with bonds like an oversupplied market?

Greg: To be honest, I think the market’s kind of tossing sand here and saying, I don’t really know what’s coming.

T3: I would argue, Diego, that what the markets telling us with cheese is that we added a significant amount of cheese production capacity with the Michigan cheese plant and that we’re gonna have more than enough supply as a result going forward from this moment in that unlike a usual year where your maximum cheese production happens in the second quarter, and then you’ve got to work down your inventories, I think the markets hinting that this year, we’re going to have more than enough cheese production and we’re not going to need to chase the market higher.

But because we’re coming off the pandemic here, I agree with Jake, I think there’s uncertainty at the market at the same time as if on one hand, logically, your mind wants to say we got more than enough cheese, these prices don’t need to be at that high. And on the other hand, they’re saying, I have no idea what’s going to happen. We’re still coming out of this pandemic and there’s a lot of variability.

Gus: Let’s talk about the Class IV curve, just like we were talking about the Class III curve because that thing has gotten really flat as well. A month ago, our Class IV carry was about 10 cents from $1.19 to $1.28. And now today, it’s from $1.32 to $1.36. So we’ve gone from about a 10-cent carry to a 4-cent carry, that has gotten flat. I think it’s probably for many of the same reasons that we’ve been seeing on the Class III side. So the non-fat option today to the fourth month out. So basically, how much higher price fourth month future versus the non-auction price. And even though nonfat futures carry has really flattened out, the nonfat auction versus the futures carry really has hung in there. We’re at 5 cents, call it, today. And we’ve been more or less between 3 to 5 cents over the past two months now. So kind of a really interesting market where the futures curve has gone almost flat but the auction futures carry has hung in there, really not very volatile at all.

I guess the last thing I’ll bring up is that we were talking about corn in Class III earlier as, kind of, having this relationship. And really commodities as a whole have moved strongly higher with few exceptions. You know, gold kind of been a laggard, but just in general, commodities are booming for the most part. Lumber sticks out because it is just a different animal. We’ve got what looks like a blow-off top forming. But we’re at $300. I think this is quoted as per 10,000 feet. But back in April of last year, we were at $300 on the lumber futures. And today we are at almost $1,300 with $400 of that coming in the past month. So April started pricing at around $827, and yesterday, we’re at $1,284. So we feel like we’re special in the dairy world, but everyone’s having their own fun.

T3: I think it’s been a great discussion. Don, Jake, thank you very much. Thanks, everybody, for participating. Really appreciate it. Until next time.

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We welcome our Jacoby trading team back to discuss the rapid increase in milk production so far in 2021, compared to 2020 in which the national herd decreased by 30,000 cows.  Don Street, our director of global strategy, We welcome our Jacoby trading team back to discuss the rapid increase in milk production so far in 2021, compared to 2020 in which the national herd decreased by 30,000 cows. <br /> <br /> <br /> <br /> Don Street, our director of global strategy, explores production issues like the hefty 3% increase in cheese as compared to last year, driven by American and cheddar. <br /> <br /> <br /> <br /> Jacob Menge, future and options trader, leads a discussion about what inflation could mean for dairy as foreshadowed by the increasing cost of many commodities, from lumber to diapers. <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> T3: Welcome, everybody to our monthly mass balanced discussion. Today, we've got my father, Ted Jacoby. We've got Joe Maxtor, who's our butter trader. We've got Don Street who tends to lead the mass balance discussion and heads our powder group. We've got Diego Carvallo, also from our powder group. We've got Gus Jacoby, who heads our milk and fluid team. We've got Greg Scheer from our milk team. We've got Jacob Menge, who's gonna lead the charting discussion who also heads up our risk management group.<br /> <br /> <br /> <br /> We've got Anna Donze who handles pooling for the milk group. Welcome, everybody. Don, why don't you take it away?<br /> <br /> <br /> <br /> Don: I think we have a real roller coaster that's getting ready to happen, certainly on milk production. And I'll just get right into this, we’ve seen a very tight protein market in the last 10 days. Cheese has been a bit more sideways but price-wise hanging in there. When you just kind of look where we've been for Q1 we had 2% more milk, and we were running 90-some-thousand cows more than a year ago. The roller coaster starts because in Q2 of last year, the cowherd shrunk by over 30,000 head. When you look at when we start in April, instead of being 90,000 head higher than a year ago, April is going to be 110,000, let’s say, it's going to be a significant jump up. That number only grows to when we get to June, we could be 150,000 cows ahead of one year ago.<br /> <br /> <br /> <br /> T3: Don, has that jumped because we shrunk the herd at this time last year because of the pandemic? Are we expecting the herd to grow over the next three to four months, or is it a combination of two?<br /> <br /> <br /> <br /> Don: I think mostly the drop of Q2 last year when the pandemic really began because we had from 5,000, 13,000, 9,000 cows every month. Take that times 12, you have 8,000 on average, you get 96,000 more cows every year. So most of this is simply the drop that took place a year ago. Plus, milk per cow a year ago was also pulled back as more co-ops instituted base programs. So my milk gross projection for Q2, it’s a really solid 3% out, which is 50% more than the growth we had in Q1. To me, that's the biggest change that's coming down the dairy road in this Q2.<br /> <br /> <br /> <br /> T3: Is it fair to say, Don, that the number is going to be twice as big in Q2 and Q1, but the real trend from Q1 to Q2 isn't more increased milk, it really reflects what happened last year because the pandemic hit and we shrunk the milk supply?<br /> <br /> <br /> <br /> Don: That is correct. If I look month-on-month, you're clearly going to have more cows. Productivity growth seems to be pretty reasonable. Ignoring the seasonal trend on milk, Q2's gonna be just a really quarter for milk. Try to think about this in terms of what we do with the milk that's produced. In Class I, bottled milk, same old story, for the two months that we've reported in 2021, were down about 2.5% over the prior year. Last two has been really strong with the exception of cottage cheese, sour cream, ice cream, yogurt has just been on a tear production-wise, 8% to 10% up, which even on a small class of milk is significant.<br /> <br /> <br /> <br /> Total cheese production was negative in January. February was really up strong. T.C. Jacoby & Co. - Dairy Traders clean 27:35
Jacoby memories: Dairy industry development over a half-century https://www.jacoby.com/jacoby-memories-dairy-industry-development-over-a-half-century/ Wed, 05 May 2021 13:56:31 +0000 http://www.jacoby.com/?p=2039 On this edition of The Milk Check, T3 and Anna join our dairy market sage and patriarch, Ted Jr., on a trip down memory lane to talk about how the dairy industry has developed over more than 50 years. They discuss changes in trucking, processing and entrepreneurship, among many other topics. The trio also debates how the Federal Order System has impacted the industry, whether it still holds water in today's market and the perception that dairy producers are often the most impacted by market downturns. T3: I thought this podcast would be a great opportunity to just talk a little bit about history. Talk a little bit about what were markets like back in the '60s and how have they evolved into what we're dealing with today? And maybe what are some of the things that are still the same and what are some of the things that are different? And I just thought it would be a great perspective to talk about how milk and cheese and whey and cream, how it all moved back then, and how it all moves around and gets balanced today. We really haven't talked about things from a historical perspective, and I thought it would just be a great conversation. T2: Well, let's start in the '50s. Tank trucks came in in the mid-'50s. They were relatively small, they were about 30,000, 35,000. By the time you got to 1960 or so, you're up to a load somewhere between 45,000. In those days, the Class 1 utilization was paramount. Depending on where you were located, you had basically 60%-plus Class 1 utilization and milk move from upper Wisconsin, Eau Claire and Bloomer and Turtle Lake, during the short period of the year, we...back to almost everywhere, to Florida to Louisiana, New Orleans, Dallas, you name it, St. Louis was a big market. Indianapolis in the '60s had 20 to 30 loads a day moving out of basically the Fond du Lac area down to Indianapolis, which is why Foremost is prominent in Indiana these days is because a lot of that milk was Foremost Milk, they actually had an office in Indiana, which wasn't closed until a few years ago. The market was much different. Class 1 utilization was the big item and we had a much more cyclical milk production profile, if you will, where in the fall of the year when it got hot, and it seems to me, if my memory serves, it got much hotter in the '60s and '70s than it does today. And production really languished, particularly down in the Southeast. And so huge volumes of milk moved and most of that milk was moved directly out of plants. It wasn't moved directly from the farm, never moved directly from the farm until, oh, probably sometime in the '90s. Farms got big enough and the technology of dairy farming reached that point. That was the way the industry was structured in those days. And it's a much different structure today. T3: To be back in the '50s and 60s, you also had a lot of Grade B milk, we don't ever talk about Grade B milk anymore. How did that affect the industry? T2: Actually, we didn't have that much Grade B milk, and most of what we had stayed home. Yeah, we moved a little, it wasn't really that much. There were quality standards when you moved. Acid was the primary quality standard, acid and temperature. And you expected the milk to show up at a bacteria count of something less, basically, than 750,000 or half a million. Again, depending on where you were, and temperature less than 45 degrees. So that was the standard. And it wouldn't make any difference whether it was B or A in those days. Quality was not a matter of somebody saying that it was B or A, it was a matter of what showed up at the plant. And if it wasn't suitable when it showed up at the plant, it was rejected. It wasn't a question of arguing about it, it was rejected. That fell back upon the seller, in our case, usually as the seller's agent, us, to dispose of it accordingly, and we did. As time went on, the volatility in certain areas caused a lot of construction. In late '70s,

On this edition of The Milk Check, T3 and Anna join our dairy market sage and patriarch, Ted Jr., on a trip down memory lane to talk about how the dairy industry has developed over more than 50 years.

They discuss changes in trucking, processing and entrepreneurship, among many other topics.

The trio also debates how the Federal Order System has impacted the industry, whether it still holds water in today’s market and the perception that dairy producers are often the most impacted by market downturns.

T3: I thought this podcast would be a great opportunity to just talk a little bit about history. Talk a little bit about what were markets like back in the ’60s and how have they evolved into what we’re dealing with today? And maybe what are some of the things that are still the same and what are some of the things that are different? And I just thought it would be a great perspective to talk about how milk and cheese and whey and cream, how it all moved back then, and how it all moves around and gets balanced today. We really haven’t talked about things from a historical perspective, and I thought it would just be a great conversation.

T2: Well, let’s start in the ’50s. Tank trucks came in in the mid-’50s. They were relatively small, they were about 30,000, 35,000. By the time you got to 1960 or so, you’re up to a load somewhere between 45,000. In those days, the Class 1 utilization was paramount. Depending on where you were located, you had basically 60%-plus Class 1 utilization and milk move from upper Wisconsin, Eau Claire and Bloomer and Turtle Lake, during the short period of the year, we…back to almost everywhere, to Florida to Louisiana, New Orleans, Dallas, you name it, St. Louis was a big market. Indianapolis in the ’60s had 20 to 30 loads a day moving out of basically the Fond du Lac area down to Indianapolis, which is why Foremost is prominent in Indiana these days is because a lot of that milk was Foremost Milk, they actually had an office in Indiana, which wasn’t closed until a few years ago.

The market was much different. Class 1 utilization was the big item and we had a much more cyclical milk production profile, if you will, where in the fall of the year when it got hot, and it seems to me, if my memory serves, it got much hotter in the ’60s and ’70s than it does today. And production really languished, particularly down in the Southeast. And so huge volumes of milk moved and most of that milk was moved directly out of plants. It wasn’t moved directly from the farm, never moved directly from the farm until, oh, probably sometime in the ’90s. Farms got big enough and the technology of dairy farming reached that point. That was the way the industry was structured in those days. And it’s a much different structure today.

T3: To be back in the ’50s and 60s, you also had a lot of Grade B milk, we don’t ever talk about Grade B milk anymore. How did that affect the industry?

T2: Actually, we didn’t have that much Grade B milk, and most of what we had stayed home. Yeah, we moved a little, it wasn’t really that much. There were quality standards when you moved. Acid was the primary quality standard, acid and temperature. And you expected the milk to show up at a bacteria count of something less, basically, than 750,000 or half a million. Again, depending on where you were, and temperature less than 45 degrees. So that was the standard. And it wouldn’t make any difference whether it was B or A in those days. Quality was not a matter of somebody saying that it was B or A, it was a matter of what showed up at the plant. And if it wasn’t suitable when it showed up at the plant, it was rejected. It wasn’t a question of arguing about it, it was rejected. That fell back upon the seller, in our case, usually as the seller’s agent, us, to dispose of it accordingly, and we did.

As time went on, the volatility in certain areas caused a lot of construction. In late ’70s, they built Holly Milk over in Carlisle, Pennsylvania, which was basically a joint venture between Interstate Milk Producers and Maryland and Virginia. It changed hands over the years and ultimately became Land O’Lakes That plant would take off and start running and then blow up the dryer and we would sometimes be up until midnight arranging trucks to get milk out of there, get it back to the Midwest, or to Ohio, or wherever we could get rid of it until they got their dryer up and running again. And the same thing happened down in Texas and New Mexico. When the equipment would break down, we’d have a multitude of haulers we could call on and most of these haulers were plant to plant type haulers and some of them had routes.

But for the most part, if you’re looking at the Northeast, for example, there was a fella by the name, and he still has tracks, Herman Ule [SP], he would sit there when…he must have had 100 trucks sitting in his yard in East Earl, Pennsylvania. He and his cousin hauled a little bit of farm milk, but mostly when something would go wrong or when you’d want to move milk from A to B and you’d run out of trucks — because Herman was very expensive — when you’d run out of trucks, then you’d call Herman and you need 20 trucks, he’d have 20 trucks and drivers that could show up within a matter of hours. Today, it’s harder to do that because most of the hauling is committed to farm milk and haulers have responsibilities for certain farms. And you normally have that farm going from, for example, Kalamazoo to Indianapolis, and he’s got trucks and drivers allocated to that move. And suddenly, you call that guy, that hauler, and tell him you want to go to Atlanta, that’s a different kettle of fish, and very disruptive. So the hauling environment today is much different.

In the ’80s, for example, if you needed a truck and a certain area looked like it was gonna have some hauling that would keep somebody busy, there wasn’t a young man in the dairy industry who didn’t anchor to buy one of those big, shiny, stainless steel drugs in a Peterbilt or Mac and go to work if he could pay the bills. And usually, they did pay the bills until maintenance issues showed up two or three years later. That was, sort of, the environment you were operating in back in the ’80s. And it was much different than it is today. So today, our Class 1 utilization is down to, what, 20% depending on where you are, more in some areas, less in others. And the amount of Class 1 utilization that we have isn’t enough to carry the amount of Class 4 when you’ve got a $2 or $3 difference between the Class 4 and the Class 3. So that change now has to be addressed. And how we’re gonna do that is probably the next big change that’s on the table for everybody.

T3: Back in the ’50s and ’60s and ’70s, was it still always Class 4 that balanced everything? I mean, today one of the rules of thumb is always if you have a cheese plant, you always run it full, especially if it’s a cheddar plant. Was that true back then as well?

T2: No, you could move it to butter powder plants, and they were certainly a little bit more flexible than cheese plants. But the main balancer of the Northeast was in New Wilmington, Pennsylvania. And we used to move milk to Northeast Ohio to four or five different cheese plants in Northeast Ohio. Orrville Milk Products had a butter powder plant there but there were also an assortment of cheese plant that served balancing uses. And a lot of those cheese plants were structured in such a way that they could pay overtime or double time on Saturday and Sunday and buy the milk cheap enough where they could run. The cheese plants were much more flexible. Today, talking about the big plants 8 million, 10 million, 12-million-pound plants, they all have enclosed vats, double-Os, or whatever. And they have set schedules and they have locked themselves into that schedule. And they’re much less flexible as far as balancing is concerned today than they were in the old days, so to speak. So that’s changed. Today, the balancing is butter powder.

But also there’s another angle to it that you need to consider. The balancing requirements today are much less because you don’t have the Class 1 sales. And Class 1 plants were the ones that needed to be balanced. So we went from 60%-plus utilization in some areas, most areas actually, to 20% in a lot of areas. And so the balancing obligations are reduced accordingly. It’s a different ballgame. And I’m inclined to believe that the balancing obligations will continue to diminish unless we make changes that bring the industry back to more Class 1 sales and school business and so on. I guess my own opinion is, I don’t see that happening unless there are major changes in the federal order that provide for more entrepreneurship in the Class 1 area.

T3: I never really thought about it that way that one of the biggest differences between milk in the ’70s and the way milk moved today is that not only has modern technology on the farm caused lower variation in milk per cow volumes throughout the country. We also have lower variation in demand changes because Class 1 was where the demand swings would be biggest when kids are in school and out of school. And it was 60% of the order at times back then and only 20% today. So you’ve had, on both sides of the spectrum, diminishing variation in supply and demand. That makes one of the major requirements of why we needed a federal order in the beginning. It’s just not as necessary today, is it?

T2: Well, I guess it depends on how you look at it. We both know that there are different ways that people look at it. And from my own perspective, I think you basically have two regulatory systems. One is the classified pricing system and the price you pay to participate in that is the regulatory system. And I think the problem that we have basically is with the regulatory system, not the classified pricing system.

T3: What do you mean when you say regulatory system, what are you referring to?

T2: Well, in order to participate in the classified pricing system, you need to make shipments to distributed plants or pool plants. And there’s a cost associated with doing that.

T3: You’re talking about qualification and things like that?

T2: Right. So there’s a cost associated with that out. In Wisconsin, for example, the benefits of pooling are much less than, say, the benefits of pooling down in the Southeast. The Southeast, of course, pooling is paramount, you have to pool. You wouldn’t be in business for a week if you didn’t pool your milk in the Southeast. But in Wisconsin, certain times you have little or no benefit, and maybe, at most, certain times of the year, under extreme circumstances you got 30 cents. The costs of participating in the regulatory system in Wisconsin are not very great, but the benefit isn’t very great either. Whereas in the Southeast, the cost of participation is huge and the benefit is also huge. So it comes back to how you look at it and what the cost and benefit is. For a cooperative who is not bound by minimum prices under the order, the cost is basically transferred to the membership and spread over the whole membership. Whereas for a proprietary handler, they’re obligated to pay the minimum price under the order. And then, of course, if they’re buying it from a co-op, they pay the co-op who basically benefits from that sale, and they have their own producers, they pay their own producers that minimum price.

So it’s the regulatory aspect to it, which I think they need to look at. And those minimum price provisions, which I think would give Class 1 sales a little bit more boost in entrepreneurship opportunity, I think would be helpful for a lot of people, particularly for the dairy farmer. Seems a little counterintuitive, but at the same time, it’s basically competition for the milk that improves the options for the dairy farmer at the farm level to, as an example, you would see that prices in Wisconsin are almost as high as the prices of Florida certain times of the year because of the fact that all those little plants up there, which basically produce specialty cheese and variations of specialty products, are competing for quality milk supplies. If I was doing it, that’s what I’d look at.

Unfortunately, I think most people today are looking at how to gild the lily and particularly hang more of the burden on Class 1, which from my perspective is exactly the wrong approach. They should be basically looking at how to increase Class 1 sales rather than require more burden on them and less people being attracted to sell milk. Not to get into it much deeper but Costco, for example, here in St. Louis, the Class 1 area is a good size three-car garage in the back of the store, which you have to search for. And it’s refrigerated and you go in there and you share the space with eggs, butter, and organic this and that, and other types of perishable products, oat milk, and whatnot. And yes, you’ve got three or four skids of milk in there, which people are picking at. So that’s a far cry from where we were 50 years ago. And if you bring Class 1 milk or bottled fluid milk, beverage milk, whatever you want to call it, back to the fore, I think that would go a long way towards eliminating the problem. And I think you can do that if you provide opportunities for entrepreneurs to get into that area.

T3: What about cream, how has cream changed in the last 50 years?

T2: Well, basically, I think we’re heading back to where we were. The traditional movement from cream was from the Michigan, Ohio area, Northern Indiana, Michigan and Ohio, what we call the Mideast today, to the East. And the markets basically were Kraft in Lowville, Abbott’s in Philadelphia, and a host of cream cheese plants who serve the cream cheese clientele all along the East Coast. There was always an active market for cream, particularly in the shorter periods of the year, and it was more on a spot basis. We got to the point in the ’90s where we started doing contracts, balancing contracts, and so on. And some of those worked out and some of ’em didn’t. But basically, there was active cream demand and the cream multiples would skyrocket in the second half of the year and then go into the toilet during the longer periods around Christmas and the flush and so on.

I think we’re heading back to a more active cream market because we’re gonna wind up with a significant volume of Mideast milk and cheese. And so I think cream will be more active and more lucrative for the sellers going forward from where we’ve been for the last 10 years or so. That’s my opinion. And, of course, you have additional supplies of cream available now in the Northeast because of the increase in components and so on. So that’ll offset that a little bit. But I do think we’ll see an active cream market once we get to July.

T3: What are some other big differences that you’ve seen as our industry has evolved over the last 50 years? Besides how milk would move and how cream would move, and how much less Class 1 utilization there is as a percentage of the total, is there anything else that always stands out to you when you think back on 50 years of working in the dairy industry?

T2: I think the trucking, which we’ve already addressed a little bit, but I think the trucking change is probably the biggest. We still move milk, for example, to the Southeast, we schedule it long in advance so the truckers can organize themselves to handle it. And what moves is directly from the farm to the customer. That, I think, is more efficient than we used to be by a lot. But we don’t have as much Class 1 sales even in the Southeast. So the volume of milk moving is, I think, reduced. There’s still milk moving out of the Southwest over to Florida, and we move some out of the Mideast to Florida. But I don’t think the volumes are anywhere near to what they were 30 or 40 years ago, I think they’re very much reduced.

Also, I might point out that there used to be a lot of manufacturing in Kentucky, and Tennessee, and Northern Alabama, for example, Northern Mississippi. Those were big evaporated milk areas. And a lot of the milk from those plants, the Grade A milk would gravitate to the bottling plants going south. So there’s a lot of stair-stepping that went on, and then they tighten the pooling provisions up in Order 5 and 7 and those plants then had problems getting enough supply to be cost-effective. So gradually, all those plants closed up. And it’s not fair to talk about strictly pooling because evaporated milk is no longer as big an item as it was. And Carnation, Defiance, and Borden’s all had evaporated milk plants in those areas. But there were cheese plants there too. Kraft had a bunch of them, Avalon Dairy had, I think at one point, about nine of them.

There were some others, I think some of the meat companies like Armour and Cudahy used to have plants in that area too. So that manufacturing trade in those areas has been very much diminished. It occurs to me today that they probably would regret that, they still like the idea of moving milk into the high-priced Class 1, but it would seem to me that they ought to take a look at it and make sure that that high-priced Class 1 is gonna be there for a lot longer. In which case, making cheese in Tennessee may be something that might be attractive again.

T3: Anna, do you have any questions?

Anna: Well, I’ve got some thoughts running through my head. I haven’t been doing this since the ’50s. So over the past 10 years, the 2 biggest shifts that I’ve seen are premiums and hauling charges. With premiums, we’ve talked a lot about milk moving to certain plants because it’s the higher price. But a lot of times, as a co-op, you’re not worried about what plants it’s going to, especially if you’re participating in a federal order because you’re gonna end up with a blend anyways, unless you’re de-pooling or something else. It’s just about the premium. And where we used to get higher premiums from plants, they just keep getting lower and lower even on contracts.

And from someone who’s looking at it from the producers’ perspective, it is really hard to watch plants who aren’t necessarily, in theory, gonna sell their products for anything less come in and offer you $2, $4, $8 under on milk. So that’s been a big shift. I don’t know if we want to talk about that in any further depth. But I also wanted to bring this up back when we were talking about hauling. I had a producer relate to me, prices were a little bit lower. They were saying if you get a $13 milk check, and the hauling is now $1.50, $2, and you’ve worked really hard to make that milk and then someone basically drives in, picks it up, drops it off somewhere, to give them that percentage of your milk check, that’s a really tough pill to swallow.

T2: It is a tough pill to swallow, but it’s better than dumping.

Anna: It’s better than not having it hauled.

T2: I know we’re faced with that situation when the pandemic hit, March or April, when suddenly we realized we were gonna have to lock down and the foodservice sales tanked and so on. As a company, we had never dumped a load of milk for anything other than the occasional antibiotic load or something like that in 60 years, and suddenly we’re faced with having to dump some. So we can well understand that from a dairyman standpoint, it’s anathema and extremely gut-wrenching to have to dump something. But on the other hand, the market for a lot of reasons because of all the volatility involved gets so twisted that you really don’t have a lot of choices, and not as many choices as you had 20, 30 years ago. Twenty, 30 years ago, every little town had a plant. They weren’t big plants, they were little plants. So it really wasn’t very difficult for us to place a load of milk. The only issue was placing it at the best price.

Now, if everybody has the same problem on a Friday afternoon at 4:00, you got hauling costs, which narrow down your options, you’ve got many, many, many fewer plants, so you don’t have as many options to choose from. And everybody has pretty much the same choices. So that’s why volatility now is sometimes more painful than it was a long time ago. You don’t have the options. If you needed to discount a load of milk into a local cheese plant back in the ’50s, the wife and the proprietor would get down there and make a vat of cheese out of it, they’d be very happy with it because their margin basically improved on that particular load. So that’s a change now you don’t have, but people get used to it. We talked about this, this morning. The big plants, the enclosed vats, the automated plants, they set a schedule, they want to stay with it, they want it to run. Instead of having 20 or 30 people, they got 3 or 4 running computers and so on to look at how the temperatures and the pumps are running and so on. So it’s a much different environment at a plant today than it was 50 years ago by a lot.

T3: What about skim condensed? That’s another market that has really changed over the years.

T2: Well, we used to have understandings to supply skim condensed to customers, for example, in St. Louis and other places. Ice cream mix, you bought either skim condensed or you bought a mix, and it was a part of the market. Ice cream is still a valuable part of the market but it’s not as big a percentage now as it used to be. Skim condensed or a really good quality powder, a lot of these plants just use powder. Powder wasn’t very soluble and they didn’t have the equipment to handle it 50 years ago. Today, quality powder can produce a much better ice cream. And then they have better pasteurization. It used to be that you pasteurized for half an hour at 140 degrees. And today they pasteurize for 16 seconds at about 180 or something like that. Plus, you got UHT and different methods of doing it. So it’s a little different now than it used to be from that standpoint.

T3: Anna, you have a question?

Anna: I was thinking, right now the biggest dynamic that I see between plants and producers, as a co-op, is we take whatever we can get. We look for the highest price, the best return, lowest haul, but everything trickles back to the producer. And even 10 years ago that really wasn’t as much the case. And I know that we’ve talked about this in the past about that being market signals, right? But plants used to pay more hauling, they used to pay more quality, premiums were better. Has everything always trickled back to the producer in terms of costs?

T2: Yes, The answer to that, Anna, is yes.

Anna: Has it always been to this level, though?

T2: Well, we haven’t had any pandemics other than this one in my experience. And we also didn’t have risk management back 50 years ago. We had situations which were desperate, 1974 comes to mind when markets were strong and going up and the premise was they were never going down, in a lot of people’s mind at least. That premise turned out to be wrong. The market broke and there were bankruptcies, particularly in the cheese industry where you had people storing cheese for just 90 days. Swiss cheese, for example, by law, all of a sudden your value, your inventory dropped 50%. Well, it’s pretty hard to buy milk cheap enough to offset that. And there were plants, New Wilmington was Swiss. And after that experience, they switched to Italian styles. But also, there were Swiss plants up and Southern Wisconsin too who had that problem, and it took several years for all those bills to be paid. Our company was involved in collecting that money over a period of time and fortunately, we got it all collected because the industry recognized that this was a particularly difficult situation.

Finally, when risk management and the CME and so on began to become more prominent in the ’90s, people were more in a position to carry inventory and handle things in a more organized fashion. And I think that had a major effect on how people approached things. You still had inventory considerations like age and value, and so on, that you had to worry about. But in the old days, you had to worry about just the value of the inventory going into the toilet. And that could break if you got too far out of hand. So you picture, you’re sitting there, and all of a sudden milk comes at you and it’s $2 a hundredweight cheaper than it was before. And boy, the temptation is to buy it, but then the cheese market goes down 40 cents. So that milk, all of a sudden, instead of being an attractive purchase turned out to be a big loser. And that was the way a lot of it was when you encountered the volatility. So you had to be pretty much on top of which way the markets were gonna go.

T3: Anna, I’m gonna take your question a different direction. It always feels like that it flows downhill to the dairy farmer. But I would say that there’s a lot of cheese companies who would argue differently in this aspect. Look, the reason the price of cheese will go up is not always because there isn’t enough milk. Sometimes the price of cheese goes up because there isn’t enough cheese capacity in the marketplace, there’s not enough plants making cheese. And that’s exactly what happened during the pandemic, the demand for cheddar cheese went through the roof. And we were constrained by cheese capacity, not by milk supply. What happened was the price of cheese went way up, and therefore, the price of milk went way up.

And so the people who invested in dairy farms were the ones who benefited from the fact that the real issue was there wasn’t enough cheese capacity. And so, in theory, from a free-market perspective, what really should have happened was the demand for cheese capacity should’ve gone up. But that’s not the way it worked because of the Federal Order System. When the price of cheese went up, the price of milk went up because the price of milk is tied to the price of cheese. And so one of the things that the Federal Order System has done, and I personally consider this to be a negative, is it has locked in the margin that a cheesemaker or a butter-maker or a nonfat dry milk producer makes, and that’s the make allowance.

And so if there happens to be over-capacity or under-capacity in the marketplace for any of those products that have a make allowance in the federal order, it’s locked in. Now you can say well, they benefit from that because the risk is taken off the table. In theory, I guess I would agree with that. But what that also does is it gives…the marketplace itself often will get incorrect signals. And so if what we really need is an increase in cheese capacity, but if every time the price of cheese goes up it causes the price of milk to go up, what we will get instead is an increase in milk production.

Another way to look at it is those make allowances have caused the easiest investment to be an investment in a commodity cheese, cheddar being the best example. And so whether or not the marketplace truly wants cheddar cheese, a lot of times, that’s what you’re gonna get because that’s the risk-free investment. Whereas if there was less of those rules in the marketplace, the entrepreneur out there who wanted to make cheese would be out there trying to figure out what’s the best cheese to make, what is the cheese that the market would really want to buy, and then, of course, you could get more creative ideas of cheeses or something along those lines that they would try to sell at the supermarket and to the consumer or to the restaurants or whatnot.

And so what’s happened is it feels to the dairy producer like it all flows down and the dairy producer has to take all the burden of that. But if you were to get outside the Federal Order System simplified or take some of the make allowances out, you would actually free up the processors to be able to be more innovative because they would have to really pay attention to the risk that they have on the table.

Anna: I think to further complicate it though too, like let’s say over the past year, you have a really high Class 3 price, you end up with a blend that gives you a negative PPD from that. The producers have a share that they’re putting back into the pool, or the co-op does because they build that higher price, they happen to be selling to that higher price. And it makes sense, you know, as the PPD does, you share that with all the producers, even the ones going to 2 and 4 who aren’t billing the plants at a higher price. But on top of that, in a lot of cases, the cheese plants that have that higher price that they would get billed know they’re getting that higher price and so they’re offering you larger negative premiums. So it gets taken out of you in both places. In theory, you’re billing this higher price to a plant and, in theory, you’re getting that at least chunk of that you’re keeping but you also lose on the premium side too. If it was just a matter of what your classified price is, that would be one thing, but the premiums add to the feeling of it all trickling down.

T3: And I agree with that, it’s in the costs, especially in an inflationary environment. And we haven’t had significant inflation at this point for almost 40 years. But we’re starting to feel it, you know, increases in hauling prices right now is a major stressor throughout the economy, not just in dairy. Those are indications of how costs are going up. And when you have a system that constrains those costs, it’s not like those costs aren’t there, but they got to pop out somewhere. I think what’s really happening is the dairy farmer is feeling like they’re dealing with the burden of all of these increased costs when the reality is the system is directing it that way.

It’s interesting, you know, you asked the question, what would happen if we didn’t have a Federal Order System? You’d have a lot of different things happen. And I think one of the things my dad has said over the years is, “If you didn’t have a Federal Order System, you’d have a lot less efficient capacity. There’d be a lot more empty plants out there so that co-ops could switch back and forth between cheese and powder and butter and whatnot based on where they could get the best value, which would add a lot more cost to the system. And with a lot more costs to the system and less efficiency, everything would be more expensive.” And I think that’s very true.

But on the other hand, those costs would be uphill rather than downhill, a dairy farmer wouldn’t feel like they’re receiving the burden of all of that. But I think so much of it, to me, is perception. A market is a market and when costs go up, everybody’s gonna find ways to pass those costs along because the alternative is they become unprofitable, and they die. And so the costs are always gonna move somewhere. And if they’re moving downhill, to me, that’s just because it’s a perception issue rather than they’re carrying an increased burden relative to others.

T2: Let me weigh in a little bit on that. I agree with you that perception is reality, but you have a market and you have a margin, and a processor, be it a co-op or a proprietary, is working to maximize his margin. And so he’ll raise his price to his customers, and he’ll pay his producers accordingly. The margin is always under pressure, it’s sometimes a pressure to get the margin greater is different or greater than it is when it’s not. And so that’s the way markets are determined. If milk on the farm is competitive, then the producers will stay home and not spend a lot of time looking for alternative markets. But if the price on the farm is not competitive, the producer will consider switching to a different market.

Today it’s changed a lot because the producers don’t have all those different markets to switch to. So as a result, in a lot of cases, the producers turn out to be squeaky wheels because they don’t have alternatives as to where they can go, plus they’re tied up with contracts and so on, which often doesn’t leave them free to make changes when the time is right. So I would, again, get back to the premise that the argument that what increases the return to the producer in this environment is competition for the milk. Again, Wisconsin, where you have the most competition from the milk from an assortment of different customers for the milk from a dairyman standpoint, has higher pay prices than almost anybody but Florida, and sometimes they even exceed Florida, because in order to persist in Wisconsin, you need that milk supply, you need economies of scale, you can’t afford to lose producers. And so as a result, you go out and you pay premiums and you put together a milk supply which is based on dairies which are close in, which are good quality. And maybe you can supplement that with milk that’s a little distressed from outside of the area at certain times of the year and so on.

So again, the premise that I would like to support is the competition for the milk is what creates revenue for dairy farmers. And where you don’t have that competition for the milk, dairy farmers suffer. A good example, without mentioning any names, is in the Southeast the last three or four years. The check-off in the Southeast was measured in dollars per hundredweight, many dollars per hundredweight in certain times of the year, where balancing costs were extreme and the costs of maintaining the milk supply in that area with hauling costs what they are and so on were severe. So it’s not entirely true that you can take advantage of the Capper-Volstead Act and collective bargain, which is what co-ops are designed to do if there’s no one to collective bargain with. And again, Wisconsin’s a good example where you’ve got an assortment of different plants, an assortment of producers to choose from, and that’s where the price is the highest.

You look at it from that standpoint, it puts a little different spin on it than just saying that we’re gonna change the formula and make the Class 3 price higher and lower by adjusting the make allowance or whatever. The expression “lipstick on a pig” is probably a good expression to cover that approach.

T3: Let me add though another dimension to the Wisconsin argument. The cheese manufacturers in Wisconsin have to pay more for their milk than the cheese manufacturers, let’s say, in Southwest, in Texas and in New Mexico. And so because they have to pay more for that milk, they have to get more creative and more innovative in selling that cheese. And so I would say there is a relationship as well between the amount of specialty cheese coming out of Wisconsin, not just commodity cheddar, or mozzarella, but all of the other kinds of cheeses from brie to gouda to edam to feta and all of the above. Because as those premiums…they’re paying $1, $2 often more than other areas of the country for their milk. And so they got to figure out how to sell that cheese at a higher price than everybody else as well, and so they’ve gotten more innovative.

And so while I agree with you that competition for the milk is a big factor as to why that’s happened, the other question is why is there more competition for the milk? And I would say one element of that is because there are more cheesemakers, more innovative cheesemakers, more highly specialized, really good people who know how to make cheese in that area of the country than in other areas. And that innovation is driving more profitability for everybody in the system in the Upper Midwest, and especially in Wisconsin. And so yes, it is because of more competition. But you also have to ask the question, why is there more competition? And there’s a skill set, in particular in Wisconsin, or at least, you know, a larger volume of people that have that skill set, that’s driving that higher level of competition as well.

T2: That’s all true. But the two go together, the creativity and marketing and management and all the things that go towards producing a higher return, which gravitates to the dairy farmer exist in Wisconsin that don’t exist, for example, in locations in the desert where you have these 10-million-pound-a-day commodity cheese plants. You’re not gonna build a plant like that from scratch in Wisconsin. You may add on to an existing plant to add to your marginal costs or your marginal profits on top of your existing business, but you’re sure as hell not gonna build a plant in Wisconsin which is similar to the plant which just got built in Michigan because you couldn’t afford to pay the dairymen to fill the plant up. You know, I hear you, but it’s competition for the milk in a multitude of markets that maximizes the return to the dairyman. And staying alive in Wisconsin, from a processor standpoint, is a difficult job too because they got to be creative and they got to be able to deliver a competitive pay price to their dairy supply. So one hand washes the other, and that’s the way it’s set up and that’s what works.

T3: And that’s what markets are.

T2: Right.

T3: I think a lot of times, for the dairy farmer, the feeling that all of these costs are being passed down to them and that they carry the burden, a lot of it has to do with perception, but it’s perception based on the reality of the fact that the way the system is set up, risk, both positive and negative benefit from that risk, has been taken off the table for a lot of processors with the make allowances. And I think that if you were to get rid of make allowances, you would introduce that risk back into the system. But that wouldn’t necessarily solve the problem from a dairy farmer’s perspective like they think it would because it has both had a positive benefit and a negative benefit to the price of milk. It is a positive benefit because when cheese capacity is driving the price of cheese up, it is the dairy farmer who benefits, but it is negative in that when there are increased costs in the system, those costs tend to be passed down to the dairy farmer. In the end, I think it’s a matter of pick your poison, which is a better path for the dairy farmer, do you want to carry more risk or less risk? And where do you take it from there?

T2: You know, over the years, make allowances have been a bit of a football and my view has always been the larger the make allowance, the more the dairy farmer benefits. Today, that probably doesn’t make any difference because today, most of the so-called premiums are negative, maybe not so much in Wisconsin, but around the rest of the country, you pretty much have a negative check-off as opposed to what the classified prices are. And that makes the classified pricing essentially an arbitrary figure. I don’t oppose, if you want to get rid of make allowances, that’s fine with me. I think probably the dairymen would benefit from that because it would encourage, to some extent, processors to reach out further for milk supply. The hauling costs have gone up, and I’m sure they’re already doing that, but it would take a little bit of the pain off the table if the negative implications of a make allowance which was too short was removed.

T3: And I agree with that. And a good way to give a practical example is if you’ve got a negative premium of 50 cents and you increase the make allowance by 5 cents a pound of cheese, 50 cents a hundredweight on a Class 3 price, your Class 3 price would drop by approximately 50 cents. But that premium would go from a negative 50 to zero almost simultaneously. So the actual price the dairy farmer would receive would actually probably be the same either way.

Anna: There’s still not as much competition for the milk, would they go ahead and take that make allowance to keep it and still do the negative 50 premium?

T3: I think if you look at it in terms of two or three months after the change, it’ll feel like somebody is keeping it. But ultimately, market forces are what’s gonna shift price.

Anna: I’d buy that, yeah.

T2: I think that today’s classified prices are strictly benchmarks. I don’t think they mean much anymore because you check off…most of the milk is paid for by cooperatives, which are not bound by the minimum price under the order. It essentially takes the proprietary side of the business out of the picture and forces them to buy through the co-op. It’s basically a benchmark, and I don’t think it’s really serving any useful purpose. But if the minimum price under of the order was removed, then let’s call it the practicality of having a large make allowance would enable people to reach out further for the milk, which would increase the competition somewhat. So I think that’s an argument that most people don’t understand because it’s a little counterintuitive.

T3: I agree.

Anna: Sounds like we’re ready to wrap this one up here. But it looks like it’ll be a long one. One thing we can say for certain whether we’re talking about pricing, transportation, seasonal production variations, or plant balancing needs is that there has been plenty of change in the industry. And I’m sure there will be plenty more for us to discuss in the future. Thanks for joining us, especially to everyone who stuck with us all the way to the end on this one.

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On this edition of The Milk Check, T3 and Anna join our dairy market sage and patriarch, Ted Jr., on a trip down memory lane to talk about how the dairy industry has developed over more than 50 years. They discuss changes in trucking, On this edition of The Milk Check, T3 and Anna join our dairy market sage and patriarch, Ted Jr., on a trip down memory lane to talk about how the dairy industry has developed over more than 50 years.<br /> <br /> <br /> <br /> They discuss changes in trucking, processing and entrepreneurship, among many other topics.<br /> <br /> <br /> <br /> The trio also debates how the Federal Order System has impacted the industry, whether it still holds water in today's market and the perception that dairy producers are often the most impacted by market downturns.<br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> T3: I thought this podcast would be a great opportunity to just talk a little bit about history. Talk a little bit about what were markets like back in the '60s and how have they evolved into what we're dealing with today? And maybe what are some of the things that are still the same and what are some of the things that are different? And I just thought it would be a great perspective to talk about how milk and cheese and whey and cream, how it all moved back then, and how it all moves around and gets balanced today. We really haven't talked about things from a historical perspective, and I thought it would just be a great conversation.<br /> <br /> <br /> <br /> T2: Well, let's start in the '50s. Tank trucks came in in the mid-'50s. They were relatively small, they were about 30,000, 35,000. By the time you got to 1960 or so, you're up to a load somewhere between 45,000. In those days, the Class 1 utilization was paramount. Depending on where you were located, you had basically 60%-plus Class 1 utilization and milk move from upper Wisconsin, Eau Claire and Bloomer and Turtle Lake, during the short period of the year, we...back to almost everywhere, to Florida to Louisiana, New Orleans, Dallas, you name it, St. Louis was a big market. Indianapolis in the '60s had 20 to 30 loads a day moving out of basically the Fond du Lac area down to Indianapolis, which is why Foremost is prominent in Indiana these days is because a lot of that milk was Foremost Milk, they actually had an office in Indiana, which wasn't closed until a few years ago.<br /> <br /> <br /> <br /> The market was much different. Class 1 utilization was the big item and we had a much more cyclical milk production profile, if you will, where in the fall of the year when it got hot, and it seems to me, if my memory serves, it got much hotter in the '60s and '70s than it does today. And production really languished, particularly down in the Southeast. And so huge volumes of milk moved and most of that milk was moved directly out of plants. It wasn't moved directly from the farm, never moved directly from the farm until, oh, probably sometime in the '90s. Farms got big enough and the technology of dairy farming reached that point. That was the way the industry was structured in those days. And it's a much different structure today.<br /> <br /> <br /> <br /> T3: To be back in the '50s and 60s, you also had a lot of Grade B milk, we don't ever talk about Grade B milk anymore. How did that affect the industry?<br /> <br /> <br /> <br /> T2: Actually, we didn't have that much Grade B milk, and most of what we had stayed home. Yeah, we moved a little, it wasn't really that much. There were quality standards when you moved. Acid was the primary quality standard, acid and temperature. And you expected the milk to show up at a bacteria count of something less, basically, than 750,000 or half a million. Again, depending on where you were, and temperature less than 45 degrees. So that was the standard. And it wouldn't make any difference whether it was B or A in those days. Quality was not a matter of somebody saying that it was B or A, it was a matter of what showed up at the plant. And if it wasn't suitable when it showed up at the plant, it was rejected. It wasn't a question of arguing about it, it was rejected. T.C. Jacoby & Co. - Dairy Traders clean 41:29
International trade practice and policy in perspective https://www.jacoby.com/international-trade-practice-and-policy-in-perspective/ Wed, 31 Mar 2021 13:40:19 +0000 http://www.jacoby.com/?p=1997 This time on The Milk Check, we welcome a leading mind in international trade policy and personal friend of the podcast. Jaime Castaneda is senior vice president of policy strategy and international trade for the National Milk Producers Federation, where he oversees the development and implementation of domestic policy. He also leads international trade negotiations for the U.S. dairy industry as senior vice president of trade policy for the U.S. Dairy Export Council. Jaime joins the Teds in a discussion of how trade policy developed over Jaime's 22 years in the industry, from dairy farmers' early reluctance to accept imports to the industry's ongoing efforts to improve and enforce trade agreements. Among other topics, they also debate whether the Federal Order System and tariff rates are holding back U.S. dairy in international markets, or if the problem is our slow response to short-term international economics and low customer loyalty outside of domestic markets. T3: Hello, everybody. Welcome to the "Milk Check," episode 35. It is March 16, and our guest today is Jaime Castenada from the U.S. Dairy Export Council. But I believe you wear multiple hats. So, I'll let you describe what roles you fill with USDEC and National Milk. Jaime: Yeah. Thanks. Good afternoon to everyone. I am actually the senior vice president for the National Milk Producers Federation. Under that capacity, I oversee the development and implementation of domestic policy, an area of different issues, including from the initiative of Foundation for the Future, that was the preload to the dairy margin coverage to Farm Bills to just name it. At the same time, I served in my capacity, as senior vice president for policy and trade, I also lead our partnership with the U.S. Dairy Export Council and serve now, for almost, actually, next month is going to be 22 years that I am with the industry and that I have been serving as our partner with the U.S. Dairy Export Council. T3: Well, wow, we're lucky to have you. And T.C. Jacolby & Company is one of the founding members of the U.S. Dairy Export Council and we've been involved with the U.S. Dairy Export Council from the very beginning. Have you been involved with the U.S. Dairy Export Council the whole time? Jaime: Yes, yes. In fact on Suber, really, I discuss joining the U.S. Dairy Export Council. The way that we work is that we operate everything that relates to policy under National Milk, specifically related to trade, just to make sure that, if you remember, the U.S. Dairy Export Council, it's a cooperator for USDA, which receives monies from MAP, the checkoff funds as well as MAP money. So, in order to make sure that advocacy is properly and it's done using membership dues, then we created this ability. And I do remember sitting... And now at U.S. Dairy Export Council is a large organization, 150 members more or less. And I do remember when sitting with Ted Sr. in a small table, Lei Jensen and a few other folks that were the original founders of the U.S. Dairy Export Council. Ted: Those were the days. I remember those days very vividly. It goes back, what, to the '90s? Jaime: Yeah, 1999. 1999, and that's where we began developing the trade policy. If you remember, prior to 1999, even dairy farmers, and this is a lot of credit to folks like yourself and Tom Camaro that look at the vision and the future. And if you remember, dairy farmers were not very keen on trade. In fact, if you talked to them on trade, in the 1990s, it was all about, "We hate imports." And it was the development through this small group of folks that were the visionaries that we developed this trade policy and this perspective, that you're not going to be able to just fight, fight, fight imports. You're better to use your capital to get better at exports. And that's what we have done over the years. Ted: Well, that's sort of the route that we took too, and NAFTA kicked in about that time.

This time on The Milk Check, we welcome a leading mind in international trade policy and personal friend of the podcast.

Jaime Castaneda is senior vice president of policy strategy and international trade for the National Milk Producers Federation, where he oversees the development and implementation of domestic policy. He also leads international trade negotiations for the U.S. dairy industry as senior vice president of trade policy for the U.S. Dairy Export Council.

Jaime joins the Teds in a discussion of how trade policy developed over Jaime’s 22 years in the industry, from dairy farmers’ early reluctance to accept imports to the industry’s ongoing efforts to improve and enforce trade agreements.

Among other topics, they also debate whether the Federal Order System and tariff rates are holding back U.S. dairy in international markets, or if the problem is our slow response to short-term international economics and low customer loyalty outside of domestic markets.

T3: Hello, everybody. Welcome to the “Milk Check,” episode 35. It is March 16, and our guest today is Jaime Castenada from the U.S. Dairy Export Council. But I believe you wear multiple hats. So, I’ll let you describe what roles you fill with USDEC and National Milk.

Jaime: Yeah. Thanks. Good afternoon to everyone. I am actually the senior vice president for the National Milk Producers Federation. Under that capacity, I oversee the development and implementation of domestic policy, an area of different issues, including from the initiative of Foundation for the Future, that was the preload to the dairy margin coverage to Farm Bills to just name it. At the same time, I served in my capacity, as senior vice president for policy and trade, I also lead our partnership with the U.S. Dairy Export Council and serve now, for almost, actually, next month is going to be 22 years that I am with the industry and that I have been serving as our partner with the U.S. Dairy Export Council.

T3: Well, wow, we’re lucky to have you. And T.C. Jacolby & Company is one of the founding members of the U.S. Dairy Export Council and we’ve been involved with the U.S. Dairy Export Council from the very beginning. Have you been involved with the U.S. Dairy Export Council the whole time?

Jaime: Yes, yes. In fact on Suber, really, I discuss joining the U.S. Dairy Export Council. The way that we work is that we operate everything that relates to policy under National Milk, specifically related to trade, just to make sure that, if you remember, the U.S. Dairy Export Council, it’s a cooperator for USDA, which receives monies from MAP, the checkoff funds as well as MAP money. So, in order to make sure that advocacy is properly and it’s done using membership dues, then we created this ability. And I do remember sitting… And now at U.S. Dairy Export Council is a large organization, 150 members more or less. And I do remember when sitting with Ted Sr. in a small table, Lei Jensen and a few other folks that were the original founders of the U.S. Dairy Export Council.

Ted: Those were the days. I remember those days very vividly. It goes back, what, to the ’90s?

Jaime: Yeah, 1999. 1999, and that’s where we began developing the trade policy. If you remember, prior to 1999, even dairy farmers, and this is a lot of credit to folks like yourself and Tom Camaro that look at the vision and the future. And if you remember, dairy farmers were not very keen on trade. In fact, if you talked to them on trade, in the 1990s, it was all about, “We hate imports.” And it was the development through this small group of folks that were the visionaries that we developed this trade policy and this perspective, that you’re not going to be able to just fight, fight, fight imports. You’re better to use your capital to get better at exports. And that’s what we have done over the years.

Ted: Well, that’s sort of the route that we took too, and NAFTA kicked in about that time. And I think it kicked in fully over, what, a five-year period? And so trade became an important cog in the wheel, and it wasn’t there before for the reasons that you just described. Suddenly, it became important, and just about that time is when you and Tom Suber and Tom Camaro and the rest of them started to be aware that it was time to get organized in that regard. And, frankly, you did a good job doing it. You put together a sustaining organization that’s grown ever since and it’s been very successful.

Jaime: Thanks.

T3: So, speaking of that, my first question would be, we recently passed a new trade pact between Mexico and Canada, the USMCA. Jaime, in your eyes, what are the differences between how NAFTA worked and how the USMCA is going to work, and where are the improvements? And is there any place where maybe it’s going to hurt the U.S. dairy industry?

Jaime: Let me start by clarifying, I know that many folks say a new trade agreement. I take issue with that, and you will know because through the conversation this afternoon, I will emphasize over and over, I will beat that dead horse, that we have not had a new trade agreement in more than 12 years. USMCA was an old agreement, NAFTA, that was just improved on the edges. And sure, thank God it was passed, and thank God we didn’t have to actually deal with removing the United States of the previous trade agreement. Now, we’ll talk a little bit more about why I say we haven’t actually passed a new trade agreement in more than 12 years. But USMCA improve somewhat access for the U.S. into Canada and eliminated what is supposed to be Class VI and Class VII pricing in Canada, which was promoting the…let me use the word dumping. It should be a more technical word. But the dumping of Canadian powder into the world market. The concern that we had there was that they were going to be producing more and more of powder. And there will be more quantities of that product in overseas replacing U.S. product. Class VI, Class VII, if you remember, was created in Canada because we were selling ultrafilter milk for cheese-making into Canada. That has happened, that Canadians have always find ways to try to close what they call loopholes. We call it legitimate trade that the Canadians constantly are trying to block and you guys have been part of that. USMCA, it’s, again, an improvement over what we had before, but I wouldn’t say that it is a major change or a new trade agreement in which we’re going to see significant new opportunities.

T3: So, one of my questions, one of the issues that has come out of the USMCA is the way Canada has administered the TRQ’s, the tariff rate quotas. Jaime, you’re in the front line with that issue. Can you explain to us exactly what the issue is?

Jaime: Yeah. And this is very important because as I stated just a minute ago, there was an improvement. But just imagine that this improvement, that it was an additional 3.25% of the Canadian market, would be actually also limited. Then, you’re talking that those small improvements are not going to be given the United States dairy farmer or manufacturing or trader the opportunities that we would actually should have. The TRQ administration is a perfect example. When USMCA was negotiated, we knew, at some point… Actually, I didn’t know that at the beginning because we heard President Trump talking about how we needed to have an open market with Canada. When we realized that the Canadians, the USDR, the U.S. government wasn’t going to be very forceful in opening the Canadian market in any significant way, we realized that whatever little we were going to have, we needed to work for everybody to be able to actually sell the highest possible value of that product. Look. What the Canadians have done is to limit the access of that TRQ to certain importers into Canada. So, for instance, if you take Jacobi or many other importers of cheese that can go directly to a Walmart or to a Costco or to a restaurant or pizza chain, they’re not allowing that to happen. The majority of the TRQ is given to processors, to major companies in Canada. So, the opportunities for folks like yourself and others to have a direct relationship with buyers, end-users in Canada are not being fulfilled by the way that actually Canada is implementing the TRQ administration.

T3: So, if that’s the case, how does that hurt the U.S. dairy industry? In my perspective, the issue is because we don’t have the opportunity to sell directly to the end-users of dairy products in Canada, those processors who have received the TRQ’s are either going to not actually utilize the TRQ’s, and therefore, not actually buy U.S. dairy products and bring them into Canada, or they’re going to apply a margin on top of whatever the margin that the U.S. dairy companies have. And they’re going to make it essentially too expensive for those exports of U.S. dairy products to Canada to actually work. Am I looking at it the right way? Am I thinking about it the right way?

Jaime: Yeah, you are. I could add that they can also buy a certain type of product, certain type of cheese that they can further process and you basically lose the greatest value of that product. There is a number of reasons why you describe it very well, the first two that we’re not importing much and we have actually seen that some of the numbers on the TRQ field rates have been very low, so far.

T3: I know that USDEC and National Milk have started engaging in conversations with the Trade Administration to see if we can address this issue. What has been done so far? And what do you think the outcome will be?

Jaime: Yeah, those two organizations have been the leading organizations on pushing for, first of all, USMCA and changes that occur on Class VII, on Class VI. And obviously, on the TRQ administration, we were the ones who provided, the very first time, the administration with the right information for them to begin reviewing this legally. We also contact members of Congress to ensure that the U.S. government, the previous administration, but also talking to this administration, look at enforcement as a priority. So, at this stage, the last communications that we had with the U.S. government was with IDFA, too, so it was IDFA, National Milk, and the U.S. Dairy as proconsul to make sure that the U.S. government knew that this was a unified position from the industry. And, at this stage, I believe USDR, the U.S. government is waiting for Katherine Tai, the nominee or the USDR position to be confirmed, which should happen this Thursday [Tai confirmed post recording]. We expect that once she’s in her position, that this would be one of her first topics, items to deal with. And we believe that USDR will be making a decision soon. Our expectation is that the next step is to call for the formation of a panel.

T3: Okay. And how long do you think it will take for that panel to be put together?

Jaime: Under USMCA, the whole system of dispute settlement is a lot faster. So, it should take, I mean, no more than a couple of months. And then there is a whole process that instead of being a WTO dispute settlement, which I think that needs major reform, and instead of taking years and years, this could be a resolution, this could be in by the end of this year if we request a tribunal panel soon.

T3: Good. You know, you mentioned the trade panel and how it’ll happen faster than it did under NAFTA. It made me think of another issue that we’ve experienced. Dad, I don’t know how long ago it was. But we used to export a fair amount of milk from Texas and New Mexico into Mexico, and then that all stopped. It’s probably over 10 years ago now, and we haven’t been able to move it forward. I’m sure you remember that, and I know Jaime, you’re familiar with that issue as well. Do you think that is an issue that could be addressed under USMCA, or is that probably not a priority for the new administration?

Jaime: We’re going to make sure that all our issues are their priorities. Obviously, they going to have many, many different people asking the same thing. This issue, as Ted Sr. knows, we dealt with it for a long time. And we thought that we were making progress. And sometimes the U.S. government is your best friend, and sometimes it creates a situation in which something becomes political. We tried to address this issue under USMCA, and I think we were making progress, and sometimes other things get involved and things are complicated. This is a matter of, for many dairy farmers in Mexico, and as a badge of honor that they don’t want fluid milk to come in. And I think that has been protectionist actions by Mexico that have prevented that we restore this trade that has absolutely no reason why not to have it.

Ted: Yeah. But Jaime, that’s true. That’s what happened. But, you know, enforcement on these trade agreements is a critical issue. I mean, we have trade agreements, for example, or understandings with a lot of different countries in the world, China being one. They’re members of the WTO and Mexico and through NAFTA and the new USMCA. But how do you achieve enforcement? Canada, obviously, it’s stretching the limit of the law, and Mexico does too. So, what good is the agreement if you can enforce the rules?

Jaime: Couldn’t agree more with you, Ted. I think that there are two major issues that the United States have fall way behind. One is catching up on trade agreements, and the second one has been on enforcement. This issue with Mexico should have been taking care of, issues with India exports. There are a number of places in the world that we need to have enforcement. And it’s one of those questions that I don’t have any specific answer other than we bring these issues, we bring cases to the U.S. government. And a lot of times, there are reasons that we cannot explain as to why the U.S. government do not proceed with an enforcement case. But sometimes, actually, you don’t need a WTO case or a USMCA case. What you need is to create leverage and to sit down with your counterpart and try to negotiate an agreement. I remember we did that with Canada a long time ago about a number of issues in which there is a number of irritants. I think it is time for us to sit down with Mexico and try to deal with a number of irritants from both sides. Actually, the Mexicans has also some issues with us, but we need to actually sit down. And as long as you don’t have that, then you’re not going to be able to resolve this.

T3: Jaime, do you think that the new administration is going to be more proactive in those kinds of issues, both from a dispute standpoint with current trade agreements, and even pursuing new trade agreements with countries where maybe we either don’t have trade agreements or the trade agreements need improvement?

Jamie: We hope that this is one of the two issues that they’re going to be addressing is enforcement. I do believe that Katherine Tai is someone that believes in enforcement, so I do believe that she will start looking at this. But you need resources, right? There’s a certain amount of lawyers. There is a certain amount of folks that actually can work on a particular issue. Now, with respect to trade agreements, I think we’re going to have to wait and see. We certainly know what we’re going to be asking the administration. And it can be possible that we have spent more than 12 years in which we have not negotiated and passed a new trade agreement while Europe, New Zealand, Australia are constantly negotiating and passing new agreements. And it is primarily because of politics. It’s not because of the economics of the country. And here, in both parties, both parties need to actually be willing to compromise. There is no reason why we shouldn’t have a trade agreement with Vietnam. There is no reason other than geopolitical perspective to not have an agreement with the Philippines. And I can keep on going with respect to trade agreements. But I do think enforcement will be a priority. Trade agreements, we’ll have to work hard on that.

T3: So, let me ask you this because when I think of trade agreements, I tend to think of it in terms of from a U.S. Dairy Export standpoint. The import tariff rates that have to be paid on U.S. dairy products relative to, let’s say, those same tariff rates coming out of Europe or coming out of New Zealand, or Australia, or other exporting countries. Would you say today the U.S. pays more in tariffs than their competition out of Europe and Oceana, or do we pay about the same amount?

Jaime: We pay more.

T3: How much more? I know it varies from country to country. But what percentage difference, in general, do you think that is?

Jaime: Yeah, you said it. It varies from country to country. But even if it’s actually relatively small tariffs, 10% to 20%, if anybody knows how important is the margins in this business and that when you’re trading and you’re buying this product, 10%, 20% makes a huge difference in whether you’re gonna be competitive or not.

T3: So, Dad, the reason I asked that question is, as Jaime was talking, I was thinking about all the conversations that we have about where the U.S. dairy prices are, and where maybe the prices are on GDP, or out of New Zealand, or out of Europe. And we tend to have this question where we ask, where we go, “Our prices on paper seem to be low enough. Why aren’t we getting the business?” I wonder if a lot of times in those discussions that we have…are we taking into account the fact that the U.S. has to pay higher tariff rates a lot of times than our competitors out of Europe and Oceana?

Ted: I’m sure that we do in a case-by-case basis. However, over a longer period of time, there’s quite a bit of variance in the international call it juxtaposition of pricing. If you look, for example, right now at the international pricing, say from New Zealand, as opposed to the U.S., and you transfer that to a milk price, without doing the math, I’m gonna guess that we’re $4 or $5 a hundredweight lower than the New Zealand on a per hundredweight basis, probably less than that with regard to Europe. However, going back about three years, the shoe was on the other foot, and it wasn’t to that extent, but our pricing was much higher. And it seems to take a while for this thing to sort of level out. And what that tells me is it’s not necessarily a tariff issue. I’m sure that tariffs have a bearing on it. But what it tells me is we’re very slow to adjust. We don’t have, for example, a lot of customer loyalty in export markets. We have customer loyalty and domestic markets. And so our industry is structured so that when we have surpluses, we want to get rid of them as quick as possible and get them out of the way of our domestic business.

And this is a structural problem with our industry, and I don’t think it’s only the United States that has that problem. But for some reason, the Europeans and the New Zealanders don’t have it to the extent that we do. And I’m not sure I understand why. Maybe our federal barter system to some extent stands in the way. But with regard to international pricing, I don’t think so. I think we have classified pricing, which should basically reflect international pricing for powder and butter and cheese. And yet, right now, our industry is languishing in the international markets on those products. I’m sure that we will catch up. That’s one of the reasons why I feel that the second half of this year is rather bullish for the U.S. dairy industry. And I know, Teddy, you don’t agree with that. But given the difference in the international markets and what we have right now, I think that we will. But why does it take so long? And why do these gaps in pricing persist for as long as they do? And I’d like to hear what Jaime would have to say on that.

Jaime: Actually, that was very good. And I appreciate always listening to you. But let me first say that, it’s not that actually, we’re not exporting. We’re still the largest exporter of skim milk powder. I mean, we’re selling record levels and inventories is not that, actually, they’re that big on the powder side. There is this differential between, obviously the GTT than the Kiwi prizes and like you said to a lesser standard, the European. I think it is more of today, at least, the ports have to do something with it. I think we’re behind of the ability to export by maybe a couple of weeks or even more. But I think, in principle, I think that tariffs have definitely an impact back here on the pricing, but it is also some of this relationship that you build, based on these free trade agreements. Look at China, for instance, and I have actually struggle with respect to the China phase one agreement in which the Chinese are supposed to be buying huge quantities of product for everybody. There’s no specific quantity for dairy.

But, you know, we still don’t sell a lot of skim milk powder into China. I’m definitely determined to try to find out more about why. But I certainly understand that New Zealanders and now the Australians have a significant quota that they can fill in the first three, four months of the year. But then you have the rest of the year that even though they’re going to be using that, there should be more opportunities. With respect to cheese, I think that what the Europeans have that we don’t have, and we can talk about the federal orders, I always say this, that I don’t think anybody has ever shown me a main reason why the federal orders should be a hurdle or a problem to export. There is a reason why we went from exporting 3% to levels of 17%. And if you would actually use a baseline or an index, that quantity would be even much, much higher. And all of that was done under the same federal orders ruling. But Europe has, just like Fonterra, has very few players. If you look at Arla, FrieslandCampina, and all these just few folks, they can actually work in a completely different world in which we work, and they can operate in an easier just because they are one or two companies that are handling most of the exports and most of the milk inside those countries.

T3: Jaime, do you think that Arla and FrieslandCampina and those bigger countries in Europe that do a lot of the exporting, do you think that they sell into the export market on a regular basis at a lower price than they sell into the domestic EU market? Because quite often that’s the impression that we get. When they want product to go away, they’ll make it go away into the export market at prices that are lower than the published prices that we see. Are you seeing that as well?

Jaime: I think that what they do, that we don’t have, if you look at Arla, look at the amount of milk that they have in the amount of different countries, now, from Germany to Denmark to England and so on. If you look at how they actually go about it, they have a huge presence in the retail market. The way that they actually price and pay farmers is just a calculation of a blend price of everything they can get for all the products that they sell. So, if you have a significant part of your overall sales that goes into retail, actually, that helps you pay higher prices, in addition to the fact that at least one-third of the farmer’s income in Europe comes from subsidized money from the government. It helps them when they do that blending. And sure, insurance is private. It is not government-induced. It helps them actually to export in a much easier way than we could ever do.

T3: Well, and we experience that when we’re trying to export U.S. dairy products. The Europeans seem to be able to adjust price competitively at times when the U.S. cannot. We think we’re competitive for a brief period of time. And then the European competitors who were chasing the same business we are seem to come up with a better price. And my feeling has always been that and maybe it’s unfairly but I tend to criticize the federal order system, that between the federal order system and the structure that we have, which can be a bit inflexible, and the futures that are tied to those federal order prices, you’ll see the Europeans who don’t have that inflexible structure. They’ll just say, “Hey, this is where we need to be to sell here, so we’re going to be here.” And then, what we’re dealing with is we’re dealing with, “Well, the futures are here. We can’t be competitive in that price. And so we can’t adjust to be competitive in the international marketplace.” And then what eventually happens is because a lot of times in the international market, you do a deal where the shipping time period is three to six months down the road from when you actually negotiate the price, that by the time you actually arrive at the moment in time where you’re making products for export, our pricing would be competitive. But we couldn’t go there because of our federal order structure at the time that the price was negotiated, and the Europeans seem to always have the freedom to do so.

T3: Jaime makes a point that I had never really got my head around before but I’d like to go back to it. The question is customer loyalty. And we’re using Arla as an example, but there are a number of European companies that have plants in a lot of different countries. If they’re involved in the sales and marketing to different outlets and exporting to different countries as part of their overall sales profile, of course, they’ve got more of an incentive to nurture, if you will, customer loyalty with different countries and different companies at different prices. The question to them is the blend price for their own individual company. And that is a much more important loyalty factor than we have under our federal order system. People tend to look at the federal order system in a bad light for the wrong reasons in my view. I don’t think that our classified pricing system hurts us, particularly on exports, given the structure of our industry. I think it’s the structure of the U.S. industry that hurts us, not the federal order system necessarily, in that we’re not incentivized to deal in international markets with the same degree of loyalty to the customers that the Europeans have, or the New Zealanders have. And you want to point your finger at the federal order, yeah, there are issues there but they’re not the big issues. In my view, they’re smaller. I don’t know how we’re going to exactly deal with that without a major structural reform within the industry. And I think that would be rather painful for the industry.

Jaime: If I can actually add to that, first of all, I agree with Ted Sr. 100%. And I would say that you look at when sometimes some folks in the industry criticize one organization or two because they’re too big. But if you look at how the Arlas and the FrieslandCampinas and all the big, big companies in Europe export and you look at Fonterra, I always say that there is a reason why Nestle or Kraft, which are pretty much in every single country in the world, including Kenya or Nicaragua, they never actually had a plant in New Zealand. And you can argue, “Oh, well, it’s a small places.” There are many countries in which they are in which they have small populations, but because Fonterra always control the milk, so, Fonterra was the only source. So, it is difficult to actually compete with folks that actually control the amount of milk that some of these companies do control. And especially that if you want to grow and be bigger here in the United States as somebody who is sourcing milk, a lot of times you get criticized for being bigger when they’re not looking at our competition.

Ted: I think Jaime makes a point and he’s sort of tiptoeing around the basis for it. And I understand it, that in a lot of ways, so we don’t control our own milk supply. We rely on others for our milk supply. And we don’t have… Our exporting countries who export value-added products, particularly, in most cases don’t control their own milk supply. And as a result, that also reflects back on customer loyalty and the incentive to maintain that loyalty with international customers and markets.

T3: So, with that in mind, Jaime, where do you see the U.S. dairy industry in terms of exports, in let’s say, 10 years? And I ask that question kind of framing it this way. You know, the majority of U.S. dairy exports are the commodities skim milk powder, whey powder, whey permeate, lactose, and a growing part of it is cheese, but the majority of the cheeses are kind of commodity mozzarella and cheddar. When you look 10 years down the road, do you think those are still going to be the dominant products, or do you think the U.S. will become more of a value-added exporter?

Jaime: Let me first say that thanks to folks like yourselves and many, many others. I have a lot of faith that we’re going to actually continue to expand on exports, and we’re going to continue to do as good as the job that we have been doing over the past 15, 20 years in growing. Do we have to actually room for improvement? Of course, there is a number of different things that we could actually do. The United States, their industry is a complex industry. Do I think that we’re going to be a commodity or more value? I think it’s going to be a little bit of everything. I certainly believe that we’re gonna actually be exporting more value-added products. But I think it’s going to be critical that we need more export opportunities, more markets. We need to open more markets. We need to actually fight protectionism around the world. If many of you or maybe the audience may not remember, “The Judgment of Paris,” movie created, it was a time in which all the wines from California beat all the French wine. I always say that we’re like the wine industry. We’re just a little bit behind. But it’s going to get to a point in which we are going to be exporting more and more high-quality cheeses, more and more high-value products. It’s going to just take time. But folks like the U.S. Dairy Export Council and many others are working toward that. And I’m very proud of the industry and everybody who is putting an effort on exporting more products.

T3: Thank you, Jaime. Dad, any other question for Jaime?

Ted: Multiple questions, but I don’t think questions that we want to raise necessarily right here. But Jaime it’s been great to talk to you. And we very much appreciate your participation in this program. It’s been a successful program for our dairy support business. And it’s people like you, which have helped us in this regard, which we appreciate. So, thank you.

T3: And Jaime, thank you very much for joining us today. And when this pandemic is finally over, I look forward to getting together with you in-person, having a few drinks, and having some of those great dairy market discussions that we always have.

Jaime: Absolutely, with you and the whole team. I’m really looking forward to that day.

T3: We are, too.

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This time on The Milk Check, we welcome a leading mind in international trade policy and personal friend of the podcast. Jaime Castaneda is senior vice president of policy strategy and international trade for the National Milk Producers Federation, This time on The Milk Check, we welcome a leading mind in international trade policy and personal friend of the podcast.<br /> <br /> <br /> <br /> Jaime Castaneda is senior vice president of policy strategy and international trade for the National Milk Producers Federation, where he oversees the development and implementation of domestic policy. He also leads international trade negotiations for the U.S. dairy industry as senior vice president of trade policy for the U.S. Dairy Export Council.<br /> <br /> <br /> <br /> Jaime joins the Teds in a discussion of how trade policy developed over Jaime's 22 years in the industry, from dairy farmers' early reluctance to accept imports to the industry's ongoing efforts to improve and enforce trade agreements.<br /> <br /> <br /> <br /> Among other topics, they also debate whether the Federal Order System and tariff rates are holding back U.S. dairy in international markets, or if the problem is our slow response to short-term international economics and low customer loyalty outside of domestic markets.<br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> T3: Hello, everybody. Welcome to the "Milk Check," episode 35. It is March 16, and our guest today is Jaime Castenada from the U.S. Dairy Export Council. But I believe you wear multiple hats. So, I'll let you describe what roles you fill with USDEC and National Milk.<br /> <br /> <br /> <br /> Jaime: Yeah. Thanks. Good afternoon to everyone. I am actually the senior vice president for the National Milk Producers Federation. Under that capacity, I oversee the development and implementation of domestic policy, an area of different issues, including from the initiative of Foundation for the Future, that was the preload to the dairy margin coverage to Farm Bills to just name it. At the same time, I served in my capacity, as senior vice president for policy and trade, I also lead our partnership with the U.S. Dairy Export Council and serve now, for almost, actually, next month is going to be 22 years that I am with the industry and that I have been serving as our partner with the U.S. Dairy Export Council.<br /> <br /> <br /> <br /> T3: Well, wow, we're lucky to have you. And T.C. Jacolby & Company is one of the founding members of the U.S. Dairy Export Council and we've been involved with the U.S. Dairy Export Council from the very beginning. Have you been involved with the U.S. Dairy Export Council the whole time?<br /> <br /> <br /> <br /> Jaime: Yes, yes. In fact on Suber, really, I discuss joining the U.S. Dairy Export Council. The way that we work is that we operate everything that relates to policy under National Milk, specifically related to trade, just to make sure that, if you remember, the U.S. Dairy Export Council, it's a cooperator for USDA, which receives monies from MAP, the checkoff funds as well as MAP money. So, in order to make sure that advocacy is properly and it's done using membership dues, then we created this ability. And I do remember sitting... And now at U.S. Dairy Export Council is a large organization, 150 members more or less. And I do remember when sitting with Ted Sr. in a small table, Lei Jensen and a few other folks that were the original founders of the U.S. Dairy Export Council.<br /> <br /> <br /> <br /> Ted: Those were the days. I remember those days very vividly. It goes back, what, to the '90s?<br /> <br /> <br /> <br /> Jaime: Yeah, 1999. 1999, and that's where we began developing the trade policy. If you remember, prior to 1999, even dairy farmers, and this is a lot of credit to folks like yourself and Tom Camaro that look at the vision and the future. And if you remember, dairy farmers were not very keen on trade. In fact, if you talked to them on trade, in the 1990s, it was all about, "We hate imports." And it was the development through this small group of folks that were the visionaries that we developed this trade policy and this perspective, T.C. Jacoby & Co. - Dairy Traders clean 33:01
Behind the scenes with Jacoby’s dairy traders, part two https://www.jacoby.com/dairy-traders-meeting-part-two/ Tue, 16 Mar 2021 13:08:31 +0000 http://www.jacoby.com/?p=1966 On this two-part edition of The Milk Check, listeners get a seat at the table during our mass balance report meeting, held after the release of monthly milk production numbers. Our traders gather to evaluate the data, forecast class allocations, share what they're hearing from buyers and sellers, and chart price data to predict market developments.  Our regular cohosts, Ted, T3 and Anna, are joined by Don Street, director of global strategy; Gus Jacoby, executive vice president of the Fluid Dairy Group; Jacob Menge, director of risk management; Brianne Breed, vice president of cheese and butter sales; Joe Maixner, cheese and butter sales manager; and Diego Carvallo, director of dry dairy ingredient trading. In part one, we evaluated the fundamentals of the dairy markets and what the monthly production numbers mean for different industry sectors. Now in part two, we look at anecdotal evidence in the wider marketplace, such as the consumer price index and international trade, to forecast dairy's future in the global economy. Anna: Welcome back to part two of the March episode of "The Milk Check," where we're going to continue to listen in as the team participates in our monthly mass balance report. If you missed Part 1, make sure to go back and listen. T3: Thanks, Anna. In this section, we'll rejoin Jake and our dairy product trading team as we talk this time about things on a much more macroeconomic level. Jake gets into a fascinating discussion about what we think inflation is going to be doing over the next few years and, from that, we'll dovetail some of the more kind of higher-level issues that we're paying attention to and how those issues might affect dairy production. Jake, take it away. Jacob: Alright. Let's kick off the product trade discussion side of things. A lot of times when we discuss the product group, we'll start kind of with a macroeconomic outlook. And I think today the obvious place to start is inflation. And we've been talking about inflation for a while. This week and last week, some really notable things happened on inflation, so I have to talk about it for two seconds here because it actually relates directly to milk in my opinion. OK, so let's talk about the consumer price index for just one second, right? It's what everybody uses to gauge inflation. You've probably heard, like, "Oh, for the last decade, we've had very low inflation." And if you use the CPI as your gauge for that, then it's true. I think the CPI is broken for gauging inflation and here's my reasoning behind that. Over the past 10 years, the wealth gap has gotten larger between the top 25% and the bottom 25%. And the CPI is terrible, terrible at capturing inflation on the assets where the wealth is actually growing. And so here's my example. CPI. What is it? It basically looks at a basket of things like fuel, of food, of housing, stuff like that, OK? I'll be very blunt. If one person makes $100,000 extra in a year or 10 people make $10,000 extra, it turns out that person that made $100,000 extra doesn't go buy extra bread with their $100,000, right? And so the CPI does not reflect that. What does the person that made the extra $100,000 buy? Stocks. They invest it. That, in my opinion, is where inflation has existed; it's the stock market. And that is actually pretty well-reflected in P/E ratios, right? Everyone these days is saying like, "P/E ratios are worthless," blah, blah, blah. Well, why is that? It's really a function of inflation. It's a different type of inflation but that is really, really, really, really important to commodities to understand. So when the inflation was kind of happening for the rich but not necessarily the poor, it's not reflected on things that the government uses to gauge inflation. And so the government hasn't really done anything to deal with the inflation because it's inflation that makes people happy. People think they're investing geniuses.

On this two-part edition of The Milk Check, listeners get a seat at the table during our mass balance report meeting, held after the release of monthly milk production numbers. Our traders gather to evaluate the data, forecast class allocations, share what they’re hearing from buyers and sellers, and chart price data to predict market developments. 

Our regular cohosts, Ted, T3 and Anna, are joined by Don Street, director of global strategy; Gus Jacoby, executive vice president of the Fluid Dairy Group; Jacob Menge, director of risk management; Brianne Breed, vice president of cheese and butter sales; Joe Maixner, cheese and butter sales manager; and Diego Carvallo, director of dry dairy ingredient trading.

In part one, we evaluated the fundamentals of the dairy markets and what the monthly production numbers mean for different industry sectors.

Now in part two, we look at anecdotal evidence in the wider marketplace, such as the consumer price index and international trade, to forecast dairy’s future in the global economy.

Anna: Welcome back to part two of the March episode of “The Milk Check,” where we’re going to continue to listen in as the team participates in our monthly mass balance report. If you missed Part 1, make sure to go back and listen.

T3: Thanks, Anna. In this section, we’ll rejoin Jake and our dairy product trading team as we talk this time about things on a much more macroeconomic level. Jake gets into a fascinating discussion about what we think inflation is going to be doing over the next few years and, from that, we’ll dovetail some of the more kind of higher-level issues that we’re paying attention to and how those issues might affect dairy production. Jake, take it away.

Jacob: Alright. Let’s kick off the product trade discussion side of things. A lot of times when we discuss the product group, we’ll start kind of with a macroeconomic outlook. And I think today the obvious place to start is inflation. And we’ve been talking about inflation for a while. This week and last week, some really notable things happened on inflation, so I have to talk about it for two seconds here because it actually relates directly to milk in my opinion.

OK, so let’s talk about the consumer price index for just one second, right? It’s what everybody uses to gauge inflation. You’ve probably heard, like, “Oh, for the last decade, we’ve had very low inflation.” And if you use the CPI as your gauge for that, then it’s true.

I think the CPI is broken for gauging inflation and here’s my reasoning behind that. Over the past 10 years, the wealth gap has gotten larger between the top 25% and the bottom 25%. And the CPI is terrible, terrible at capturing inflation on the assets where the wealth is actually growing.

And so here’s my example. CPI. What is it? It basically looks at a basket of things like fuel, of food, of housing, stuff like that, OK? I’ll be very blunt. If one person makes $100,000 extra in a year or 10 people make $10,000 extra, it turns out that person that made $100,000 extra doesn’t go buy extra bread with their $100,000, right?

And so the CPI does not reflect that. What does the person that made the extra $100,000 buy? Stocks. They invest it. That, in my opinion, is where inflation has existed; it’s the stock market.

And that is actually pretty well-reflected in P/E ratios, right? Everyone these days is saying like, “P/E ratios are worthless,” blah, blah, blah. Well, why is that? It’s really a function of inflation. It’s a different type of inflation but that is really, really, really, really important to commodities to understand.

So when the inflation was kind of happening for the rich but not necessarily the poor, it’s not reflected on things that the government uses to gauge inflation. And so the government hasn’t really done anything to deal with the inflation because it’s inflation that makes people happy. People think they’re investing geniuses. You basically could have bought anything in the past five years and looked good, OK?

But one other point I’ll make on this. So you’ve probably heard the feds say like, “Hey, we’re going to look at inflation and we’re not going to really raise rates until inflation starts kicking in.” OK, they’re looking at this, right? The CPI is primarily what they’re looking at. Those rates are big, and what those interest rates are doing is really going to have a big impact on our commodity.

So here’s one other thing I’m going to show — the 10-year breakeven inflation rate. This is basically what the market is guessing inflation is going to be. Let’s just note that we have gotten back to where we were in 2018. There is a way that you can basically take this 10-year breakeven inflation rate and compare it to the 10-year treasury and kind of see how big of a panic the market’s in about inflation. So, again, we are back where we were in 2018 on this breakeven inflation rate.

If we look at the 10-year note though, 3.19. We’re at 1.48 now. It’s basically half of where it was even though our breakeven inflation rate is back where it was in 2018. So not keeping pace with each other is starting to have the market…as you can see, it’s trying to catch up. This is the last two weeks I’m talking about. These 10-year notes are just going nuts. This is going to be something that’s going to basically kick any inflation into overdrive. It’s a hit.

And so now here’s the crescendo of this thesis I’m laying out here. What could cause this inflation a.k.a. the CPI to kick in and go higher? It would be exactly like something like a $15 minimum wage or exactly like the economy re-opening and suddenly maybe people didn’t spend their stimulus checks and it gets poured back in. It’s stuff like that. And if the Fed sees the CPIs start really getting steeper, that would be something I could see them saying, “OK, now we’re going to raise rates.” That takes a lot of money from the equities and puts it into commodities. And so that’s where we’ve wound up.

And I think the market is way, way, way underpricing inflation. And that is going to matter for probably the metals and stuff first, but sooner than everyone thinks probably the softs and ags. It’s going to have an impact. If so, I’m bullish commodities here, and I’m bullish commodities sooner than the market is really pricing it. The market kind of thinks maybe we start seeing inflation five to eight years from now. I think, in commodities, it’s more like one or two or it’s happening right now. I really do think this is going to just hit. I might be wrong, but I definitely don’t think we’re going in with deflationary environments or something like that.

OK, with the inflation discussion kind of in the back of our minds, let’s go ahead and transition to talking about commodities. Corn’s sitting at, like, mid-five bucks. It really stopped going up. It’s kind of just been from August to now more or less this linear line higher. Really impressive. I am surprised with some data coming out of China that this didn’t slow down a bit. I mean, it slowed down relatively than it was during December, but it’s still on a tear. Really the same story over on the soybean side of things. I’m personally, again, surprised with what has been some of the data that the last WASDE had. I thought we were going to get some kind of a slowdown here but not really. Any comments there, Diego?

Diego: Yeah, no. I agree. I also thought that this wasn’t going to last that long. Apparently, China’s space has been kept very high, and there have also been some problems with Argentina and Brazil’s crop. Argentina mainly with exports, government regulating the amount of product that can be exported in order to provide for their own country people, and Brazil with some weather issues, and the combination of those two high demands and some issues with the supplier has taken prices skyrocketing.

Jacob: I don’t think it can be ignored but relating to the lecture I just gave five minutes ago that I subjected you all to, let’s just look at these beans compared to just commodities in general. This includes metal. This includes everything. Not so different. I’ve heard a lot of explanations of why corn and why beans have done what they’ve done.

When you look at it though, compared to just a commodity fund, this commodity fund includes everything. A huge basket. It’s on the same thing. I mean, it’s up huge. It’s like up 4 bucks on a $13, $14 stock. I’m a little surprised we haven’t seen a bit more of it in dairy; it’s probably because we don’t have quite as much managed money. It’s got to filter through at some point though.

And this is kind of to Gus’ point that he was bringing up earlier. If these farmers’ input costs are spiking and stay expensive, it’s going to come through eventually. Maybe we’re one step removed here in dairy but just look at commodity funds. This market is hot.

All right. So let’s dive into dairy specifically a little bit here. This is our spot market, all of our Class III spot market. So we’ve got butter, whey, and the cheeses in here. So you can kind of see, you know, what’s the spread between the futures and the spot market has been. It was really wide last year. I mean, no surprise there. It’s really kind of narrowed up now.

My question, I guess, for the group would be, was the volatility that… last year purely coronavirus-related? Are we going to get volatile again? I mean, does the spot market keep a discount to the futures then because of some reason? Is sell-side liquidity just gone? I don’t know.

Ted: We’ve had periods where we’ve had commodity funds invested in dairy futures. Is there any indication that that’s going on now?

Jacob: Yeah, actually. Two weeks ago, the Commitments of Traders came out, and they had just taken a lot of money out. They had put a decent amount of money in in the beginning of January and they took it out at the beginning of February.

I would not be surprised to see that kind of trading happen where they’re just kind of dipping in, and I would kind of expect them to keep holding a bigger position, so it kind of grows. You know, so maybe they put 1,000 contracts in, and then only take 500 out, and then they do another 1,000, and it just kind of grows.

It’s just going to depend on what milk does relative to these other commodities. If corn stays really high, milk might start looking attractive because people can do the math that we kind of were just talking about where, you know, the milk cost will probably go up if corn stays really high, and they’ll just say, “Well, the better relative value is just to go buy milk instead of going and buying corn.” We’ll have to see. If corn collapses, that’s probably not going to be true. The managed money probably won’t come in as much.

I guess I want to talk about carries, too, real quick. So this is our Class III carries. We are pretty darn high for this time of year. It’s the third-highest ever. How does that work out? Does the back half stay higher because of re-opening and then we’re going to get this demand coming in? I don’t know. I think it sticks out quite a bit to me to have a carry quite as large as this. I would be surprised if it sticks around, but, again, it’s a very different circumstance coming out of lockdown and stuff.

What else we got? We got milk versus the ag products. This is just Class III. This is like a basket of agricultural products. We have just way underperformed relative to other agricultural commodities. You know, we’re down slightly on our Class III when you average it out over about the past year. The ags who are just on a tear. When you look at this historically, this is pretty wide relative to how Class III is relative to the other ags. Usually, they’re much narrower than this. So got to keep an eye on this. One of these has to give it up; either milk is going to have to go higher or, I would say, ag is going to have to kind of slow down.

T3: When the ags are significantly below the milk, it’s kind of an indicator that you’re going to have milk production increases. And when it’s significantly above, it’s kind of an indicator that maybe you won’t because it’s your inputs in the milk production.

Jacob: The very last thing—and this is related, again, to kind of what we’re seeing happening in the bond markets—has got to be the dollar index. We’ve got to touch on this one. We are pretty much at the lows we saw back in early January. We’ve touched this morning 89.7, I think. If we look at a weekly chart and go back to now 2015, we’re pretty much at these same lows from 2018. If we scroll back even further, it doesn’t look like we’re on that low, right? I mean, prior to 2014 and earlier, something in the low 80s was the norm.

This is just going to be a…if we break below this 89 level and let’s say we head to the low 80s on the dollar index, that is going to have a huge impact on our dairy market. Really I think exports are just going to be gangbusters. So something to keep an eye on. Maybe logistics hamper that a little bit, but I don’t think there’s anything to note yet but if this thing starts to make another leg lower, that’s when we’ll really perk up here.

Questions?

Don: So we have record crop planting intentions announced by USDA on both corn and beans, but it didn’t seem to have tempered pricing at all.

Jacob: I think it’s money flowing into commodities. I think it’s a big part of it. I will tell you I’ve heard people talk about…they’re worried about drought, OK? So, hey, we’re worried about a potential drought. I think any guess of drought before, like, March or April is just…I don’t think it’s worth much. Things can change so much.

So I don’t know how big of a factor that’s really having. I think it’s just the rising tide lifting all boats here. I mean, look at commodity baskets and corn and beans are following in lockstep along with those commodity baskets. So, I really do think it’s just money flowing into commodities, and I don’t see that stopping.

Gus: It’s got to affect these farmers here. And, you know, I know they all have their silage kind of covered for an extended period of time, but at some point in I guess, you know, late summer, early fall, we’re going to have to have higher prices or they’re just going to… Except for those who properly hedge that far out and except for those who have their own crops and plan not to sell and call, right, which might be a good move if you’re betting on most producers to call, but it doesn’t seem like these commodity prices will come down any time soon to put it in line for farm economics to work certainly at the futures numbers that we’re seeing.

Jacob: I’ve got to note, Gus, we are inverted on the corn market. So if you’re a farmer, you could go lock in 473 corn for December.

Gus: What is that, 75 cents or so difference in the current, but it’s still much pricier than it was, you know, a year ago.

Jacob: But you can lock an $18 milk which is better than you could lock in $18. OK, $17 average Class III, Class IV. I am with you. I agree. I think this comes through. I am not actually disagreeing with you. I just don’t want to make it seem like it’s 550 corn versus $17 milk. I mean that is a difference, right?

Gus: Yeah, of course.

Ted: Cyclically it looks like we’re sort of supporting something similar to what happened in 2014, doesn’t it?

Gus: A little bit.

T3: That’s a really good way to put it, 2014 was all about international demand, and I think the question is, are we going to get the kind of international demand that we did then?

Gus: At the moment, we are. Our CME and DPSR is relative to the GDT, and I know that’s not a perfect comparison. I’m just saying, if you look at that from a snapshot standpoint, there’s a large discrepancy there. So exports, as far as I can tell, are going to continue for a while unless there’s some drastic change in the international markets or our markets.

T3: Well, the big question I think we have is are the logistics problems we have going to get solved because my gut tells me, if we solve the logistics problems we have, we narrow that gap. If we don’t, we don’t narrow the gap, but we’re not really taking advantage of it and we keep that gap because we can’t get anything exported because we can’t get the containers under it.

Gus: Yeah.

Diego: Most articles and things that I have read about these logistic bottlenecks are already talking about this problem going through summer. So, some of them talk about July as going back to normal. Some of them are talking about sooner than that. But what they all agree is that it’s not going to get solved in the next month.

T3: Do we know, is Europe having the same kind of logistics issues that the U.S. is?

Diego: They are on a lower scale, that’s what I’ve read.

Gus: OK, but if you look at the production report we just got here the other day, their production isn’t gangbusters. It’s kind of been waffling around 1%. If you look at where they’ve been on milk production, you know, it doesn’t seem like they’re going to jump any time soon. And I’m making some assumptions here. You know, Jacob and others might know more than me, but the reality is, if we’re exporting commodities like we are, then I would assume that prices for feed over in Europe are adverse as well from a farm economics standpoint. And therefore if that’s the case for them to expand any time soon, you know, granted they’re running higher prices, but they have no exports, what does that mean, right? So I don’t know. It’s sizing up to be a very interesting marketplace for the rest of this year for sure.

Jacob: That was all I have. Does anybody else have anything they want to see or discuss further?

T3: I think we’ve covered it. I think we’ve had a fantastic conversation today.

Thanks, everybody, for listening. And Don, Gus, Jake, Diego, Brienne, and Joe, thanks for participating. This was part two of a two-part section where our listeners had an opportunity to listen in to our trading team talk about what we’re seeing in the industry today and what we think prices are probably going to be doing over the second half of the year. I hope you enjoyed the opportunity, and I look forward to talking to you again next month. Good luck, everybody, and keep on milking.

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On this two-part edition of The Milk Check, listeners get a seat at the table during our mass balance report meeting, held after the release of monthly milk production numbers. Our traders gather to evaluate the data, forecast class allocations, On this two-part edition of The Milk Check, listeners get a seat at the table during our mass balance report meeting, held after the release of monthly milk production numbers. Our traders gather to evaluate the data, forecast class allocations, share what they're hearing from buyers and sellers, and chart price data to predict market developments. <br /> <br /> <br /> <br /> Our regular cohosts, Ted, T3 and Anna, are joined by Don Street, director of global strategy; Gus Jacoby, executive vice president of the Fluid Dairy Group; Jacob Menge, director of risk management; Brianne Breed, vice president of cheese and butter sales; Joe Maixner, cheese and butter sales manager; and Diego Carvallo, director of dry dairy ingredient trading.<br /> <br /> <br /> <br /> In part one, we evaluated the fundamentals of the dairy markets and what the monthly production numbers mean for different industry sectors. <br /> <br /> <br /> <br /> Now in part two, we look at anecdotal evidence in the wider marketplace, such as the consumer price index and international trade, to forecast dairy's future in the global economy.<br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome back to part two of the March episode of "The Milk Check," where we're going to continue to listen in as the team participates in our monthly mass balance report. If you missed Part 1, make sure to go back and listen.<br /> <br /> <br /> <br /> T3: Thanks, Anna. In this section, we'll rejoin Jake and our dairy product trading team as we talk this time about things on a much more macroeconomic level. Jake gets into a fascinating discussion about what we think inflation is going to be doing over the next few years and, from that, we'll dovetail some of the more kind of higher-level issues that we're paying attention to and how those issues might affect dairy production. Jake, take it away.<br /> <br /> <br /> <br /> Jacob: Alright. Let's kick off the product trade discussion side of things. A lot of times when we discuss the product group, we'll start kind of with a macroeconomic outlook. And I think today the obvious place to start is inflation. And we've been talking about inflation for a while. This week and last week, some really notable things happened on inflation, so I have to talk about it for two seconds here because it actually relates directly to milk in my opinion.<br /> <br /> <br /> <br /> OK, so let's talk about the consumer price index for just one second, right? It's what everybody uses to gauge inflation. You've probably heard, like, "Oh, for the last decade, we've had very low inflation." And if you use the CPI as your gauge for that, then it's true.<br /> <br /> <br /> <br /> I think the CPI is broken for gauging inflation and here's my reasoning behind that. Over the past 10 years, the wealth gap has gotten larger between the top 25% and the bottom 25%. And the CPI is terrible, terrible at capturing inflation on the assets where the wealth is actually growing. <br /> <br /> <br /> <br /> And so here's my example. CPI. What is it? It basically looks at a basket of things like fuel, of food, of housing, stuff like that, OK? I'll be very blunt. If one person makes $100,000 extra in a year or 10 people make $10,000 extra, it turns out that person that made $100,000 extra doesn't go buy extra bread with their $100,000, right?<br /> <br /> <br /> <br /> And so the CPI does not reflect that. What does the person that made the extra $100,000 buy? Stocks. They invest it. That, in my opinion, is where inflation has existed; it's the stock market. <br /> <br /> <br /> <br /> And that is actually pretty well-reflected in P/E ratios, right? Everyone these days is saying like, "P/E ratios are worthless," blah, blah, blah. Well, why is that? It's really a function of inflation. It's a different type of inflation but that is really, really, really, really important to commodities to understand.<br /> <br /> <br /> <br /> T.C. Jacoby & Co. - Dairy Traders clean 20:12
Behind the scenes with Jacoby’s dairy traders, part one https://www.jacoby.com/dairy-traders-meeting-part-one/ Tue, 09 Mar 2021 21:33:27 +0000 http://www.jacoby.com/?p=1960 On this two-part edition of The Milk Check, listeners get a seat at the table during our mass balance report meeting, held after the release of monthly milk production numbers. Our traders gather to evaluate the data, forecast class allocations, share what they're hearing from buyers and sellers, and chart price data to predict market developments.  Our regular cohosts, Ted, T3 and Anna, are joined by Don Street, director of global strategy; Gus Jacoby, executive vice president of the Fluid Dairy Group; Jacob Menge, director of risk management; Brianne Breed, vice president of cheese and butter sales; Joe Maixner, cheese and butter sales manager; and Diego Carvallo, director of dry dairy ingredient trading. In part one, we evaluate the fundamentals of the dairy markets and what the monthly production numbers mean for different industry sectors. In part two, we will look at anecdotal evidence in the wider marketplace, such as the consumer price index and international trade, to forecast dairy's future in the global economy. 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 on "The Milk Check," we're doing things a little bit differently. Every month, the T.C. Jacoby & Company, we have a conversation that we call the mass balance report, and it happens right after the monthly milk production numbers come out. We get all the available traders in the company together to discuss what the most current reports and numbers mean. This month, our listeners will get an opportunity to eavesdrop on that conversation. This edition will be released in two parts, so be sure to listen to both to get their thoughts on a variety of topics, from production and utilization to inflation. T3: Thanks, Anna. And thank you everybody for listening today. So when you're listening to our traders talk, the thing to keep in mind is a lot of times when we're trying to get our head around what we think prices might do, there're really three elements to that process. The first element is evaluating the fundamentals. As you hear Don Street talk about what the milk production report has done and what we think milk production is going to do and where milk is gonna be allocated between the different classes of milk, you're really gonna be hearing us talking about the fundamentals. The second part that goes into our evaluation is what I call the anecdotal evidence, which is the fact that our traders are talking to buyers and sellers of dairy products in the marketplace every day. And what we're hearing from those buyers and sellers also goes into our opinions of what the market might do. The final thing that comes into play is where we are evaluating what we call the technical information. All of the futures and options markets we have in the dairy industry today and all of the spot auctions that we have in the industry today ultimately create a series of price data. And as you chart that price data, those charts often give you signals as to what you think this market might do next. And when you hear Jacob Menge, our director of risk management, talk, that's mostly what you're going to be hearing, him looking at those charts and telling us what those charts are hinting at. So I think this conversation today is gonna be a very interesting conversation, and I hope you enjoy it as much as we do. T3: Joining us today is Don Street, our director of global strategy. Don: Hey, Ted. Glad to be here. T3: Gus Jacoby, executive vice president of our fluid dairy group. Gus: Hello, thanks for having me. T3: Jacob Menge, our director of risk management. Jacob: Pleasure to be here. T3: Brianne Breed, our vice president of cheese and butter sales. Brianne: Hi there. Thanks for having me. T3: Joe Maixner, sales manager for cheese and butter Joe: Hi there, everybody. T3: And Diego Carvallo,

On this two-part edition of The Milk Check, listeners get a seat at the table during our mass balance report meeting, held after the release of monthly milk production numbers. Our traders gather to evaluate the data, forecast class allocations, share what they’re hearing from buyers and sellers, and chart price data to predict market developments. 

Our regular cohosts, Ted, T3 and Anna, are joined by Don Street, director of global strategy; Gus Jacoby, executive vice president of the Fluid Dairy Group; Jacob Menge, director of risk management; Brianne Breed, vice president of cheese and butter sales; Joe Maixner, cheese and butter sales manager; and Diego Carvallo, director of dry dairy ingredient trading.

In part one, we evaluate the fundamentals of the dairy markets and what the monthly production numbers mean for different industry sectors.

In part two, we will look at anecdotal evidence in the wider marketplace, such as the consumer price index and international trade, to forecast dairy’s future in the global economy.

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 on “The Milk Check,” we’re doing things a little bit differently. Every month, the T.C. Jacoby & Company, we have a conversation that we call the mass balance report, and it happens right after the monthly milk production numbers come out. We get all the available traders in the company together to discuss what the most current reports and numbers mean. This month, our listeners will get an opportunity to eavesdrop on that conversation. This edition will be released in two parts, so be sure to listen to both to get their thoughts on a variety of topics, from production and utilization to inflation.

T3: Thanks, Anna. And thank you everybody for listening today. So when you’re listening to our traders talk, the thing to keep in mind is a lot of times when we’re trying to get our head around what we think prices might do, there’re really three elements to that process.

The first element is evaluating the fundamentals. As you hear Don Street talk about what the milk production report has done and what we think milk production is going to do and where milk is gonna be allocated between the different classes of milk, you’re really gonna be hearing us talking about the fundamentals.

The second part that goes into our evaluation is what I call the anecdotal evidence, which is the fact that our traders are talking to buyers and sellers of dairy products in the marketplace every day. And what we’re hearing from those buyers and sellers also goes into our opinions of what the market might do.

The final thing that comes into play is where we are evaluating what we call the technical information. All of the futures and options markets we have in the dairy industry today and all of the spot auctions that we have in the industry today ultimately create a series of price data. And as you chart that price data, those charts often give you signals as to what you think this market might do next. And when you hear Jacob Menge, our director of risk management, talk, that’s mostly what you’re going to be hearing, him looking at those charts and telling us what those charts are hinting at. So I think this conversation today is gonna be a very interesting conversation, and I hope you enjoy it as much as we do.

T3: Joining us today is Don Street, our director of global strategy.

Don: Hey, Ted. Glad to be here.

T3: Gus Jacoby, executive vice president of our fluid dairy group.

Gus: Hello, thanks for having me.

T3: Jacob Menge, our director of risk management.

Jacob: Pleasure to be here.

T3: Brianne Breed, our vice president of cheese and butter sales.

Brianne: Hi there. Thanks for having me.

T3: Joe Maixner, sales manager for cheese and butter

Joe: Hi there, everybody.

T3: And Diego Carvallo, our director of dry dairy ingredient trading.

Diego: Hello, everyone. Thanks for the invitation.

T3: Thanks for joining us. Don, why don’t you take it away?

Don: Thanks, Ted. So we now have the January milk production estimates from USDA. And a big surprise, everybody in the industry was expecting January milk to be up 3% year on year, following a very strong December number at 2.9% up. The big surprise was a revision by USDA on California milk production, which in December actually went from positive to negative and was also negative year on year in January. This left the January production increase estimate at 1.8% versus everybody’s expectation at 3% — a lot less milk to be processed than what we thought.

But similar to what we talked about last month, Cal numbers, as we’re rolling forward, are kind of up 1% over prior year, but the growth over prior month is almost zero, almost no growth. They’re up 6,000 or 8,000 head each month.

And the big change by USDA is the change in milk per cow. December scaled back to 2.6%, January that everybody thought would be 3% up is only up 1.8%. February, going to 28 days this year versus 29 last year, we’re still going to be up I know 1% on cows and maybe 1% on milk per cow. But then you have the 3.45% adjustment on one last day, so it’s going to be down. But it’ll be up on same-day basis.

And then March, well, I’m at 2% up, right? And this is a big drop. It’s all if the USDA numbers are correct or re-corrected, you’re only up 2%. And we have now full-year 2020 numbers, Class I, just flat. Class II was up pretty decently for the year. This is no change. It’s just more confirmed by the 12th month of data. When you go to cheeses overall, really low growth, 4/10 of a percent. But American was up pretty solid at 2%, cheddar even more. All the Italian styles were down. I think everybody knows this, but we produce more Italian-style cheese than American types and have for quite a while. And then Class IV, no real change here. Butter’s pretty strong, non-fat and skim pretty much in line. NPC had a gangbuster year on volume, on growth.

So what do I think is happening?

Well, the first thing is 2% growth for a while rather than 3%, and with the caveat that April will be really screwy because last year, April production fell with the imposition of quotas, particularly in the Southwest.

Will Italian cheese production gain production growth, pull more milk? I think that’s a big question. You have the St. John’s plant, if it were running full year at 8 million pounds a day, it would be a 5% increase in American-type cheese production. So let’s say it was staggered production ramp up, it’ll be 3% up, provided nobody else produces less.

And then finally, total cheese, if it were to go up 3%, I’m not suggesting that, requires 1.5% more milk. So then you start to think, well, maybe this thing is starting to shift to be a tighter market.

January milk, December products. Class I was actually up in December. Class II was up. Cheese was up a half percent, and you need a total of 1% more milk. Our production increase in January was 1.8% and that would suggest you would see 5% more butter powder. And what we saw last year, butter was up 6.6%, powder was up 5.2%, 5.3%. If you throw in MPC, powders were up actually, 8%. That’s how you look as of January.

If I try to roll this thing forward more on the basis of what I think will happen, I think fluid milk, there is no growth. I think whatever gyrations we went through with COVID and kids at home, I think that’s back to flat at best for the next three to four months. And then you think, well, OK, ice cream, sour cream, yogurt, cottage cheese can squeeze out some more growth, and that if Italian cheeses come back, grow at 2% or let the total cheese growth be at 2%, then you need 1.5% more milk. And we’re kind of 1% up on cows, 1% up on milk per cow, gives you 2% of more milk. And that, instead of having to put as much milk into Class IV, where you have to grow at 5%, 6%, then your growth is much more modest at 3%. Still more production, but about half of the increase that we were dealing with. So what do you think? What do I have right or wrong, or what would you like to change?

T3: I can’t get away from the 800-pound gorilla question in the room, which is, is the USDA right about California now, or were they right about California a month ago?

Gus: They were desperate to move surplus over the holidays and into January. My feeling is, is that there is merit to California being where they’re at from a growth standpoint.

T3: Meaning that the December numbers were right, not the January numbers that the USDA put out.

Gus: I know that they were long and exceeding their dryer capacity. That’s about all I can say.

T3: So the idea that milk production in California, what did they say? What did the January reports say, Don, that it was now, instead of being up 2.7%, it’s now down 0.7%?

Don: Yes. It went from positive to negative.

T3: So basically, based on what you…your conversations, you’d expect that number to be up 2.7%, not down 0.7%?

Gus: Not back then. Now I haven’t talked to them recently. They haven’t needed to move any product all that bad recently. They were certainly in one of their bigger surplus holidays they’ve been in a long time.

Don: To add to that, cheese production in California in December was down about 4% year over year. So that, in and of itself would give the appearance of more milk in the market. The number in California was still up.

Gus: We do know one major mozzarella maker that is out in California who did not make near as much mozzarella in their facility as they typically do.

Don: Right, and that feeds into these nationalized data numbers, right? Motz is down and California was down, so I think all of that is true.

But, Ted, to come back to your question, I don’t know how we know what’s really right here relative to the USDA numbers. Everybody seems to think there’s plenty of milk, and we’ve seen lots of weakness in prices to confirm that. But is it 2% more milk or is it 3% more milk? And that’s a big difference.

T3: And that’s a hard one, because it’s so hard to get a feel for what’s really going on in the mozzarella market. Big mozzarella manufacturers, if those plants in California are running at 5% lower capacity than last year, the numbers make sense, and that’s entirely possible.

Joe: I would venture to say that maybe that’s possible on the cheese side, but I don’t think on the Class IV side that that’s the case. I think that they’re still running full out, given intel that I’ve heard.

Gus: That makes sense too, right, Joe? Because, for example, in California, where else is that milk gonna go? And you’re talking about a state that has ample Class IV capacity, and they actually contracted a few years ago, and they’re catching up to where they were to fill that capacity.

Joe: Yeah.

Gus: So, that’s a lot of milk or butter powder that’s been made in California that wasn’t made there before.

Don: Well, within the last five years, you have two new butter powder plants. You know, just from my perspective, opinion on this, I think we have the potential to be much tighter than the whole milk complex, but it will need a recovery and production of Italian cheese for that to happen. And we’ve talked all last year that that’s a food service impact, and COVID, and shutdowns, and less flow through restaurants, that all contributed to it. And then we’re back to the question, well, how does that recover as we go into summer of ’21?

T3: And that’s a hard one, because to me, the big question is, why is mozzarella and Italian production down as much as it is? Is it a direct result of the food service, fewer restaurants running as a result of COVID, or are there other dynamics at play? We knew going into when the pandemic hit last March that the mozzarella industry was feeling like it was oversupplied. But it seems to have gotten worse during the pandemic and hasn’t come back. Yet, pizza sales, at least from everything I’ve heard, have fully recovered.

Don: Just from the home delivery aspect of Domino’s, Pizza Hut, right, that volume should be up, not down.

Gus: Here’s my explanation to that, Ted, because I think when you really think about it, it’s actually fairly logical. The high-end mozzarella is only consumed when you go out, right? The only mozzarella that’s consistently being consumed through a pandemic at home is your cheaper pizza cheese. And then when you start to think about the actual capacity to make either the cheaper stuff or the high-end stuff, which is you know is made differently, no one is going to invest in capacity for a short-term bump in growth, right?

So there’s only so much capacity out there for the cheaper mozzarella, and you’re just not going to use the higher end mozzarella capacity that…when you can’t sell it, i.e., you know, we talked about the companies that make the high-end pasta filata and those type of things that go to your Dewey’s Pizza or high-end pizzerias. That mozzarella is just not in demand. And as the economy has opened up, it will come back. But it’s certainly not where it was a year ago at this time. That’s a pretty big chunk, and that’s going to only slowly come back until the economy is fully open and the habits of the consumers who go out and eat that high-end pizza are back doing that thing again.

Brianne: I think one other thing that you have to keep in mind is that it’s been difficult to export and a lot of the mozzarella that’s produced, and there’s a good chunk of it, gets exported. We obviously have some consumption decreases here in the U.S. I think it’s probably safe to say that’s happening elsewhere. And then you add on the logistics issues, so it’s just kind of like a double whammy for the mozzarella market.

T3: And pizza in most countries outside the U.S., with the exception of the EU, it’s not a low-income product, it’s a high-income product. People go out and it’s a special meal to have a pizza in Asia. That would definitely make sense.

So your Italians are still getting hurt. Cheddar is doing OK. Milk production is up, but maybe not up as much as we were thinking for the last four or five months.

Don: And last one, fluid consumption has been up, down, sideways, and I think it’s just back to flat.

T3: Yes, but if we’d assume that the world starts moving back towards normal as the percentage of the population that’s vaccinated goes up, you have to believe we’re going to go negative in terms of year-over-year comparisons for Class I.

Don: That would make sense.

T3: And it might be significantly negative, because we’ll be measuring against serious strength during the pandemic.

Don: Some months we were up 4% or 5%, which hasn’t happened for years. And, right, so if you get a heavy restaurant demand, except for very young kids, you’re not going to order a glass of milk at a nice restaurant.

T3: Right. Let’s assume we’re looking at the second half of 2021 and let’s assume milk production during that time is up 1.7%.

Don: I was gonna say 1.5%, but 1.7% is good.

T3: And let’s assume Class I in the second half of the year is down 5%, Class II is up 2%. Does that sound right?

Don: You know, I think for years it was flat 2%. It’s, I think maybe, during the past year, people have rediscovered that some of these products are pretty good and they enjoy them. So I think you could see some continued growth there.

T3: All right, so we’re up 2% in the second half of the year on Class II, we’re up 2% on Class III. At 1.7% milk production increase, we’re up 9.1% on Class IV in the second half of the year. That’s a big number.

Don: That is a big number.

Ted: But I would dispute the 5% Class I.

T3: I would agree.

Ted: I think that’s overly bearish. I guess my own personal opinion would be that it would be relatively flat.

T3: I think that there is a positive effect there, but keep in mind, we will be measuring against extreme strength. Because when you compare April of this year to April of last year, everybody will have been closeted up at home last April compared to this April. And that especially gets true when you get into May and June.

Ted: Yeah, but the issue is whether they all of a sudden stop drinking milk, which they’ve been drinking for the last year.

T3: If they’re not at home, I would argue, yes, they will drink less milk because you don’t reach for a milk when you’re out and about. You reach for it at home.

Ted: Well, that has a significant impact on Class IV.

T3: Yep.

Don: Yeah, it’s a big swing, right? Because for the full year of 2020, Class I was zero, OK. for the full year. And if you just go back to zero and you get 2% growth in cheese, look, you know, you’re almost no change on Class IV, 1%. By the same token, cheese down 1.5%, you get three times more production of butter powder. I mean, that’s the sensitivity of the whole complex, right? Cheese sneezes and everybody else jumps off the cliff. So what does happen the second half of the year? Is milk going to be up 1.7% or is it going to be up 1%?

Joe: Pretty hard to believe you’ll be able to get 1.7% later in the second half, going against 2.7% to 3.2%.

Ted: If we’re looking right now at $18 Class III, and I’m not sure where Class IV is at the moment, but I know it’s somewhat lower but heading up, we’re going to see production increases. Even though it’s wildly gyrated at the moment, an $18 Class III, even with some Class IV, is going to be very beneficial to the dairymen.

Jacob: Do we buy that the farmers can’t hedge their milk? I mean, that’s what we’ve been hearing a lot, right? Farmers are just saying, well, we can’t hedge because we don’t know what class we’re going to be, blah, blah, blah. We have all these issues. I would think right now these numbers look pretty good, and someone could just lock in a good portion of the rest of their year. And do we buy the story that it just can’t be hedged because that would really impact, you know, if we drop over the next few months what the rest of the year looks like.

T3: Yeah, the whole issue would be cooling and hedging.

Ted: The reason that they’re saying that is that there is such a juxtaposition between the Class III and IV, and it does appear that that is heading back in the direction of some parity. I don’t know whether it’s safe to say that they can’t hedge or not, particularly when we’re sitting here in February and we’re talking about decisions made in August or September.

Jacob: We’ve got Class IV, though, you know, we’ll just call it around 16 bucks, a little over 16 bucks in the second half of the year. So average, you’re still probably north of $17.

Ted: I guess that’s right. And that would indicate to me that there’s going to be production.

Gus: Well, Jacob, talk a little about corn. I mean corns have fared about a fair amount higher than it has been in a little while, right?

Jacob: It is. The best point on corn is if you’re in the Midwest, it probably doesn’t really impact you all that much, this high price. Because you probably grow some corn yourself, basis isn’t insane. But if you’re a California dairy farmer right now, you are just getting slaughtered. Your cost-to-feed is really high relative to what it has been, you know, four- or five-year average here, and you probably aren’t growing any of it yourself. So, yeah, I think if you’re not in the Midwest, as a dairy farmer, that makes a big, big impact. I think you’re right on the money there, Don.

Gus: And there’s also a fair amount of export of those row crop commodities. So even though the futures trend down, I think you have opportunity for them to go up too. I think there’re some question marks there. And then the beef price is going up too. So there is some incentive to call, so I’m not so sure that we’re in a situation directly. Although I understand completely what Ted just mentioned, there is a possibility that the farm economics could impede some production as we move through the year.

Jacob: Class III, March touched it loads this past Tuesday, I guess. And we’ve obviously come off pretty good since there.

It’s a pretty good level, and we’ve touched this level a lot. You know, this upper 15th level, we touched it earlier in February, back in December, back in August. The market just kind of doesn’t want to break that level. So that’s just a price level to keep an eye on. If we get high 15s again on the futures, it seems like buyers tend to step in around there.

Cheese, to just going back even further, really same level on cheese. It’s like a $1.60.

Butter has had the most interesting auction over the past month here. I don’t really know how to feel about this one. What we’re looking at is the average of the second and third month. So this is an average of March and April futures right now.

We are just running into an area with, like, no volume. So if we break out above kind of just where we’re at right now, this like low 160s, all bets are off. I don’t know why we couldn’t just run into the 180s. I really don’t. I don’t think you’re gonna find much resistance. I’ll be curious to see what happens. I think an equal possibility is we just kind of stall out at this like 170 level. We never really make it into the box here. We run into all of the volume and just kind of stall. So that’s what I’m looking at on butter.

If I’m a betting man, I would be kind of surprised if we see this $1.75. We’ll see. Butter has got a mind of its own.

I’m tracing on non-fat back from May of last year. I kind of like this where we start getting volume again is like one 106, 106.5. I don’t really hate that.

The argument against us getting as low as 106, 107, and this is more spot, but the argument against us getting that low is going to be this moving average. That’s a pretty long-term moving average. It’s the, I think, 150-day, or, excuse me, it’s the 100-week moving average. So markets tend to trade around those levels. We’ll see. Run into some volume at this 106, 107 level. So, yeah, that’s kind of what non-fat is looking a little bit like.

T3: Thanks, everybody, for participating in the podcast this month. And thanks to our listeners for joining us.

This recording was part one of a two-part episode where our listeners have the opportunity to listen in to some of the discussions we have on a monthly basis about what we think dairy prices will do among our dairy trading team.

Part two, we’re going to get into some more high-level macroeconomic issues, including an in-depth discussion about what we think inflation will be doing in the second half of the year and how inflation might affect dairy prices. It’s a fascinating discussion, and I encourage everybody to tune right into part two right after this.

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On this two-part edition of The Milk Check, listeners get a seat at the table during our mass balance report meeting, held after the release of monthly milk production numbers. Our traders gather to evaluate the data, forecast class allocations, On this two-part edition of The Milk Check, listeners get a seat at the table during our mass balance report meeting, held after the release of monthly milk production numbers. Our traders gather to evaluate the data, forecast class allocations, share what they're hearing from buyers and sellers, and chart price data to predict market developments. <br /> <br /> <br /> <br /> Our regular cohosts, Ted, T3 and Anna, are joined by Don Street, director of global strategy; Gus Jacoby, executive vice president of the Fluid Dairy Group; Jacob Menge, director of risk management; Brianne Breed, vice president of cheese and butter sales; Joe Maixner, cheese and butter sales manager; and Diego Carvallo, director of dry dairy ingredient trading.<br /> <br /> <br /> <br /> In part one, we evaluate the fundamentals of the dairy markets and what the monthly production numbers mean for different industry sectors. <br /> <br /> <br /> <br /> In part two, we will look at anecdotal evidence in the wider marketplace, such as the consumer price index and international trade, to forecast dairy's future in the global economy.<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. Today on "The Milk Check," we're doing things a little bit differently. Every month, the T.C. Jacoby & Company, we have a conversation that we call the mass balance report, and it happens right after the monthly milk production numbers come out. We get all the available traders in the company together to discuss what the most current reports and numbers mean. This month, our listeners will get an opportunity to eavesdrop on that conversation. This edition will be released in two parts, so be sure to listen to both to get their thoughts on a variety of topics, from production and utilization to inflation.<br /> <br /> <br /> <br /> T3: Thanks, Anna. And thank you everybody for listening today. So when you're listening to our traders talk, the thing to keep in mind is a lot of times when we're trying to get our head around what we think prices might do, there're really three elements to that process. <br /> <br /> <br /> <br /> The first element is evaluating the fundamentals. As you hear Don Street talk about what the milk production report has done and what we think milk production is going to do and where milk is gonna be allocated between the different classes of milk, you're really gonna be hearing us talking about the fundamentals. <br /> <br /> <br /> <br /> The second part that goes into our evaluation is what I call the anecdotal evidence, which is the fact that our traders are talking to buyers and sellers of dairy products in the marketplace every day. And what we're hearing from those buyers and sellers also goes into our opinions of what the market might do. <br /> <br /> <br /> <br /> The final thing that comes into play is where we are evaluating what we call the technical information. All of the futures and options markets we have in the dairy industry today and all of the spot auctions that we have in the industry today ultimately create a series of price data. And as you chart that price data, those charts often give you signals as to what you think this market might do next. And when you hear Jacob Menge, our director of risk management, talk, that's mostly what you're going to be hearing, him looking at those charts and telling us what those charts are hinting at. So I think this conversation today is gonna be a very interesting conversation, and I hope you enjoy it as much as we do. <br /> <br /> <br /> <br /> T3: Joining us today is Don Street, our director of global strategy.<br /> <br /> <br /> <br /> Don: Hey, Ted. Glad to be here.<br /> <br /> <br /> <br /> T3: Gus Jacoby, executive vice president of our fluid dairy group.<br /> <br /> <br /> <br /> Gus: Hello, T.C. Jacoby & Co. - Dairy Traders clean 24:27
New normals for a dairy lobbyist https://www.jacoby.com/new-normals-for-a-dairy-lobbyist/ Tue, 09 Feb 2021 18:22:25 +0000 http://www.jacoby.com/?p=1927 The Milk Check welcomes guest J. David Carlin to discuss the role of dairy lobbyists in Washington, how they've adjusted to the pandemic and industry outlooks during the Biden administration. Carlin is the International Dairy Foods Association's senior vice president of legislative affairs and economic policy. Ted, T3 and Anna talk with their guest about issues like how lobbying via Zoom allows for additional public input, the importance of enforcing international trade deals, volatility in dairy pricing and much more. T3: Good morning, everybody. Welcome. Today, we have a guest. I'd like to introduce everybody to Dave Carlin. Dave is senior vice president of legislative affairs and economic policy for the International Dairy Foods Association. Dave, welcome. Thanks for joining us. Dave: Thanks, Ted. Glad to be with you. T3: Why don't you just, kind of, tell everybody a little bit about what you do? What's your job in Washington? Dave: Well, I'm one of those lobbyists that probably keeps the town running in a lot of different ways, but we're not very popular outside the Beltway. So, that's what I've been doing in Washington for the last, oh, I guess, 30, 35 years. And I came to IDFA about six and a half years ago; grew up on a dairy farm in central Kansas. So, a little bit of a homecoming for me and decided at least that I could, if I'm going to lobby, I could lobby on behalf of an industry that I care about and believe in. So, I'm part of a team of folks over here at IDFA that advocates for policy positions with the Congress and the administration that we think will benefit the dairy industry. And we work with our members to prioritize those policy requests and make sure that whatever we're working toward is going to be impactful and meaningful. So we've, of course, been very active in the COVID policy debate. We work a lot on nutrition issues and trade issues, given how important trade is to our industry, and a lot of other issues that come up here in Washington. We also do little work in the economic policy area as my title, kind of, indicates. So, milk pricing issues and FMMO issues or other things that we sometimes focus on, and I get involved in here. That's, kind of, a 30,000-foot view of what I do. I'm not walking the halls of Congress these days, that hasn't been possible since COVID started last March. So, my world, like everybody else's, is very virtual, but we've managed to create some new pathways and make it work, from a virtual standpoint. So, advocacy continues here in Washington, and hopefully, as I said, it will benefit our industry going forward. So, that's my 30,000-foot overview of what I do. T3: As I was hearing you talk, Dave, you provided what I thought was the perfect segue. Tell us about what lobbying Congress was like during COVID, because so much happened in the last 12 months as this pandemic evolved. Kind of give us a walkthrough of how that played out, from your perspective. Dave: Yeah, and I will start by saying it played out much better than I would have ever expected when we first got into this mess. Typically, as I said, I'm able to go to the House and Senate office buildings, I can set up meetings with staff and see members, and we did fundraisers and events in the evenings on the political side. That was what I did for 30 years and then COVID hit. And the Congress basically shut down like everything else shut down, all the buildings were closed, members were working from their home states and districts a lot of times, staff were scattered to the wind. And I really thought, "Gosh, how are we going to find people?" First of all, they don't typically give out their cell phone numbers, and you're at the mercy of an office email account. But what was fascinating to me, and I think it's been true across the board for all of us, is how accessible people have been including Congressional staff, and policymakers and members of Congress for that ma...

The Milk Check welcomes guest J. David Carlin to discuss the role of dairy lobbyists in Washington, how they’ve adjusted to the pandemic and industry outlooks during the Biden administration.

Carlin is the International Dairy Foods Association’s senior vice president of legislative affairs and economic policy.

Ted, T3 and Anna talk with their guest about issues like how lobbying via Zoom allows for additional public input, the importance of enforcing international trade deals, volatility in dairy pricing and much more.

T3: Good morning, everybody. Welcome. Today, we have a guest. I’d like to introduce everybody to Dave Carlin. Dave is senior vice president of legislative affairs and economic policy for the International Dairy Foods Association. Dave, welcome. Thanks for joining us.

Dave: Thanks, Ted. Glad to be with you.

T3: Why don’t you just, kind of, tell everybody a little bit about what you do? What’s your job in Washington?

Dave: Well, I’m one of those lobbyists that probably keeps the town running in a lot of different ways, but we’re not very popular outside the Beltway. So, that’s what I’ve been doing in Washington for the last, oh, I guess, 30, 35 years. And I came to IDFA about six and a half years ago; grew up on a dairy farm in central Kansas. So, a little bit of a homecoming for me and decided at least that I could, if I’m going to lobby, I could lobby on behalf of an industry that I care about and believe in.

So, I’m part of a team of folks over here at IDFA that advocates for policy positions with the Congress and the administration that we think will benefit the dairy industry. And we work with our members to prioritize those policy requests and make sure that whatever we’re working toward is going to be impactful and meaningful.

So we’ve, of course, been very active in the COVID policy debate. We work a lot on nutrition issues and trade issues, given how important trade is to our industry, and a lot of other issues that come up here in Washington. We also do little work in the economic policy area as my title, kind of, indicates. So, milk pricing issues and FMMO issues or other things that we sometimes focus on, and I get involved in here.

That’s, kind of, a 30,000-foot view of what I do. I’m not walking the halls of Congress these days, that hasn’t been possible since COVID started last March. So, my world, like everybody else’s, is very virtual, but we’ve managed to create some new pathways and make it work, from a virtual standpoint. So, advocacy continues here in Washington, and hopefully, as I said, it will benefit our industry going forward. So, that’s my 30,000-foot overview of what I do.

T3: As I was hearing you talk, Dave, you provided what I thought was the perfect segue. Tell us about what lobbying Congress was like during COVID, because so much happened in the last 12 months as this pandemic evolved. Kind of give us a walkthrough of how that played out, from your perspective.

Dave: Yeah, and I will start by saying it played out much better than I would have ever expected when we first got into this mess. Typically, as I said, I’m able to go to the House and Senate office buildings, I can set up meetings with staff and see members, and we did fundraisers and events in the evenings on the political side. That was what I did for 30 years and then COVID hit. And the Congress basically shut down like everything else shut down, all the buildings were closed, members were working from their home states and districts a lot of times, staff were scattered to the wind.

And I really thought, “Gosh, how are we going to find people?”

First of all, they don’t typically give out their cell phone numbers, and you’re at the mercy of an office email account. But what was fascinating to me, and I think it’s been true across the board for all of us, is how accessible people have been including Congressional staff, and policymakers and members of Congress for that matter. In part, because we don’t have travel time between appointments, we don’t have things we’re rushing off to get to it all hours of the day. I mean, a lot of us are based out of our homes.

And I have found that it was, frankly, in some cases, a lot easier to meet with staff virtually, whether it was on the phone, or on a team’s call, or a Zoom call of some sort, and bring in colleagues. And one thing that I think we definitely have taken advantage of, as an association, is the ability to bring our members into these conversations. Typically, it’s me, right? Typically, it’s me and my team and Michael, lobbying on behalf of our members. And so, we’re indirectly communicating with Congress and the administration on our member’s behalf. But because of the virtual world we live in, I was able to invite our members, our Dairy Association members, our dairy company members to join me on some of these calls and be part of these Zoom conversations with members of Congress.

And we can set those up at their convenience, they don’t have to fly to Washington and spend a whole day here, they can take 30 minutes out of their schedule, two or three times a month, and get on the phone with members of Congress and make the case directly about why something matters to them and their businesses back home. That’s what changed. And that’s what I hope continues going forward because, gosh, you know, the direct connection between a constituent and a member is so much more valuable than what a lobbyist brings to the table. I mean, we have the expertise, we, kind of, know how to shape the questioning and frame the questions and all sorts of things like that. But to hear directly from a constituent in a Zoom meeting is so much more impactful. So, Ted, I hope that answers your question. It certainly played out a lot in COVID. And like I said, I hope it continues because it’s really proved to be quite a valuable tool.

Ted: I think it will continue. I am looking forward to getting back in the office one day where I can get to know everybody again. But by the same token, once you are very familiar with someone, whether it’s a congressperson or whoever, it’s not necessary to hop on a plane every time you visit.

Dave: That’s true.

Ted: So maybe you’ll reduce your flying for each individual by a factor of about eight or 10, and that does expand your time.

T3: You’ll increase your touches, you’ll be able to talk to people more often because the amount of time it takes to have those conversations is drastically reduced. You still need the two people in the same room, you know, opportunities from time to time. We’re human beings. we’re social beings. But Zoom has done a lot to bridge that gap. And I don’t think it’s going away any time soon.

Ted: I agree.

Dave: I don’t think so either, yeah.

T3: So, Dave, I’ve got another question for you, actually a couple of questions. My first would be, when you’re lobbying — and I don’t want to spend too much time today talking about lobbying, I more want to talk about, what do we expect with the new administration — but when you’re lobbying, do you spend more time talking directly to, let’s say, a congressman or a senator, or is it their staff who does the majority of the work?

Dave: Well, it’s a little bit of both. And I’ll tell you, we usually would start with a staffer, hopefully, it’s somebody we know. And we have cultivated, over the years, dairy champions in Congress, and the staffers that work for them, and tried to educate them on the industry and, kind of, our issues. Because a lot of our issues carry over from Congress to Congress, not that there’s not progress that’s sometimes made, but a lot of times, the same issues crop up over a period of years.

So, staff and members become quite comfortable talking about those issues but it’s good usually to start with the staff. And then after the staff has been briefed, they can often talk to the member and help set up the conversation. And again, a lot of times when we’ve got the member of Congress having a meeting there, we would try to bring in our own members, our dairy processing members, to have those follow-up conversations at that level. But I’d say most of the day-to-day work is done at the staff level. And then some of the deal closing, if you will, might be done at the member level.

T3: OK, interesting. So, as we were going through COVID, we had the Food Box Program, we had other initiatives on ways to help the economy, not just nationally, but almost globally. And obviously, dairy and agriculture was very involved in that. And things happened much more quickly than usual in 2020 because of COVID. Talk us through, for example, how the Food Box Program came to be, you know, from your perspective as a lobbyist.

Dave: Yeah, that was a really interesting phenomenon, right? One of the first things that happened in March, from an industry perspective, was we got together with our board members, and also with National Milk, and we said, “What do we want to do as an industry?”

We need to be united. I think one of the things that is also a truism in lobbying is that if you’ve got a divided industry, it makes your ability to achieve goals on Capitol Hill much more difficult. So, we wanted to be united with National Milk.

And we came up with a number of priorities that both organizations agreed on. First and foremost was to protect the producer. And there are programs that were put in place during the COVID pandemic to provide direct payments to farmers, and we wanted to make sure dairy farmers were not buffeted around during this time of great volatility, so we agreed on that.

We wanted to make sure that workers in the industry, in the plants, and also on the farm, were considered to be essential so that they could have access to PPE on a preferential basis. And now, of course, vaccines as they’re being rolled out, making sure that they’re, sort of, at the front of the line, right behind perhaps the healthcare workers.

And then finally, we wanted to make sure that families, lower-income families who needed help and needed food had access to good nutritious dairy products. And that’s, kind of, where the Food Box Program came from. Not that we came up with that idea, we didn’t, but USDA came up with that program. And we wanted to be a part of it, along with other food groups and people in those industries.

And we wanted to make sure that a wide variety of dairy products were included in those boxes. We wanted to make sure that fluid milk was a big part of those boxes. And we worked really closely, over the many months that those food boxes had been rolling out to make sure that we were part of that, and to make sure that the cheese that was included was a lot of different types of cheese, and not just cheddar and not just mozzarella. We made sure, as I said, fluid milk was a big component there. We’ve worked also to encourage that butter be included. And all this, hopefully, happening in a way that, again, first and foremost made sure that needy families were getting nutritious food products, including nutritious dairy products, but also that it was hopefully happening in a way that minimized market disruptions, from an industry perspective.

So, the Food Box Program, of course, continues. With the last COVID bill that was enacted in December, there was, like, another $1.5 billion for food boxes included in that bill that will take those boxes into April and May of this year.

One of the questions we’ve been asking at Dairy Forum is, what’s the future that program look like?

We’ve asked that of the new chairwoman of the Senate Agriculture Committee yesterday, Senator Debbie Stabenow, “Is the new administration likely to continue the Food Box Program? Is it going to instead focus on increasing SNAP benefits and things like that? Where are we headed?”

And I don’t think there are any definitive answers yet. But I think those are the kinds of things we’re going to be paying attention to, with changing administration, in particular.

Ted: With the change in the administration, what are the things that you think are gonna most likely change? What was the Trump administration like? What were the kind of things, from a dairy perspective, that were important to that administration that maybe is different from the way that the Biden administration is going to start looking at things?

Dave: It was a signature program, I think the Food Box Program. And the Biden team has been more interested in increasing the level of SNAP benefits that are available to families that are already enrolled in SNAP and also increasing eligibility for the SNAP program. So, there’s a difference in focus but the same goal, right? That to try to make sure that needy families have access to food. That’s one example.

One other differentiator, perhaps we won’t know until we get a little further into the administration is, one of the victories that our industry achieved in the last three years was a change in the school meal rules that allowed 1% flavored milk to be served again in schools. And that happened in 2017, not too far after the Trump administration came into office.

And we had, up to that point, then only able to serve skim milk, skim-flavored milk, I should say, in schools, and kids just didn’t like the taste of that product. And while 1% isn’t, you know, nirvana, it’s not whole flavored, it’s not 2% flavored, it’s at least better than skim flavored. And we were convinced that if we could put that product back into schools, and that was the best we could do under the Dietary Guidelines limitations, that we would be in good shape. And I think it’s proven to be true. We have seen since that program, or that role change was made in ’17, we’ve seen more orders for milk, we’ve seen less food waste in cafeterias. And anecdotally, at least, we’re seeing a real positive trend line as opposed to a negative trend line in terms of school milk consumption.

Now, what we don’t know is what the Biden administration will do there. We know that Secretary Vilsack obviously now has a strong familiarity with our industry. But what his team will do, in that particular case, if they will move us back to a skim-flavored rule only for school milk, you know, we’ll have to wait and see.

We’re certainly going to be working hard to hopefully convince them to keep 1% flavored in schools. And that’s one of the priorities that we’re working on together with our friends at National Milk who, of course, represent the cooperatives. But that’s something that we’ll continue to see. And that could be a difference between the two administrations.

Another thing that we got at the end of the Trump administration that is also helpful, from a nutrition standpoint, was, for the first time, fluid milk was added to the Emergency Food Assistance Program catalog.

T3: Oh, good.

Dave: Food banks can now turn to that catalog and order milk. And it will be part of what USDA will provide to them. Now, that was happening with Section 32 purchases and other purchases. So, it’s not like the food banks haven’t had fluid milk. We’ve worked hard over the last few years to put more gallons of fluid milk in food banks, because it’s frankly, one of the top requested items in a food bank. And there are certain challenges there, of course, it’s refrigeration and storage, etc., but we’ve been able to do a good deal there. But one of the last things that Trump administration was able to do on their way out was add fluid milk to the EFAP catalog, if you will. We hope that continues in the new administration. We hope that that is not changed in a negative way.

Those are just some examples of some of the things that we were able to achieve during the Trump administration and some things we hope will continue into the Biden administration.

T3: You brought up Secretary Vilsack and for those of our listeners who don’t know, Secretary Vilsack was the Secretary of Agriculture for all eight of Barack Obama’s years of presidency. And then in the four years during the Trump administration, he ran the U.S Dairy Export Council, and during those four years became very familiar with all of the issues in the dairy industry. How much of a benefit is having someone in that position, as Secretary of Agriculture, who knows dairy that well? How good for the industry is that going to be? And how do you think that’s going to benefit us?

Dave: I think it’s great. I think it’s a tremendous situation that we find ourselves in, in terms of his going back to the department for a lot of reasons. Not only because he knows our industry so well after having spent four years as the head of USDEC, as you mentioned, but also because he knows his way around the department already. He won’t be learning how the building is structured or who to call when he needs a light bulb changed. He knows exactly how that building runs. And so we’re gonna see, not only because of the dairy background, but also just again, his experience and familiarity with USDA, he’s gonna hit the ground running. And I think that’s one of the reasons, frankly, that the President selected him for that job.

There is a lot that President Biden wants to accomplish quickly, and we’ve seen that already, right? We’ve seen a number of executive orders roll out over the past five, six days, you know, where I think it’s number 35 or 36 and counting. And that’s just an indicator that this administration wants to hit the ground running, felt it had to hit the ground running, and the USDA is going to be right in the thick of things. And in order to make sure we have a department that can be part of those conversations, you need an experienced person at the lead role. And that’s what Tom Vilsack provides, is that leadership and that, again, that familiarity with dairy is a positive, it’s a wonderful thing. But I think in addition to that, just his experience at USDA is also going to be beneficial.

T3: And I agree, I think it’s a huge benefit. And it’ll be interesting to see how the next few years play out with him in that role.

What do you think are the things maybe that we need to worry about, as an industry, at least in terms of how things may evolve in Washington, D.C? Is there anything that stands out to you that might be of concern?

Dave: A couple of things. One is an area I haven’t touched on yet, and that’s trade. We as an industry, trade is so important to us, 15% of our milk already, and more is going to overseas markets. And that number is only going to grow over the next 10 years, 20 years. I think another 33 billion pounds of milk is going to need a home, in like, 2028. And where’s that milk gonna go if we can’t find markets that are gonna be open to us? And that means not only preserving the market access that we have with our trading partners, but also growing our access and finding new markets in Southeast Asia and other places around the globe.

And what I’m concerned about, Ted, is the new administration, again, is very focused on COVID and very focused on the economy domestically, and rightfully so. But what they have also said is that they’re probably not going to spend too much time on trade, until they get some of the domestic policies addressed, that they care about. And what I’m concerned about is that every day that passes where we’re not in the game, from a trade standpoint, meaning we’re not negotiating new trade agreements or we’re not trying to get back into multilateral trade agreements like the Trans-Pacific Partnership that we pulled out of when Mr. Trump came into the office, is a day we lose ground to our exporter competitors.

That worries me, honestly. So, that’s an area that I think we do have to keep an eye on. And we do, as an industry, have to continue to advocate for and put pressure on the new administration to move forward more quickly there, perhaps, than they would like to.

Ted: Before COVID hit, one of the things, let’s call it one of the themes of the Trump presidency, seemed to be trade wars and renegotiating a lot of the arrangements that we did have. And of course, it felt like we were dealing with trade wars rather than trying to improve the situation we already had. One of the senses I get is that the Biden administration is not going to be like that, we’re not going to feel like we’re in a battle about where tariffs should be on both sides. But it almost sounds like, what you’re saying is the biggest fear is that they may not be involved in a war, but they’re not going to be doing much to improve it either. It’s just going to, kind of, go quiet.

Is that kind of the right way to look at it or there’s some other things that we need to be thinking about?

Dave: Unfortunately, that is, kind of, the posture we find ourselves in at the moment. Now, that’s not static, that can change and that can change quickly. And there’s, you know, some people who observe trade matters more closely than I do. Have seen some positive comments out of the White House in the administration in the last 48 hours on trade that may indicate that they’re willing to move a little more quickly, for example, to get back into TPP, which would be a very positive thing for our country, if we could do that.

But I do agree with you. I think that the overall posture is one of prioritization. And again, for legitimate reasons, the new administration is going to be focused on COVID and it’s going to be focused on domestic economy.

And what we have to do is make our case, as an industry, along with other industries that are benefited by global trade, that global trade is a significant part of what we have to do to grow our economy and turn our economy around again. And we can play a productive role if we are able to achieve greater trade agreements with more countries than we would if we sit on the sidelines, continue to sit on the sidelines.

And that’s where we’re gonna have to play a role. That’s what people like me are supposed to do. We’re advocates, and that’s our job, is to bring those messages to the new administration, and hopefully convince them to move more quickly on that debate.

T3: Dad, Anna, I’ve been kind of dominating the questions. Are there any questions that you guys have before I tee up the next one?

Ted: Let me interject a little bit on trade.

I think trade is ultimately important, and probably the most important thing for the industry. But we have issues that I think the former administration was trying to address with regard to access to markets. We’ve had almost no access to the European market, for example. And that was just put on the table here in the last year or so. And then, of course, access to the Asian markets, a lot of strings are attached, particularly with regard to China, which of course, was part of the discussion that we’ve been having with them lately.

Do you think that the new administration is willing to look at those issues?

I mean, from the standpoint of USDEC, where Tom Vilsack came from — and he did a great job, I might add — but market access for the U.S is what’s ultimately important. And that’s going to involve some arm twisting in order to get it, and I’m questioning whether or not the new administration is capable of doing that.

Dave: I think they’re capable of doing it. I just don’t know that they’re going to dedicate the political capital necessary to do it, at least in the short term. I do think the low hanging fruit for this new administration in the trade agreement space, may be reviving old trade agreements, like, TPP, the Trans-Pacific Partnership that I mentioned earlier that includes a lot of countries that are important to our industry. And we were part of it under the Obama administration and, of course, Mr. Trump pulled us out of that agreement when he came in office. So, we can get back into the agreement. That’s something in the short term that could be positive. I agree with you, though, that the EU is a critical market for us, and we’re nowhere there, from a dairy standpoint.

Another market that you might also think about, that we did make some progress on, frankly, during the Trump administration was Canada. You know, because we did re-negotiate NAFTA, and we have a USMCA agreement, U.S.-Mexico-Canada Agreement, now in force. And another sign of progress was at the end of the administration, USTR initiated consultations with the Canadians on some of their dairy policies that we believe are not consistent with the obligations, the commitments, that the Canadians made as part of that new USMCA agreement. And well, that sounds like, sort of, diplomatic code words there, you know, “initiate consultations,” my trade colleagues tell me that that’s a fairly serious step.

And it will hopefully be something that we, again, have to encourage the new administration to follow through on because we do want to continue to hold Canada’s feet to the fire on its administration of its TRQ program, and to make sure that its milk pricing classes are as committed to under USMCA 6 and 7 are gone, and are not revived under some new number or some new class of milk, so we don’t find ourselves back in the same position we were in a year or two ago, where skim milk powder was being exported out of Canada and flooding the global marketplace and depressing prices, and really affecting our ability to market that product in a meaningful way to our trade partners.

So, that’s the kind of thing that doesn’t require trade negotiations or a new treaty partner. It requires enforcing an existing agreement, and that’s something that we will be advocating for very strongly in the early months of the Biden administration.

Ted: I think you’ve hit a nerve in enforcing existing agreements, because that’s been the problem all along with the old NAFTA agreement.

We used to ship a lot of milk for over 15, 18 years into Mexico, for example. And then all of a sudden, it was cut off, which was obviously in violation of NAFTA in those days, but nobody cared. Nobody was willing to do the hard work of getting in there and saying, “Hey, this is in violation of our agreement.” And so, guess what? Raw milk was shipped into Mexico. And as far as our company was concerned, that was a big deal. In Canada with their Class 7 price, I think the new agreement has, sort of, affected that, as you say, quite a bit. But there was also a lot of milk, also filtered milk and blends and so on that moved into Canada. And I’m not sure whether under the new agreement that’s going to continue or not. So, enforcement is a big issue and enforcement is probably something that most people don’t have the tummy for.

T3: You know, Dad, I’ll get I’ll take it a step further. To me, some of those issues are where having Secretary Vilsack so familiar with the dairy industry ends up being very important to us. Most secretaries of agriculture, who don’t have the dairy background that he has, aren’t going to understand the issue of what’s really going on with Canada, how the way they set up those tariff rate quotas would effectively block our ability to take advantage of the way the agreement was set up.

Ted: That’s right.

T3: Secretary Vilsack understands that. Fingers crossed, that’s going to play a role in helping us expand our market share in Canada.

Dave: I agree with you Ted, both Teds there. I think that’s right.

I mean, I can tell you that Michael Dykes, who’s my boss, spent a significant amount of time getting Bob Lighthizer, who was USTR, of course, for Mr. Trump, up to speed on Canadian dairy practices when they were negotiating USMCA. And there were several late nights and lots of hours spent explaining the nuances of dairy and milk pricing and Canadian practices to Mr. Lighthizer. But it paid off because he was an eager learner. And again, I think dairy really benefits from the new agreement provided it’s strongly enforced.

And you’re right, we won’t have to do that with Secretary Vilsack. We started in a much better place there. The new USTR, Katherine Tai, is someone who also has a strong policy background on trade issues, having worked for the House Ways and Means Committee before, of course, being named as the USTR designate. I don’t know enough about her background to know how familiar she is with trade, I’m sorry with dairy trade, but I do, again, at least from a policy and substance standpoint, I think she’s going to be, if she doesn’t know all the ins and outs of Canadian dairy practices, I bet she’s going to learn them pretty quickly, because she strikes me as a very smart person who is again, well-steeped in trade policy. So, we start, at least, in a strong position there as well.

T3: Anna, any questions from you?

Anna: The majority of my calls this year from producers have been about pricing, Federal Milk Marketing Orders, their concerns, issues with prices, kind of, really not looking like they expected at all. Is there anything on the horizon that we should be looking at, that’s being discussed right now?

Dave: It’s interesting, right? The COVID pandemic has, of course, had a lot of impacts. And one of the impact it certainly has had is volatility in dairy pricing, particularly this summer and into the fall, and it continues, obviously, in the Class III and Class IV space primarily, and it impacts everything else pricing wise.

So, I think it’s something that we have to kind of keep our eye on.

The point I have made in the past, recent past, is that one of the things we should probably avoid doing is making major policy decisions on milk pricing in the middle of a crisis, while there is such high volatility, when hopefully, as the new president is seeming to say here today and yesterday, you know, we may be in a better position as a country by summer and early fall.

Not to minimize that’s a long period of time for people to put up with volatile conditions between now and then, but I guess my point would be, as somebody who’s worked around policy matters for my entire career, you’re better off making longer-term policy decisions in a time of stability, then you are in a crisis. That isn’t to say that we will not engage as an organization with other stakeholders to look at possible solutions or changes or tweaks, if you will, to those issues as necessary. We’re open to that. We certainly will engage on those issues. There’s nothing concrete yet, but I can certainly say that that’s something that we’re working with our economic policy committee to, kind of, discuss and to consider.

So as proposals are put forward, as folks are thinking about things, again, we’re happy to engage.

It would be better if we could wait a bit and let things settle down before we make any radical changes to a policy. Because then obviously, what could happen is you do that, and then, six months or a year later, find yourself needing to change it again. And given how policy changes work, you don’t want to move that around too often. So, that would be my only caution.

T3: If the dairy industry wants to make significant changes to something like the Federal Order system, it’s practically a requirement that National Milk and IDFA are on the same page. Is that a fair statement?

Dave: Yes.

T3: OK, because that’s one of the things that I know always tends to be the issue is it’s a lot more than two steps. But there’s a two big step process, which is first for farmers and processors to get aligned and agree on a system that both think is a better system than what we have now. And then secondly, to take that to the administration and suggest that these are the changes that they’d like to have happen.

Dave: That is correct. And if I may, I’ll, kind of, walk you back in time with an example of that, that’s relevant to our current discussion. Which is in 2017, we were getting ready for the next Farm Bill, which would have been the 2018 Farm Bill, and as part of that, IDFA and National Milk got together and said, “Is there something we can do to improve the FMMO pricing structure for a wide range of stakeholders?”

And one of the rubs that had been there was, particularly for Class I, was a lack of access to risk management tools. The other classes had a dairy forward contracting program that had been in place for several Farm Bills that provided those tools. And Class I had been excluded from that program. We were originally, IDFA, looking to try to add Class I to that program, but we weren’t able to get consensus to do that with our cooperative friends.

So, we came back to the table with another idea, which was to change the higher of Class I mover from the higher of III and IV to a simple average. And because we did that, and because if we were able to do that, we would have Class I stakeholders, market participants able that to use the Class III and Class IV futures products that are already in place at the CME and other places to hedge their risk a bit, because they would know. It was a simple average, as opposed to every month not knowing which one of those class prices was going to be the mover in a particular month. So, that was the advantage.

And then, what we did, though, to take care of producers, to be fair to producers — and again, both sides wanted to do this — was look back over 17 years of data, monthly data from the FMMO system, all the orders, and basically run the numbers and say, “Okay, if we’d had this new mover in place for that period of time on a monthly basis, what would that have meant for producers?”

And what we found was — and, by the way, National Milk came to the table with exactly the same number, 74 cents — was that it is, that’s what we had to add to the mover price is 74 cents, because on average, that’s what it was going to cost producers on a monthly basis. Some months producers were going to be ahead, some months behind, but on average 74 cents. And that was 17 years’ worth of data.

So, we added that without hesitation. I’ll tell you a little story. We had our folks on our Economic Policy Committee, just representatives from that committee, coming to Chicago. National Milk had its representatives coming to Chicago for what we were hoping was not going to be more than a six- or seven-hour meeting at the Hilton, at the airport. We got into the room at 10:00, and we put our data on the table, they put the same number on the table. We were out of there by 11:30.

So, absolutely Ted, what you said is true. And then here’s all… I’ll prove it. When we finished and we were all agreed, we took it to the House and Senate ag committees, they said, “Oh my god, you people have agreed on a position? Well, that’s fine, we’ll put it in the Farm Bill.”

We put it in the House Farm Bill, we put it in the Senate Farm Bill, and it was the easiest piece of lobbying I’ve ever done, because National Milk and IDFA agreed.

And so, you’re absolutely right, whatever we come up with next, whether it’s on something having to do with the mover on Class I or something on pooling or something, who knows? Bank allowances are coming our way at some point as well. And I suspect all these things could get, kind of, wrapped up together at some point. But whatever we come up with it, we’re much better off as an industry. We can work it out amongst all stakeholders, and then if it’s going to have a congressional component to it, go to them with an agreed-upon position. Because if we do that, it will make it a lot easier to get what we want, as an industry.

T3: And that makes great sense. Of course, when it comes to the Federal Order, COVID wasn’t nice to how that change looks today, because the volatility of the last year caused dairy farmers, who traditionally would hedge with Class III prices, kind of, blew up those hedges because the volatility caused a whole bunch of depooling, which caused that 74 cents to really get distorted over the last 10 to 11 months.

I’ve heard from a number of different farmers and, Anna, tell me if you’re hearing it a little differently, that now they’re regretting the decision of moving away from the higher of. But the reality is, the real cause of the problem wasn’t the math that led to 74 cents and away from the higher of, but the fact that handlers were allowed to depool, causing the ultimate payment price to the dairy farmer to no longer correlate well with the way, perhaps, they hedge their milk. Is that a fair statement, Anna?

Anna: Honestly, the bigger issue that I’m hearing, whether it’s putting in protections or hedging, or however they’re managing things, no one really knows what to expect.

T3: Depooling is making hedging now more difficult on the dairy farmer’s side.

Anna: I think it makes it more difficult. I think depooling has a variety of issues, even just in terms of what it does to a Class I, you know, a bottling plant and the disadvantage it puts them in. It’s got a ton of issues.

Ted: I think perhaps one of the bigger parts of that issue is that most of the farmers don’t understand it. They think that depooling is money coming out of their pocket. And since 90-plus percent of the milk is cooperative milk anyway, the cooperatives depool because it helps the bottom line of a co-op, but the co-op’s money by law goes back to the dairyman anyway, it just doesn’t come back at the same time. So yeah, the depooling does interfere with the risk management but the perception that it’s coming out of the dairyman’s pocket is wrong. But where it does make a difference is proprietary handlers who we rely on to sell Class I milk for qualification purposes, are put at a severe disadvantage because they can’t really do it.

T3: Oh, yeah.

Ted: And proprietary handlers, particularly the bottling plants, got a big problem, because obviously Class I sales are declining. And their ability… Well, most of them don’t have their own milk supply, a few still do, but most of them these days deal with the co-ops who can depool. And it’s presumed that when they do that, they pass some of the money on to the bottler. But given the decline in Class I sales and so on over the years, and the bankruptcies on the Class I side, it would appear to me that there’s some inequity there that probably needs to be addressed.

Ted: Dave, I’m going to steal a line that I’ve heard Michael say many, many times and say, thank you, thank you, thank you for joining us. Really appreciate it, and good luck in Washington, D.C. Thank you. Thanks a bunch.

Dave: You’re welcome. Thanks. It was great to be with you. And I really enjoyed the conversation today.

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The Milk Check welcomes guest J. David Carlin to discuss the role of dairy lobbyists in Washington, how they've adjusted to the pandemic and industry outlooks during the Biden administration. Carlin is the International Dairy Foods Association's sen... The Milk Check welcomes guest J. David Carlin to discuss the role of dairy lobbyists in Washington, how they've adjusted to the pandemic and industry outlooks during the Biden administration.<br /> <br /> <br /> <br /> Carlin is the International Dairy Foods Association's senior vice president of legislative affairs and economic policy.<br /> <br /> <br /> <br /> Ted, T3 and Anna talk with their guest about issues like how lobbying via Zoom allows for additional public input, the importance of enforcing international trade deals, volatility in dairy pricing and much more.<br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> T3: Good morning, everybody. Welcome. Today, we have a guest. I'd like to introduce everybody to Dave Carlin. Dave is senior vice president of legislative affairs and economic policy for the International Dairy Foods Association. Dave, welcome. Thanks for joining us.<br /> <br /> <br /> <br /> Dave: Thanks, Ted. Glad to be with you.<br /> <br /> <br /> <br /> T3: Why don't you just, kind of, tell everybody a little bit about what you do? What's your job in Washington?<br /> <br /> <br /> <br /> Dave: Well, I'm one of those lobbyists that probably keeps the town running in a lot of different ways, but we're not very popular outside the Beltway. So, that's what I've been doing in Washington for the last, oh, I guess, 30, 35 years. And I came to IDFA about six and a half years ago; grew up on a dairy farm in central Kansas. So, a little bit of a homecoming for me and decided at least that I could, if I'm going to lobby, I could lobby on behalf of an industry that I care about and believe in. <br /> <br /> <br /> <br /> So, I'm part of a team of folks over here at IDFA that advocates for policy positions with the Congress and the administration that we think will benefit the dairy industry. And we work with our members to prioritize those policy requests and make sure that whatever we're working toward is going to be impactful and meaningful.<br /> <br /> <br /> <br /> So we've, of course, been very active in the COVID policy debate. We work a lot on nutrition issues and trade issues, given how important trade is to our industry, and a lot of other issues that come up here in Washington. We also do little work in the economic policy area as my title, kind of, indicates. So, milk pricing issues and FMMO issues or other things that we sometimes focus on, and I get involved in here. <br /> <br /> <br /> <br /> That's, kind of, a 30,000-foot view of what I do. I'm not walking the halls of Congress these days, that hasn't been possible since COVID started last March. So, my world, like everybody else's, is very virtual, but we've managed to create some new pathways and make it work, from a virtual standpoint. So, advocacy continues here in Washington, and hopefully, as I said, it will benefit our industry going forward. So, that's my 30,000-foot overview of what I do.<br /> <br /> <br /> <br /> T3: As I was hearing you talk, Dave, you provided what I thought was the perfect segue. Tell us about what lobbying Congress was like during COVID, because so much happened in the last 12 months as this pandemic evolved. Kind of give us a walkthrough of how that played out, from your perspective.<br /> <br /> <br /> <br /> Dave: Yeah, and I will start by saying it played out much better than I would have ever expected when we first got into this mess. Typically, as I said, I'm able to go to the House and Senate office buildings, I can set up meetings with staff and see members, and we did fundraisers and events in the evenings on the political side. That was what I did for 30 years and then COVID hit. And the Congress basically shut down like everything else shut down, all the buildings were closed, members were working from their home states and districts a lot of times, staff were scattered to the wind. <br /> <br /> <br /> <br /> And I really thought, "Gosh, T.C. Jacoby & Co. - Dairy Traders clean 38:47
COVID has changed consumer behavior. Is it permanent? https://www.jacoby.com/covid-has-changed-consumer-behavior/ Wed, 21 Oct 2020 19:18:25 +0000 http://www.jacoby.com/?p=1869 Did you rediscover the joy of cooking this year? You're not alone. There's no doubt that dairy consumer behaviors have changed in the COVID era. Who does it help and who does it hurt? Who can capitalize and who's in trouble? Ted, T3 and Anna debate. Also, T3 observes an even more worrying trend among Millennial and Generation Z consumers on the horizon—and it's got nothing to do with the pandemic. 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. Ted: You know, we're heading down the road from fall into winter, and temperatures are dropping and worried reports of the virus picking up speed in various parts of the country. Do we expect to have another debacle of dumped milk because of it? Obviously, my answer would be no. T3: Mine would too. Ted: And I think that there may be a silver lining, you know, not because of the virus but because of the fact that we now have some experience with it. I think it's correct to say that retail cheese sales are up. And I think they're up by, I saw, I've seen a number of different reports but anywhere from 1% to 3%. T3: Oh, I think it's more than that. I think most assumptions right now, they may be up 1% to 3% in the current week. But I think, you know, since let's say April 1st, most of the numbers I see are within, let's say 3 or 4 percentage points of 10%. Ted: Retail. T3: Retail. And there's an offset obviously on the foodservice side. Ted: Yeah. Well, the question that I wanted to raise, even though I don't recall 10% but the question that I wanted to raise is, will we lose that going forward? And I'm beginning to come down on the side that we won't, I don't think it'll sustain necessarily that level of increase but I doubt if it's going to go back to where it was before the pandemic. People started using cheese and eating cheese and became more accustomed to cheese. And I've several times used the example of my cheese counter at one of the stores I shop at that specializes in organic and really good specialty cheeses, and sometimes their cheese counter, which is relatively small but really well-stocked, is so crowded. I can hardly get at it. I have to elbow my way in and they stock a lot of artisan cheese and foreign cheeses and so on. Especially cheeses with cranberries and chives and all sorts of stuff. I think the increase in sales of cheese are locked in. Now, is that going to translate to increases in cheddar block or barrels? Well, that's another question, isn't it? And I don't know whether it will or won't. I tend to think that we may see this vertical integration sort of come to a halt and we see more diversification in cheese manufacturing towards different styles of cheese. In the last—Teddy correct me if I'm wrong—10, 20, 30 years. We've seen vertical integration where people have gone huge plants to mot the cheddar blocks to cheddar barrels, in some cases to parmesan, and they basically chew up milk at a commodity sale cheese. I think we're heading more towards specialty kinds of pieces. I think of Emmy as a good example. They produce a lot of different styles and they market them. I get this one website called The Deli Markets or something like that, that I happened to be on the email list for and all those different styles of cheeses, Carr Valley, Cowgirl Creamery, and all those different styles of cheese are on display at these cheese counters now. And people are picking up these little pieces and trying them. I think it tended to go in that direction. And I believe that that'll continue because percentage of our cheese disappearance to increase. T3: So I am going to agree with you but I'm going to come at it from a different direction. I have been under the impression for the last few years that mozzarella growth, for example, domestic consumption of mozzarella growth has been plateauing.

Did you rediscover the joy of cooking this year?

You’re not alone.

There’s no doubt that dairy consumer behaviors have changed in the COVID era. Who does it help and who does it hurt? Who can capitalize and who’s in trouble? Ted, T3 and Anna debate.

Also, T3 observes an even more worrying trend among Millennial and Generation Z consumers on the horizon—and it’s got nothing to do with the pandemic.

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.

Ted: You know, we’re heading down the road from fall into winter, and temperatures are dropping and worried reports of the virus picking up speed in various parts of the country. Do we expect to have another debacle of dumped milk because of it? Obviously, my answer would be no.

T3: Mine would too.

Ted: And I think that there may be a silver lining, you know, not because of the virus but because of the fact that we now have some experience with it. I think it’s correct to say that retail cheese sales are up. And I think they’re up by, I saw, I’ve seen a number of different reports but anywhere from 1% to 3%.

T3: Oh, I think it’s more than that. I think most assumptions right now, they may be up 1% to 3% in the current week. But I think, you know, since let’s say April 1st, most of the numbers I see are within, let’s say 3 or 4 percentage points of 10%.

Ted: Retail.

T3: Retail. And there’s an offset obviously on the foodservice side.

Ted: Yeah. Well, the question that I wanted to raise, even though I don’t recall 10% but the question that I wanted to raise is, will we lose that going forward? And I’m beginning to come down on the side that we won’t, I don’t think it’ll sustain necessarily that level of increase but I doubt if it’s going to go back to where it was before the pandemic. People started using cheese and eating cheese and became more accustomed to cheese. And I’ve several times used the example of my cheese counter at one of the stores I shop at that specializes in organic and really good specialty cheeses, and sometimes their cheese counter, which is relatively small but really well-stocked, is so crowded. I can hardly get at it. I have to elbow my way in and they stock a lot of artisan cheese and foreign cheeses and so on. Especially cheeses with cranberries and chives and all sorts of stuff.

I think the increase in sales of cheese are locked in. Now, is that going to translate to increases in cheddar block or barrels? Well, that’s another question, isn’t it? And I don’t know whether it will or won’t. I tend to think that we may see this vertical integration sort of come to a halt and we see more diversification in cheese manufacturing towards different styles of cheese. In the last—Teddy correct me if I’m wrong—10, 20, 30 years. We’ve seen vertical integration where people have gone huge plants to mot the cheddar blocks to cheddar barrels, in some cases to parmesan, and they basically chew up milk at a commodity sale cheese.

I think we’re heading more towards specialty kinds of pieces. I think of Emmy as a good example. They produce a lot of different styles and they market them. I get this one website called The Deli Markets or something like that, that I happened to be on the email list for and all those different styles of cheeses, Carr Valley, Cowgirl Creamery, and all those different styles of cheese are on display at these cheese counters now. And people are picking up these little pieces and trying them. I think it tended to go in that direction. And I believe that that’ll continue because percentage of our cheese disappearance to increase.

T3: So I am going to agree with you but I’m going to come at it from a different direction. I have been under the impression for the last few years that mozzarella growth, for example, domestic consumption of mozzarella growth has been plateauing. And I think most pizza cheese manufacturers would agree with me that the demand domestically for mozzarella and for pizza cheeses has really started to plateau. The pizza industry has just grown so much that it’s just gotten to a point where that growth has really slowed down. There’s still nice growth, I think, for mozzarella internationally but domestically it’s dropped off. And so I do tend to believe that mozzarella production in domestic consumption is going to be relatively flat. Maybe small increases less than 1% going forward.

I think cheddar demand also is going to calm down. And I say that this way: I think one of the reasons we’ve had such great demand for cheddar cheese in 2020, and as a result, very high cheese prices is because during the pandemic, as people have been forced to spend more time at home, one of the things they’ve done is they’ve tended to revert to their comfort foods. And cheddar cheese, in particular, tends to be very much a comfort food. A cheese that you grew up with, let’s say. How is that going to change going forward? What is our expectations of the dairy industry and demand for dairy and then specifically demand for cheese going forward as we come out of our COVID experience?

I’ve been reading a couple of different articles, there’s been a lot of food industry magazines who are trying to make predictions on how the world has changed when it comes to food going forward because of COVID. And there’s three things that have stood out to me. One, people have re-learned their joy of cooking, and there’s a strong belief out there going forward there will be a lot more cooking at home, at least in the, let’s say next two, three, four, five years because people have really enjoyed cooking at home. And as we go forward into a more normal environment, my expectation is that cooking at home is not necessarily going to be only comfort foods. And so the consumer’s diet is going to start to diversify even more towards being adventurous in their foods and trying specialty cheeses, like the ones you named.

I suspect we’re going to have some nice specialty cheese growth retail-wise, you know, in 2021 and beyond. The big question is what is going to happen to the white tablecloth restaurant? One of the interesting articles I [read] made the case that you’re going to have a lot more of the nicer restaurants have a lot more patio seating and outdoor seating. Maybe not in Florida but in most parts of the United States, that means their sales and their restaurant traffic is going to be a lot lower in the winter than in the spring and the summer and the fall. And so they’re actually expecting more volatility and they were talking about food in general, not just cheese. But they were saying you may start seeing more volatility in food prices seasonally because of the way restaurant traffic is going to be more volatile seasonally because those sit-down restaurants that do open back up, the weather outside are going to have a big effect on their traffic.

I think that makes a lot of sense to me because we’re already seeing the restaurants that have survived this and that have opened back up, they’ve actually taken up four or five parking spaces in front of their restaurant and put kind of a temporary fence around those parking spaces and put tables in it so that they could have more outdoor seating. And so I think you’re going to start seeing more and more restaurants expand their patio seating. And I think that’s going to affect cheese consumption as well because people do not eat the same at home as they do when they’re at the restaurant.

But you know, the specialty cheese companies that we work with tell us that that loss of the white tablecloth demand for specialty cheese is a significant loss and they have not gotten it back yet. And even though they’re saying that their retail demand is actually up and for a while, even though overall cheese retail demand was up, my understanding was it was almost all up in the dairy case and not in the deli case. But now you’re starting to see increases in the deli case but you’re not getting the demand all the way back on the white tablecloth restaurant side. And the feedback is that specialty cheese companies for the most part are doing fine but they are concerned about their foodservice sales because of that. They’ve seen a drop-off that they haven’t fully gotten back yet.

Ted: Let me interject a little bit of contrary, thought. You know, one of the things we’ve seen in the last 30 years or so, 40 years, is the increase in the fast-food restaurants. The McDonald’s, the Burger Chefs, and Arby’s, and so on. And we have all these chains now that use basically processed cheese that are fast, what we call today, fast food restaurants, as opposed to a white tablecloth restaurant.

Now, speaking for ourselves and thinking about the view that you just put forward, we continue to patronize white table restaurants for a couple of reasons. First of all, the people who own them are friends of ours. And so we want them to know that we haven’t forgot them. And so we go out and every once in a while go to a nice restaurant in the Italian section of St. Louis or others who we have patronized for many years. But overall, the population over the last 40, 50 years has moved away from cooking at home towards fast food. Is it right to say that the damage will occur in the white tablecloth restaurant as opposed to the fast-food joint? My inclination is to say that I would think that the white tablecloths will probably be the better of the two choices, just thinking about it. Because the people who learned to cook at home basically are people who formerly went out to the fast food joint. And they’re not the people who frequent the white tablecloths.

Now, will they continue to do that when they open back up? You know, we drove down through Illinois here Monday, and you can’t even stop at a McDonald’s or anything because they’re closed. All you have is a drive-through, and the line is out to the street but just the same, you don’t have any sit-down spots. And I think Illinois is a special case. I think they, as opposed to Missouri, had to have that policy but I’m inclined to believe that people who have been frequenting the fast-food joints are the ones that are going to do more of the eating at home, as opposed to the ones that frequent the white tablecloth as a matter of going out with the family on a Friday or Saturday night. Anna, what do you think?

Anna: Well, I disagree with the long-term people cooking at home a little bit. We’ve always liked to cook and we cook a lot here. And I think that a lot of people may be rediscovering that. But the one thing that strikes me about that is when kids have activities again, and you’ve got soccer and football and hockey and everything else going on, people didn’t go out to eat instead of cooking because they hated cooking. They did it because they were busy. That to me will be the determining factor in whether or not people are cooking more or going back out to eat.

Ted: I think you make a good point but not everybody who goes and frequents fast-food joints, follow up on my line of thought, does so because they’re trucking the soccer or hockey game. A lot of people go just to go, just to not cook.

Anna: Yeah.

Ted: And the question that I raise is that going to change? And I’m going to argue that I think it will change. The only question is how much compared to how it used to be. Cheese sales are up right now, and we’re talking about how much, a little bit earlier and how much of that increase is going to be sustained over the next six, eight months as we get back to normal. I think it’ll be significant. And yes, as Ted argues, it will be at the expense of the restaurant industry. And he’s thinking white tablecloths, and he’s thinking the deli counter. And I think he’s obviously correct, but my argument would be that I think what I’m calling the fast food joint will probably suffer more if people get used to cooking at home.

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: I actually do disagree with you, Dad. I don’t believe it’s the fast-food restaurants that’ll suffer. I do believe it’s generally the white tablecloth restaurants that will suffer. But I’m also going to say this, from a cheese perspective, you know, one of the things that the restaurant industry is adapting to, ignoring COVID for a second, is the millennials don’t like processed cheese, generally speaking. And this is very true of Generation Z, which is those kids just graduating from college and starting to come into the workforce. Big believers in eco-friendly, sustainability, you know, good for the environment. And what’s going to happen is you’re going to start seeing fast food restaurants or QSR, quick-serve restaurants, you’re going to see a big evolution in that industry towards more sustainable and more eco-friendly foods.

Panera has been kind of a good example of how the fast-food industry is changing away from a McDonald’s towards a Panera. And the next step will be towards foods that are better for you, foods that have more vegetables, maybe more foods that are plant-based, which is a scary thing for the dairy industry. And that’s going to affect the diet as well, is I think that people are going to start very slowly moving away from your foods that lack nutrition towards foods that are more nutritious, but I don’t think they’re going to give up the fast food part of it. Much of which for the reasons that Anna mentioned, which is they just don’t have time. In today’s world, they’re just too busy, especially if they have kids.

Ted: Well, I guess we’re going to find out. It’s a lot easier to cook at home today than it was 50 years ago. I mean, 50 years ago, you snapped your own string beans and so on. And today you buy a packet, you immerse it in hot water and, you know, you still prepare food like a small plate or something like that but they come precut and ready to cook and so on. So cooking at home and structuring a nutritious meal, I think over the last six months, as a lot of people who have had a lot of practice.

Anna: I don’t know how I feel about because we’re probably an anomaly here but we still snap our own green beans and everything, anyway. I don’t buy a lot…

Ted: You are an anomaly.

Anna: Yes. I don’t know. I’m trying to think about, you know, with my whole family, with my siblings and everything. I think that those types of meals, a frozen lasagna, or a bag of green beans that you would throw in the microwave or put in the pot. I think that those were things that people were doing anyways, when they were cooking at home, just for the convenience factor. And again, I think that’s the same argument that I’m making for fast food being just fine. I think that those are the things we go to when we’re busy. Especially the fast food question, that’s something that I don’t think changes for a really long time. I think we’re in this spot with this market trend or whatever, for a really long time. I don’t see people going back to any kind of normal behavior until really what are we thinking, fall of next year?

Ted: Well, I don’t know how long it’s going to take to get to what we call “normal” but my own calendar is sort of set for next spring, given the development of vaccines, and so on and treatments. Wall Street Journal this morning talks about treatments other than vaccines that are evidently rather effective. So, you know, there’s a lot of treatment knowledge that’s been gained in the last six months that we didn’t have when this whole thing hit us. I’m sort of thinking that by next spring we’ll be back to some semblance of normal.

T3: And, Dad, I agree with you and I’ll just make another statement to that effect. I’m actually personally a little bit pessimistic about the development of a vaccine within the next six to nine months. I think it’s going to take longer. And, for example, there was a couple of trials, one by Pfizer, and I think the other by Eli Lilly, they just put a pause on the trials for the vaccine. They weren’t coming out as they expected them to, I guess.

Ted: Well, let’s wrap this up. You know, the cheese market is going nuts right now again. How long is it going to last?

T3: All right. So today is what? October 14. We’re recording this on Wednesday, October 14. We’re at $2.72 on cheddar block, $2.2050 on cheddar barrel. We think this market is about as high as it’s going to go. It could go another five to 10 cents higher. The real question is how long is it going to stay up here and what’s going to happen when it’s over? You know, this time of year, I think when we are in the calendar plays a major role, October 14, you know, between now and Thanksgiving is when the majority of orders are placed for the holidays. You get some reloading the first week in December.

But my gut tells me that we are going to stay up here for a few more weeks. And then when we drop, it’s probably going to be slowly at first. You may have like an air pocket drop down to two bucks but that’s still the high level of what cheese markets are historically. And then you’ll probably kind of hover right around there until the holiday orders are filled. And then somewhere around December 15th, my guess is you’ll drop down into the $1.70s, let’s say. Maybe lower than that for barrels. It’s going to be interesting how things in the first and second quarter of next year play out. My gut is there’s a lot of inventory rebuilding that has to take place.

This volatility in these high prices we’ve been dealing with has been a direct result of actually not having much cheddar at all in inventory. And so that’s going to keep prices from getting too low in the first half of next year. It is very, very difficult to predict what demand is going to be like in 2021. I’ve had heard a number of economists who by this point, they’re usually giving their prediction to the quarter of a cent as to what they think the market’s going to be like in the following year. They’re just declining to answer the question. They say that the data is just too hard to read and they really don’t know.

And so that’s going to play a big role as to what prices do next year but the first half of the year, I think we’re going to maybe average something in the $1.60s or $1.70s because we do have a lot of inventory to build back, to get our usual amount of cheddar that we carry in inventory, the aging program with our cheddar. You make parmesan in the same equipment that you make cheddar, at least industrial parm. All of those inventories need to get built back. And as a result, it’s going to take a while before we see prices get too low. And then whether they do get a lot lower than let’s say dairy farmers would like, is really going to depend on what demand is like next year. You know, if we go into a recession of some kind, obviously we’d have some reason to be concerned.

Anna: I know we’ve talked about food service trends, restaurants, grocery stores, and everything else. When you’re talking about all of those things, whether it’s price or demand, how much are we factoring in the election?

T3: I would tie the economy to the election. But honestly, I don’t know if anybody has a good feel if one or the other [candidate for] president gets elected, what demand’s going to do. I think that usually, you can kind of have a feel for that, you know, Republican versus Democrat, whatnot. But this year, I think actually, you know, the whole COVID thing, the whole how the government reacts to COVID, can play a role. I actually think it may be a bigger deal as to who controls the Senate after the election, rather than who’s president in terms of the economy. I’m not sure how the economy is going to react to one president winning or the other, or one party controlling the Senate to the other. It’s just a hard question to answer this year.

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.

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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Did you rediscover the joy of cooking this year? You're not alone. There's no doubt that dairy consumer behaviors have changed in the COVID era. Who does it help and who does it hurt? Who can capitalize and who's in trouble? Ted, Did you rediscover the joy of cooking this year? <br /> <br /> <br /> <br /> You're not alone. <br /> <br /> <br /> <br /> There's no doubt that dairy consumer behaviors have changed in the COVID era. Who does it help and who does it hurt? Who can capitalize and who's in trouble? Ted, T3 and Anna debate.<br /> <br /> <br /> <br /> Also, T3 observes an even more worrying trend among Millennial and Generation Z consumers on the horizon—and it's got nothing to do with the pandemic.<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 /> Ted: You know, we're heading down the road from fall into winter, and temperatures are dropping and worried reports of the virus picking up speed in various parts of the country. Do we expect to have another debacle of dumped milk because of it? Obviously, my answer would be no.<br /> <br /> <br /> <br /> T3: Mine would too.<br /> <br /> <br /> <br /> Ted: And I think that there may be a silver lining, you know, not because of the virus but because of the fact that we now have some experience with it. I think it's correct to say that retail cheese sales are up. And I think they're up by, I saw, I've seen a number of different reports but anywhere from 1% to 3%.<br /> <br /> <br /> <br /> T3: Oh, I think it's more than that. I think most assumptions right now, they may be up 1% to 3% in the current week. But I think, you know, since let's say April 1st, most of the numbers I see are within, let's say 3 or 4 percentage points of 10%.<br /> <br /> <br /> <br /> Ted: Retail.<br /> <br /> <br /> <br /> T3: Retail. And there's an offset obviously on the foodservice side.<br /> <br /> <br /> <br /> Ted: Yeah. Well, the question that I wanted to raise, even though I don't recall 10% but the question that I wanted to raise is, will we lose that going forward? And I'm beginning to come down on the side that we won't, I don't think it'll sustain necessarily that level of increase but I doubt if it's going to go back to where it was before the pandemic. People started using cheese and eating cheese and became more accustomed to cheese. And I've several times used the example of my cheese counter at one of the stores I shop at that specializes in organic and really good specialty cheeses, and sometimes their cheese counter, which is relatively small but really well-stocked, is so crowded. I can hardly get at it. I have to elbow my way in and they stock a lot of artisan cheese and foreign cheeses and so on. Especially cheeses with cranberries and chives and all sorts of stuff.<br /> <br /> <br /> <br /> I think the increase in sales of cheese are locked in. Now, is that going to translate to increases in cheddar block or barrels? Well, that's another question, isn't it? And I don't know whether it will or won't. I tend to think that we may see this vertical integration sort of come to a halt and we see more diversification in cheese manufacturing towards different styles of cheese. In the last—Teddy correct me if I'm wrong—10, 20, 30 years. We've seen vertical integration where people have gone huge plants to mot the cheddar blocks to cheddar barrels, in some cases to parmesan, and they basically chew up milk at a commodity sale cheese.<br /> <br /> <br /> <br /> I think we're heading more towards specialty kinds of pieces. I think of Emmy as a good example. They produce a lot of different styles and they market them. I get this one website called The Deli Markets or something like that, that I happened to be on the email list for and all those different styles of cheeses, Carr Valley, Cowgirl Creamery, and all those different styles of cheese are on display at these cheese counters now. And people are picking up these little pieces and trying them. I think it tended to go in that direction. T.C. Jacoby & Co. - Dairy Traders clean 21:13
Why the Federal Orders curtail competition and squeeze America’s dairy farmers https://www.jacoby.com/federal-orders-squeeze-dairy-farmers/ Fri, 18 Sep 2020 12:53:00 +0000 http://www.jacoby.com/?p=1847 We're no strangers to criticizing the Federal Order system. We find a way to do it almost every episode. But this month, we're devoting the entire conversation to the fact that the regulatory framework in the dairy industry has hurt producers' bottom lines more than helped. It's a phenomenon we've noted in bits and pieces in previous episodes, including near the end of our conversation last month. But in this episode, we examine the lack of competition and innovation in the industry with an eye toward its earliest source—the Capper-Volstead Act of 1922. Ted shares an idea for how to fix the problem. It might seem backward—but only at first. T3: What do we want to talk about? Ted: Well, one thing as Anna can testify we've gotten some emails from mostly dairy farmers who express a lot of paranoia with regard to the federal order system and the regulatory system and where the money is going and so on. I think we had part of that discussion last time, didn't we? Didn't we shelf part of it? Anna: I know we started that conversation. Ted: Yeah. We beat it a lot. And we've also danced around it a lot. The tenor of the emails that we got was paranoid. You know, somebody's going south with the money, the co-ops are no good, they're stealing the cash, and that isn't what's happening and that's not the problem. Anna: You know, even some of our producers have had a little bit of paranoia, and not about the co-ops or us, but about the Federal Order system in general. Because when everybody has money taken out of their check, they don't understand that somebody is getting it. It looks like, you know, the MA office is keeping it or something, when really it's not that. It's that it gets distributed to the co-ops and everything, especially the ones who are using, you know, lower price utilization. Ted: You know, if we want to go back to square one and the Capper-Volstead Act, and then regulation that developed not at the same time but eight or ten years later, the Capper-Volstead Act gave the co-ops power to collective bargaining similar to a labor union. Well, let's take a look at the results of that. In the '30s, when the Capper-Volstead Act came in, we had basically fluid dairies, bottling plants, were 70% or 80% of the market in cheese, and it was a balancing item similar to what powder is today. It was not a good retail product in the '30s. And the collective bargaining was mostly targeted towards the fluid end of the industry. Look at the results. The fluid end of the industry has been destroyed. So, how do we solve that problem? The problem is not necessarily the fault of cooperatives. The problem basically goes back to the structure and the fact that we've eliminated competition for the milk. Now, that, of course, that gets back to, well, what's competition? Is it collective bargaining or is it handlers bidding for the supply? So that's a discussion, I think, that probably needs to be had but it needs to be had in the vein of not being anti-cooperative because that's not the right way to do it. There's some very good cooperatives in the United States and in the world actually. But generally speaking, they don't do a good job on the marketing side of the business. And that's where 50% of the price on the retail shelf is. It's in marketing. The dairyman winds up lucky, 20%, 25% of the retail price. So, obviously, to my mind, there's something wrong. And I think it comes back to the fact that you don't have the competition for the milk, and that's a regulatory issue. I'm not sure how you solve it. Clipping the wings of the cooperative a little bit. I'm not sure that's an answer but empowering the proprietary side of the industry might be a better answer. T3: What is the best way to increase competition for milk in a certain region? It's the more plants looking to buy milk, especially that capacity relative to supply, is what's going to drive up the overage price for the milk. And so, We're no strangers to criticizing the Federal Order system. We find a way to do it almost every episode. But this month, we're devoting the entire conversation to the fact that the regulatory framework in the dairy industry has hurt producers' botto... We're no strangers to criticizing the Federal Order system. We find a way to do it almost every episode.<br /> <br /> <br /> <br /> But this month, we're devoting the entire conversation to the fact that the regulatory framework in the dairy industry has hurt producers' bottom lines more than helped.<br /> <br /> <br /> <br /> It's a phenomenon we've noted in bits and pieces in previous episodes, including near the end of our conversation last month. But in this episode, we examine the lack of competition and innovation in the industry with an eye toward its earliest source—the Capper-Volstead Act of 1922.<br /> <br /> <br /> <br /> Ted shares an idea for how to fix the problem. It might seem backward—but only at first.<br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> T3: What do we want to talk about?<br /> <br /> <br /> <br /> Ted: Well, one thing as Anna can testify we've gotten some emails from mostly dairy farmers who express a lot of paranoia with regard to the federal order system and the regulatory system and where the money is going and so on. I think we had part of that discussion last time, didn't we? Didn't we shelf part of it?<br /> <br /> <br /> <br /> Anna: I know we started that conversation.<br /> <br /> <br /> <br /> Ted: Yeah. We beat it a lot. And we've also danced around it a lot. The tenor of the emails that we got was paranoid. You know, somebody's going south with the money, the co-ops are no good, they're stealing the cash, and that isn't what's happening and that's not the problem.<br /> <br /> <br /> <br /> Anna: You know, even some of our producers have had a little bit of paranoia, and not about the co-ops or us, but about the Federal Order system in general. Because when everybody has money taken out of their check, they don't understand that somebody is getting it. It looks like, you know, the MA office is keeping it or something, when really it's not that. It's that it gets distributed to the co-ops and everything, especially the ones who are using, you know, lower price utilization.<br /> <br /> <br /> <br /> Ted: You know, if we want to go back to square one and the Capper-Volstead Act, and then regulation that developed not at the same time but eight or ten years later, the Capper-Volstead Act gave the co-ops power to collective bargaining similar to a labor union. Well, let's take a look at the results of that. In the '30s, when the Capper-Volstead Act came in, we had basically fluid dairies, bottling plants, were 70% or 80% of the market in cheese, and it was a balancing item similar to what powder is today.<br /> <br /> <br /> <br /> It was not a good retail product in the '30s. And the collective bargaining was mostly targeted towards the fluid end of the industry. Look at the results. The fluid end of the industry has been destroyed. So, how do we solve that problem? The problem is not necessarily the fault of cooperatives. The problem basically goes back to the structure and the fact that we've eliminated competition for the milk. Now, that, of course, that gets back to, well, what's competition? Is it collective bargaining or is it handlers bidding for the supply?<br /> <br /> <br /> <br /> So that's a discussion, I think, that probably needs to be had but it needs to be had in the vein of not being anti-cooperative because that's not the right way to do it. There's some very good cooperatives in the United States and in the world actually. But generally speaking, they don't do a good job on the marketing side of the business. And that's where 50% of the price on the retail shelf is. It's in marketing. The dairyman winds up lucky, 20%, 25% of the retail price. So, obviously, to my mind, there's something wrong. And I think it comes back to the fact that you don't have the competition for the milk, and that's a regulatory issue. I'm not sure how you solve it. Clipping the wings of the cooperative a little bit. T.C. Jacoby & Co. - Dairy Traders clean 33:08 From the outhouse to the penthouse and back again https://www.jacoby.com/from-the-outhouse-to-the-penthouse-and-back-again/ Mon, 17 Aug 2020 17:08:18 +0000 http://www.jacoby.com/?p=1827 You'd only need one look at recent history on the CME to see the rollercoaster that has been spot cheddar prices. In this episode, T3 notes the collision of around a half-dozen contributing factors to explain why it's happening. Ted discusses why the Federal Order system is hurting the situation more than it's helping. 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. Ted: What should we talk about? Markets have gone from the penthouse to the outhouse. T3: Well, I would say the markets went from a fair price to the outhouse to the penthouse back to the outhouse, and I actually think we're gonna probably end up back in the penthouse in about a month. It's a roller coaster. Ted: And it's chaos on the milk side. I visited with our milk group today a little bit and depending on what you're making and what you're selling and what your orders are, you've got the Class III for August right now at $19-something, and I think probably around $19.50 or so. And you've got the Class III for September probably around $17 maybe? T3: Yeah $16.80 or so right now, $17. Ted: Something like that. So they could have as much as a $3 per hundredweight gap. So here we are trying to sell milk for delivery at this point in time and people are trying to figure out what price they're gonna wind up having to absorb to put the milk into cheese and then what they're gonna be able to sell the cheese for. So the futures market, at least in my view, is rather inadequate to solve that particular problem. And I think that accounts for a lot of the issues right now because, Teddy, and you correct me, you're in cheese, but the inventories are not burdensome and the sales haven't been that bad. In some cases, depending on the style and so on, they've been pretty darn good. And yet the milk, we wind up with some people unwilling to pay the going rate for milk because of the violence in the market at this point in time. T3: Exactly. And I think the biggest problem that we have right now in the marketplace isn't necessarily the price as much as it is the volatility of the price. Why don't I start by explaining, kind of, what's causing this volatility? What has the journey been since, let's say, the end of March and what it's doing farther down the food distribution channel and how people at the supermarket level and at the restaurant level are reacting to it, and then we can talk about how that feeds all the way back to the milk price and what's causing this rollercoaster that is creating stress for everybody in the pipeline? When the pandemic started and restaurants started closing and food distributors started canceling cheese orders, the price started to drop. And by the end of March, the price had almost gone all the way down to $1 a pound. But two things happened while we were that low. The first thing that happened was supermarkets started seeing huge increases in sales. And the first part to keep your head around is cheddar, which is how we price all of our cheese and ultimately our milk, is really a market that's skewed to retail. We sell more cheddar marginally in retail and more mozzarella, for example, in food service. And all you have to do is think about it when you're in a supermarket and you look at all the shredded cheeses on all the pegs in the dairy case, you'll see a lot more cheddar packages than you will mozzarella packages. Whereas if you're thinking about it from a foodservice perspective and you think about all the pizzas and lasagna and Italian food and everything you eat, they actually sell a lot more mozzarella in that direction. And so what happened is once you hit the bottom, three things happened simultaneously. The supermarkets' orders were very, very strong, and so they were ordering more cheddar than usual, a lot more. Second, we were low enough that we were far below the international market and we g... You'd only need one look at recent history on the CME to see the rollercoaster that has been spot cheddar prices. In this episode, T3 notes the collision of around a half-dozen contributing factors to explain why it's happening. You'd only need one look at recent history on the CME to see the rollercoaster that has been spot cheddar prices.<br /> <br /> <br /> <br /> In this episode, T3 notes the collision of around a half-dozen contributing factors to explain why it's happening. Ted discusses why the Federal Order system is hurting the situation more than it's helping.<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 /> Ted: What should we talk about? Markets have gone from the penthouse to the outhouse.<br /> <br /> <br /> <br /> T3: Well, I would say the markets went from a fair price to the outhouse to the penthouse back to the outhouse, and I actually think we're gonna probably end up back in the penthouse in about a month. It's a roller coaster.<br /> <br /> <br /> <br /> Ted: And it's chaos on the milk side. I visited with our milk group today a little bit and depending on what you're making and what you're selling and what your orders are, you've got the Class III for August right now at $19-something, and I think probably around $19.50 or so. And you've got the Class III for September probably around $17 maybe?<br /> <br /> <br /> <br /> T3: Yeah $16.80 or so right now, $17.<br /> <br /> <br /> <br /> Ted: Something like that. So they could have as much as a $3 per hundredweight gap. So here we are trying to sell milk for delivery at this point in time and people are trying to figure out what price they're gonna wind up having to absorb to put the milk into cheese and then what they're gonna be able to sell the cheese for. So the futures market, at least in my view, is rather inadequate to solve that particular problem. And I think that accounts for a lot of the issues right now because, Teddy, and you correct me, you're in cheese, but the inventories are not burdensome and the sales haven't been that bad. In some cases, depending on the style and so on, they've been pretty darn good. And yet the milk, we wind up with some people unwilling to pay the going rate for milk because of the violence in the market at this point in time.<br /> <br /> <br /> <br /> T3: Exactly. And I think the biggest problem that we have right now in the marketplace isn't necessarily the price as much as it is the volatility of the price. Why don't I start by explaining, kind of, what's causing this volatility? What has the journey been since, let's say, the end of March and what it's doing farther down the food distribution channel and how people at the supermarket level and at the restaurant level are reacting to it, and then we can talk about how that feeds all the way back to the milk price and what's causing this rollercoaster that is creating stress for everybody in the pipeline?<br /> <br /> <br /> <br /> When the pandemic started and restaurants started closing and food distributors started canceling cheese orders, the price started to drop. And by the end of March, the price had almost gone all the way down to $1 a pound. But two things happened while we were that low. The first thing that happened was supermarkets started seeing huge increases in sales. And the first part to keep your head around is cheddar, which is how we price all of our cheese and ultimately our milk, is really a market that's skewed to retail. We sell more cheddar marginally in retail and more mozzarella, for example, in food service. And all you have to do is think about it when you're in a supermarket and you look at all the shredded cheeses on all the pegs in the dairy case, you'll see a lot more cheddar packages than you will mozzarella packages. Whereas if you're thinking about it from a foodservice perspective and you think about all the pizzas and lasagna and Italian food and everything you eat, they actually sell a lot more mozzarella in that direction.<br /> <br /> <br /> T.C. Jacoby & Co. - Dairy Traders clean 31:57 “A couple of weird months” ahead for dairy markets https://www.jacoby.com/weird-weeks-ahead-for-dairy/ Wed, 15 Jul 2020 18:46:39 +0000 http://www.jacoby.com/?p=1792 The last few weeks have been some of the strangest for an industry in the midst of its weirdest year in memory. Listen as Ted, T3 and Anna get to the bottom of why spot cheddar prices maintain a steady hold on improbably high prices and why the Federal Order system appears to be doing the opposite of what it was meant for. T3: So here's where we're at. It's July 8. Today, cheddar blocks on the CME spot market are trading at $2.7375 a pound, barrels are trading at $2.40 a pound, nonfat is trading at a dollar three and a quarter, butter is trading at $1.68 and three quarters. You have over a $10 difference between where July, Class III milk will probably come in and where July, Class IV milk will probably come in, which is really about as big a disparity as I've ever seen in my 25 years of trading cheese and powder in the United States. It's amazing. Talking a little bit about the markets and what we expect going forward, starting with cheese, there has been for the month of June a genuine tightness in cheese specifically in cheddar blocks and cheddar barrels. We talked about this in the last podcast, you have a unique situation where retail sales continue to be much stronger than normal because of the pandemic. At the same time, the anticipation of the world opening back up, restaurants opening back up was causing food service distributors to order in large quantities to refill their pipelines, and you had the USDA's purchasing program and Food Box Program on top of all of that. And that created kind of a perfect storm of all the usual demand for cheeses across the whole Food Industry, whether it's restaurant-based, whether it's supermarket-based or whether it's government-based were all ordering it levels much higher than they normally do, which caused the shortage on cheddar and drove the market up to, you know, prices at $2.50 or higher. You know, the question everybody's been asking already for a month is how sustainable are we up here? And the answer that I think I would give everybody is we are not going to be at $2.50 for the rest of the year, but we've been at $2.50 for over a month now and it is not out of the realm of possibility that we stay here for another two to four weeks. Furthermore, if we do drop off these lofty levels, I'm not sure we're dropping, let's say to $1.50 or to $1.75. There is enough underlying demand, that that probably that first place where you drop to is still probably above $2 a pound. And the reason I say that is all of the converters out there, those who buy the cheese and shredded or chunk it or slice it and put it into the packages for retail or restaurant demand, they're telling us that their inventories of cheddar block and cheddar barrel, if you're a processed cheese manufacturer, are on the low end of where they like them to be at this time of the year. Keep in mind that usually right around the end of June beginning of July is when cheese inventories peak. And then as we get through the second half of the year and demand picks up for the holidays, and milk production decreases because of the heat of the summer, you start seeing cheese inventories dropped back down. Well, at least by the tone that I'm hearing from a lot of our customers, you're actually at a place where people are very uncomfortable with how much cheese they have in inventory. And they're inclined to say "We don't have enough and we're concerned about having enough cheese for the remainder of the year." Now, the flip side of that is they will also say in the same conversation, "We have absolutely no idea what to expect when it comes to demand." We would expect that it's possible the food service distributors have over-ordered in terms of the restaurants opening back up, because everything we're hearing about restaurants is they're running it, let's say 50% of capacity. On the flip side, QSR, which is your McDonald's of the world, your Panera bread's, your Chick-fil-A's, etc., The last few weeks have been some of the strangest for an industry in the midst of its weirdest year in memory. Listen as Ted, T3 and Anna get to the bottom of why spot cheddar prices maintain a steady hold on improbably high prices and why the Fede... The last few weeks have been some of the strangest for an industry in the midst of its weirdest year in memory.<br /> <br /> <br /> <br /> Listen as Ted, T3 and Anna get to the bottom of why spot cheddar prices maintain a steady hold on improbably high prices and why the Federal Order system appears to be doing the opposite of what it was meant for.<br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> T3: So here's where we're at. It's July 8. Today, cheddar blocks on the CME spot market are trading at $2.7375 a pound, barrels are trading at $2.40 a pound, nonfat is trading at a dollar three and a quarter, butter is trading at $1.68 and three quarters. You have over a $10 difference between where July, Class III milk will probably come in and where July, Class IV milk will probably come in, which is really about as big a disparity as I've ever seen in my 25 years of trading cheese and powder in the United States. It's amazing. Talking a little bit about the markets and what we expect going forward, starting with cheese, there has been for the month of June a genuine tightness in cheese specifically in cheddar blocks and cheddar barrels. We talked about this in the last podcast, you have a unique situation where retail sales continue to be much stronger than normal because of the pandemic. At the same time, the anticipation of the world opening back up, restaurants opening back up was causing food service distributors to order in large quantities to refill their pipelines, and you had the USDA's purchasing program and Food Box Program on top of all of that. And that created kind of a perfect storm of all the usual demand for cheeses across the whole Food Industry, whether it's restaurant-based, whether it's supermarket-based or whether it's government-based were all ordering it levels much higher than they normally do, which caused the shortage on cheddar and drove the market up to, you know, prices at $2.50 or higher.<br /> <br /> <br /> <br /> You know, the question everybody's been asking already for a month is how sustainable are we up here? And the answer that I think I would give everybody is we are not going to be at $2.50 for the rest of the year, but we've been at $2.50 for over a month now and it is not out of the realm of possibility that we stay here for another two to four weeks. Furthermore, if we do drop off these lofty levels, I'm not sure we're dropping, let's say to $1.50 or to $1.75. There is enough underlying demand, that that probably that first place where you drop to is still probably above $2 a pound. And the reason I say that is all of the converters out there, those who buy the cheese and shredded or chunk it or slice it and put it into the packages for retail or restaurant demand, they're telling us that their inventories of cheddar block and cheddar barrel, if you're a processed cheese manufacturer, are on the low end of where they like them to be at this time of the year. Keep in mind that usually right around the end of June beginning of July is when cheese inventories peak. And then as we get through the second half of the year and demand picks up for the holidays, and milk production decreases because of the heat of the summer, you start seeing cheese inventories dropped back down. Well, at least by the tone that I'm hearing from a lot of our customers, you're actually at a place where people are very uncomfortable with how much cheese they have in inventory. And they're inclined to say "We don't have enough and we're concerned about having enough cheese for the remainder of the year."<br /> <br /> <br /> <br /> Now, the flip side of that is they will also say in the same conversation, "We have absolutely no idea what to expect when it comes to demand." We would expect that it's possible the food service distributors have over-ordered in terms of the restaurants opening back up, because everything we're hearing about restaurants is they're running it, T.C. Jacoby & Co. - Dairy Traders clean 25:34 The dairy industry chases its tail https://www.jacoby.com/the-dairy-industry-chases-its-tail/ Wed, 03 Jun 2020 20:17:02 +0000 http://www.jacoby.com/?p=1763 Volatility continues to permeate the dairy industry as the world economy contemplates a return to "normal." CME spot cheddar is the most pronounced example, having rocketed up to $2.40 at the time this recording. Why? T3 explains how it's a symptom of an environment where the entire industry is guessing. Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. Ted: Maybe we ought to start the discussion by someone telling us why the cheese market is doing what it's doing. T3: Okay. Anna: Good luck. T3: I'm assuming you mean me. Ted: Yeah. T3: So, how about we use the analogy of we're on a roller coaster and we just went down the big hill and now we're going up the big hill. Ted: It's gotten much higher than I thought it would ever go. I thought the thing would be ready to crash at $1.90. T3: Yeah. I think everybody's kind of in the same boat. To me, it's a combination of factors all hitting at the same time. You still have retail sales running at 20% to 30% above normal, you now have foodservice distributors refilling the pipeline that emptied out when COVID-19 started. Well, now, restaurants are starting to open back up and they're trying to refill the pipeline in preparation for everything going back to normal. And I just talked to one of the big cheese mozzarella manufacturers here late last week who told me his foodservice orders are running at 120% of what they normally would this time of the year. In addition to that, you have the food box program, the USDA Food Box Program, which is quickly becoming a debacle because a number of the winners of the program did not properly calculate or hedge the cheese and butter portion of their purchases to put the program together to deliver to, you know, the charities. So, when they bid that price, they bid it at a fixed price. Now, there was an interview with one of the larger regional foodservice distributors about a week ago, I'm going to paraphrase here. But basically, what this owner said was that they bid on the Food Box Program and they were told their bid was too high. And what he said was he goes, he believed the winners of many of the bids did not have their head around what the true costs were to put the whole program together. And that they may have been underestimating what the cost of some of the products were, specifically cheese and butter on the dairy side of things. And his comment was U.S. Foodservice, Sysco, Performance Food Group, all bid on the program and all were told their bids were too high because there's no way that some of the winners of this program could possibly put together some of these boxes at some of the costs that they bid if they won the program and these guys didn't. So, that has to be very concerning. And that was before the cheese price raised to what is now $2.40. But you add that demand on top of foodservice distribution demand running at a 120% of normal because they're refilling the pipeline on top of retail demand, that's still running at about 120% of normal. And that's the recipe for cheese market that is raised from $1.01 to $2.40 in the span of a little more than three weeks and is likely to keep going higher before it comes back down. One of the things that I think also plays into this is the fact that production planning, distribution planning, you know, all of these big companies, whether you're a foodservice distributor or a restaurant group, restaurant chains, or cheese manufacturers, they all have planning departments. So, they can plan production, they can plan what their demand is, they can plan what their sales are, they can plan what their purchases should be. This COVID-19 experience, I mean, it's pretty safe to say that every single planning department in the country has probably taken their original plans and throw them out the window. They're chasing their tail right now trying to figure o... Volatility continues to permeate the dairy industry as the world economy contemplates a return to "normal." CME spot cheddar is the most pronounced example, having rocketed up to $2.40 at the time this recording. Why? Volatility continues to permeate the dairy industry as the world economy contemplates a return to "normal." <br /> <br /> <br /> <br /> CME spot cheddar is the most pronounced example, having rocketed up to $2.40 at the time this recording.<br /> <br /> <br /> <br /> Why? T3 explains how it's a symptom of an environment where the entire industry is guessing.<br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind.<br /> <br /> <br /> <br /> Ted: Maybe we ought to start the discussion by someone telling us why the cheese market is doing what it's doing.<br /> <br /> <br /> <br /> T3: Okay.<br /> <br /> <br /> <br /> Anna: Good luck.<br /> <br /> <br /> <br /> T3: I'm assuming you mean me.<br /> <br /> <br /> <br /> Ted: Yeah.<br /> <br /> <br /> <br /> T3: So, how about we use the analogy of we're on a roller coaster and we just went down the big hill and now we're going up the big hill.<br /> <br /> <br /> <br /> Ted: It's gotten much higher than I thought it would ever go. I thought the thing would be ready to crash at $1.90.<br /> <br /> <br /> <br /> T3: Yeah. I think everybody's kind of in the same boat. To me, it's a combination of factors all hitting at the same time. You still have retail sales running at 20% to 30% above normal, you now have foodservice distributors refilling the pipeline that emptied out when COVID-19 started. Well, now, restaurants are starting to open back up and they're trying to refill the pipeline in preparation for everything going back to normal. And I just talked to one of the big cheese mozzarella manufacturers here late last week who told me his foodservice orders are running at 120% of what they normally would this time of the year. In addition to that, you have the food box program, the USDA Food Box Program, which is quickly becoming a debacle because a number of the winners of the program did not properly calculate or hedge the cheese and butter portion of their purchases to put the program together to deliver to, you know, the charities. So, when they bid that price, they bid it at a fixed price. Now, there was an interview with one of the larger regional foodservice distributors about a week ago, I'm going to paraphrase here.<br /> <br /> <br /> <br /> But basically, what this owner said was that they bid on the Food Box Program and they were told their bid was too high. And what he said was he goes, he believed the winners of many of the bids did not have their head around what the true costs were to put the whole program together. And that they may have been underestimating what the cost of some of the products were, specifically cheese and butter on the dairy side of things. And his comment was U.S. Foodservice, Sysco, Performance Food Group, all bid on the program and all were told their bids were too high because there's no way that some of the winners of this program could possibly put together some of these boxes at some of the costs that they bid if they won the program and these guys didn't. So, that has to be very concerning. And that was before the cheese price raised to what is now $2.40. But you add that demand on top of foodservice distribution demand running at a 120% of normal because they're refilling the pipeline on top of retail demand, that's still running at about 120% of normal. And that's the recipe for cheese market that is raised from $1.01 to $2.40 in the span of a little more than three weeks and is likely to keep going higher before it comes back down.<br /> <br /> <br /> <br /> One of the things that I think also plays into this is the fact that production planning, distribution planning, you know, all of these big companies, whether you're a foodservice distributor or a restaurant group, restaurant chains, or cheese manufacturers, they all have planning departments. So, T.C. Jacoby & Co. - Dairy Traders clean 28:00 Is USDA’s proposed COVID-19 dairy assistance enough? https://www.jacoby.com/is-usda-covid-assistance-enough/ Tue, 12 May 2020 13:04:57 +0000 http://www.jacoby.com/?p=1745 Help is on the way for dairy farmers who were forced to dump milk as COVID-19 continues to jostle the industry. But does the USDA's proposed assistance go far enough? And, is Washington relying on outdated methods to solve a uniquely 21st century problem? Ted, T3 and Anna discuss the proposal and offer predictions on the timetable for a return to "normal." Ted's dogs Henry and Ralphie offer their analysis. Anna: Welcome to "The Milk Check," a podcast from T. C. Jacoby & Company, where we share market insights and analysis with dairy farmers in mind. T3: So last week the USDA finally announced their plans to help the dairy industry and they came out with a package to help dairy farmers and then they also came out with a package to, what they called the food box package that included some food service distributors to get money to food banks and also some bid programs to buy some cheese and butter and other dairy products. The program to help dairy farmers I think I'd start by saying was probably underwhelming for most people in the industry. It probably helped smaller producers more than larger producers because it capped the compensation at $125,000 for the one program, and if it included some of the help they put on grains and others, I think it was capped at $250,000. For large farmers, that is really a drop in the bucket, and some of the numbers I've heard out there probably doesn't help some of those larger farmers by more than, 15, 16, 17 cents a hundredweight. Now for the smaller producers, that can potentially be very valuable. And if they're covering 85% of the losses and 85% of the drop in price from where they were in January to where they were by the middle of April, it probably is gonna end up being very helpful. But for the industry as a whole, these days over 70%, 75% of the milk comes from larger producers. And so you ended up with a program that probably did not help the majority of producers, at least from a milk perspective in the industry. The other thing it did not include, it didn't include anything that would incentivize reducing the milk supply because it was a direct payment program. And so the USDA will pay farmers directly, which means that it can't be used to incentivize producing less milk so that we can avoid dumping milk. But that also is, the third issue is there was nothing in the announcement at all to help with paying for the milk that was dumped, because so many processors had lost enough food service sales that they simply were not in a position to take milk and so they had to push back on their contracts and simply not take the milk. And in many cases, there were force majeure declarations, or in some cases, they didn't even take it that far. They just said, "We can't take it." And the Co-ops had no choice but to dump the milk because they had nowhere else to go with it. So that USDA program I would say has been underwhelming. And I don't know, Dad, do you have any other thoughts as to what you're hearing about how farmers are reacting to the program? Ted: Well, I haven't really heard how they're reacting. I don't think we're far enough into it. At this point all these programs are simply discussion. Nothing at this point has been written in stone. The problem would be with regard to the $125,000 you're right, it is a drop in the bucket and it addresses 20% or 25% of the milk supply and leaves the other 70% or so out, so they don't participate in that program at all. It strikes me, and then they're talking about purchasing programs and then the Secretary actually vocalized an aversion to any remuneration for dumped milk with the theory that ,"Oh no, we're not gonna do that. We're gonna buy products and we're gonna distribute it to the poor. Or we're gonna buy it through CCC," which, CCC's program was antiquated 30 years ago. The problem with the CCC program is they buy powder and the butter and cheese and they put it in storage. Help is on the way for dairy farmers who were forced to dump milk as COVID-19 continues to jostle the industry. But does the USDA's proposed assistance go far enough? And, is Washington relying on outdated methods to solve a uniquely 21st century pr... Help is on the way for dairy farmers who were forced to dump milk as COVID-19 continues to jostle the industry.<br /> <br /> <br /> <br /> But does the USDA's proposed assistance go far enough? And, is Washington relying on outdated methods to solve a uniquely 21st century problem?<br /> <br /> <br /> <br /> Ted, T3 and Anna discuss the proposal and offer predictions on the timetable for a return to "normal." Ted's dogs Henry and Ralphie offer their analysis.<br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to "The Milk Check," a podcast from T. C. Jacoby & Company, where we share market insights and analysis with dairy farmers in mind.<br /> <br /> <br /> <br /> T3: So last week the USDA finally announced their plans to help the dairy industry and they came out with a package to help dairy farmers and then they also came out with a package to, what they called the food box package that included some food service distributors to get money to food banks and also some bid programs to buy some cheese and butter and other dairy products. The program to help dairy farmers I think I'd start by saying was probably underwhelming for most people in the industry. It probably helped smaller producers more than larger producers because it capped the compensation at $125,000 for the one program, and if it included some of the help they put on grains and others, I think it was capped at $250,000. For large farmers, that is really a drop in the bucket, and some of the numbers I've heard out there probably doesn't help some of those larger farmers by more than, 15, 16, 17 cents a hundredweight. Now for the smaller producers, that can potentially be very valuable. And if they're covering 85% of the losses and 85% of the drop in price from where they were in January to where they were by the middle of April, it probably is gonna end up being very helpful. But for the industry as a whole, these days over 70%, 75% of the milk comes from larger producers. And so you ended up with a program that probably did not help the majority of producers, at least from a milk perspective in the industry.<br /> <br /> <br /> <br /> The other thing it did not include, it didn't include anything that would incentivize reducing the milk supply because it was a direct payment program. And so the USDA will pay farmers directly, which means that it can't be used to incentivize producing less milk so that we can avoid dumping milk. But that also is, the third issue is there was nothing in the announcement at all to help with paying for the milk that was dumped, because so many processors had lost enough food service sales that they simply were not in a position to take milk and so they had to push back on their contracts and simply not take the milk. And in many cases, there were force majeure declarations, or in some cases, they didn't even take it that far. They just said, "We can't take it." And the Co-ops had no choice but to dump the milk because they had nowhere else to go with it. So that USDA program I would say has been underwhelming. And I don't know, Dad, do you have any other thoughts as to what you're hearing about how farmers are reacting to the program?<br /> <br /> <br /> <br /> Ted: Well, I haven't really heard how they're reacting. I don't think we're far enough into it. At this point all these programs are simply discussion. Nothing at this point has been written in stone. The problem would be with regard to the $125,000 you're right, it is a drop in the bucket and it addresses 20% or 25% of the milk supply and leaves the other 70% or so out, so they don't participate in that program at all. It strikes me, and then they're talking about purchasing programs and then the Secretary actually vocalized an aversion to any remuneration for dumped milk with the theory that ,"Oh no, we're not gonna do that. We're gonna buy products and we're gonna distribute it to the poor. T.C. Jacoby & Co. - Dairy Traders clean 34:37 COVID-19 could cause “an unbelievable shock” for dairy https://www.jacoby.com/covid-19-an-unbelievable-shock/ Fri, 03 Apr 2020 12:47:36 +0000 http://www.jacoby.com/?p=1722 As the COVID-19 crisis wears on, its effects on the dairy industry have become more acute. Will producers be forced to dump milk for a lack of buyers? Should the government step in to prop them up? And even if it did, would that be enough to prevent farmers from going out of business? Ted, T3 and Anna foresee a tough few weeks ahead. Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. T3: The last time we had the podcast...we did a podcast which was about two and a half weeks ago, there was a general feeling at the time that cheese and specifically cheddar might hold up okay in this because retail sales were good. What was really interesting what happened, you had the initial push into the supermarkets and everybody went into the supermarkets to buy and they bought up the whole store, you know, so that they could go home and stay at home for an extended period of time. And that drove retail sales way up and everybody expected those sales to come back down as we got into the middle of this crisis. Today is April 2. So this was about a week ago today, I would say a little over a week ago, Wednesday of last week. The best analogy that I've been able to come up with is around the interstate. You're driving at full speed, you know, little over the speed limit like we always do. And you will arrive in traffic, and you go from driving 60 miles an hour, you know, to almost a dead stop as fast as you can, because everything's backed up. And the reality is, it's traffic, you're gonna start moving again but once you're in traffic you're gonna be moving at 30 miles an hour. And that was almost exactly what we felt with this market in the middle of last week, everything was running at full speed. The restaurant chains and that distribution pipeline was really pulling hard and eager for every piece of cheese, especially cheddar that they could get their hands on. And then they just got to the point where they were caught up. And so there are all of those extra orders, which were extra orders so that you could take the displaced foodservice demand and put it into retail, all of a sudden those extra orders really slowed down. And the whole market just backed up and it's backed up almost immediately. And so it was within a 24- to 48-hour period you went from you know, moving a lot of cheese all over the place to try and reallocate the cheese towards retail sales to, "Okay, now where do we go with this cheese because nobody's buying?" It happened very quickly and all of a sudden the market really had no choice but to come down and that's why you suddenly saw this cheese market, you know, drop over the matter of three or four trading days from you know, something almost at $1.80 down to something at $1.30. Now, what will happen from here, I think it's harder to predict. I think the reality is hit that even cheddar which is I think the cheese that's gonna hold up best in this environment, the sales into retail are probably not gonna be enough to overcome the loss of sales on the food service side, especially when you consider that there's a lot of milk being moved away from non-cheddar plants into cheddar plants. So every cheddar plant in the country is running full. Where do we go from here? You know, one of the great reality of a market economy is uncertainty really tends to get people to stop buying not just at the consumer level, but also at the business level. And nobody was gonna buy any extra cheese at $1.70, now that we're at $1.30, my belief is we're in a place where companies are gonna say, "This crisis is temporary, eventually we'll come out of it. And I'm willing to build inventory here." So we're gonna start seeing cheese clearing against somewhere around these prices. My hope is that maybe we bounce out of the $1.30s, I'm gonna guess into the $1.40s but it's really hard to tell. You know, As the COVID-19 crisis wears on, its effects on the dairy industry have become more acute. Will producers be forced to dump milk for a lack of buyers? Should the government step in to prop them up? And even if it did, As the COVID-19 crisis wears on, its effects on the dairy industry have become more acute.<br /> <br /> <br /> <br /> Will producers be forced to dump milk for a lack of buyers? Should the government step in to prop them up? And even if it did, would that be enough to prevent farmers from going out of business?<br /> <br /> <br /> <br /> Ted, T3 and Anna foresee a tough few weeks ahead.<br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind.<br /> <br /> <br /> <br /> T3: The last time we had the podcast...we did a podcast which was about two and a half weeks ago, there was a general feeling at the time that cheese and specifically cheddar might hold up okay in this because retail sales were good. What was really interesting what happened, you had the initial push into the supermarkets and everybody went into the supermarkets to buy and they bought up the whole store, you know, so that they could go home and stay at home for an extended period of time. And that drove retail sales way up and everybody expected those sales to come back down as we got into the middle of this crisis. Today is April 2. So this was about a week ago today, I would say a little over a week ago, Wednesday of last week. The best analogy that I've been able to come up with is around the interstate. You're driving at full speed, you know, little over the speed limit like we always do. And you will arrive in traffic, and you go from driving 60 miles an hour, you know, to almost a dead stop as fast as you can, because everything's backed up. And the reality is, it's traffic, you're gonna start moving again but once you're in traffic you're gonna be moving at 30 miles an hour.<br /> <br /> <br /> <br /> And that was almost exactly what we felt with this market in the middle of last week, everything was running at full speed. The restaurant chains and that distribution pipeline was really pulling hard and eager for every piece of cheese, especially cheddar that they could get their hands on. And then they just got to the point where they were caught up. And so there are all of those extra orders, which were extra orders so that you could take the displaced foodservice demand and put it into retail, all of a sudden those extra orders really slowed down. And the whole market just backed up and it's backed up almost immediately. And so it was within a 24- to 48-hour period you went from you know, moving a lot of cheese all over the place to try and reallocate the cheese towards retail sales to, "Okay, now where do we go with this cheese because nobody's buying?" It happened very quickly and all of a sudden the market really had no choice but to come down and that's why you suddenly saw this cheese market, you know, drop over the matter of three or four trading days from you know, something almost at $1.80 down to something at $1.30.<br /> <br /> <br /> <br /> Now, what will happen from here, I think it's harder to predict. I think the reality is hit that even cheddar which is I think the cheese that's gonna hold up best in this environment, the sales into retail are probably not gonna be enough to overcome the loss of sales on the food service side, especially when you consider that there's a lot of milk being moved away from non-cheddar plants into cheddar plants. So every cheddar plant in the country is running full. Where do we go from here? You know, one of the great reality of a market economy is uncertainty really tends to get people to stop buying not just at the consumer level, but also at the business level. And nobody was gonna buy any extra cheese at $1.70, now that we're at $1.30, my belief is we're in a place where companies are gonna say, "This crisis is temporary, eventually we'll come out of it. And I'm willing to build inventory here. T.C. Jacoby & Co. - Dairy Traders clean 25:35 COVID-19: A lot left to learn https://www.jacoby.com/covid-19-a-lot-left-to-learn/ Fri, 20 Mar 2020 22:02:22 +0000 http://www.jacoby.com/?p=1690 As the global COVID-19 outbreak continues to disrupt life as we know it, the dairy industry knows only one thing for sure: There's a lot left to learn about the impact the pandemic will have on global markets. Ted, T3 and Anna phone in for a discussion on dairy markets buffeted by confusion. But as Ted reminds us, uncertainty is no stranger to dairy. He says the industry is equipped to handle what's thrown at it. Anna: Welcome to the ''Milk Check,'' a podcast from TC Jacoby & Company where we share market insights and analysis with dairy farmers in mind. Ted: Leading into this by now I think everybody's interested in knowing what effect the coronavirus will have on the dairy industry. And of course, at this point in time, the effect is mostly confusion in that consumers are going into the grocery stores and cleaning out the milk section, buying long-life products including cheese and shying away from going into restaurants and food service establishments. And so we have a migration of milk away from cheese plants serving food service and special kinds of group facilities, restaurants and so on, hotels, towards retail, cut wrap and retail-type packages. In addition to that, we have a shortage of milk at the bottling plant because people are going in and cleaning out the dairy case similar to what they traditionally do just before a hurricane hits down in Florida. The normal effect of this is to have this surge in production and change, and then a week to ten days later, everybody has a lot of inventory in their refrigerator and sales start to back up and surplus begins to exist. Whether that's gonna happen this time or not remains to be seen. It could not in that everybody seems to be heading for their home and then planning on staying there for a while. And I think most people are expecting to be there at least a month. So that's gonna mean that they're gonna keep an inventory of milk, long shelf life products and so on, and they're gonna be eating those kinds of products at home as opposed to going out to restaurants. School lunch business is another issue. I understand that in some areas, the school milk is being delivered by school buses. I'm not quite sure how that works. But most of the milk being consumed now will be consumed at the kitchen table. So that also bodes well for retail milk sales. Does not bode well for people who are looking at school lunch business, school milk. So there is confusion, and how long it will play out remains to be seen. It could go on for a week or two and it could go on for a month or two, maybe longer. So we'll have to see. The dairy industry in general can handle whatever is thrown at them. Production was just announced for last month and it's up some big numbers, roughly one and a half percent depending on who you're reading. One source says 2%. That's a very bearish number with regard to milk and milk pricing under the longer term and would indicate that milk pricing, a Class III price somewhere in the $17.00, $17.50 range, pretty attractive to dairyman for them being increased production that much. Our general view of it is that anything over 1% is bearish as far as milk is concerned. And I think the markets right now in addition to the negative effects of the corona issue, I think production is also weighing heavily on the markets. Even though the cheese market went down a little bit today, the futures market went up because I believe basically that the pressure down is overdone and so it's rebounding somewhat. Ted, would you wanna weigh in on the cheese market? T3: Sure. Obviously what's happening in cheese, just like all the rest of the, not just dairy, but the food industry, is you're seeing everything skewed towards retail demand at the moment. There's a lot of retail supermarket chains or club stores that are reporting, you know, demand for cheese and other dairy products up as much as two times to three times normal demand. As the global COVID-19 outbreak continues to disrupt life as we know it, the dairy industry knows only one thing for sure: There's a lot left to learn about the impact the pandemic will have on global markets. Ted, As the global COVID-19 outbreak continues to disrupt life as we know it, the dairy industry knows only one thing for sure: There's a lot left to learn about the impact the pandemic will have on global markets.<br /> <br /> <br /> <br /> Ted, T3 and Anna phone in for a discussion on dairy markets buffeted by confusion.<br /> <br /> <br /> <br /> But as Ted reminds us, uncertainty is no stranger to dairy. He says the industry is equipped to handle what's thrown at it.<br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to the ''Milk Check,'' a podcast from TC Jacoby & Company where we share market insights and analysis with dairy farmers in mind.<br /> <br /> <br /> <br /> Ted: Leading into this by now I think everybody's interested in knowing what effect the coronavirus will have on the dairy industry. And of course, at this point in time, the effect is mostly confusion in that consumers are going into the grocery stores and cleaning out the milk section, buying long-life products including cheese and shying away from going into restaurants and food service establishments. And so we have a migration of milk away from cheese plants serving food service and special kinds of group facilities, restaurants and so on, hotels, towards retail, cut wrap and retail-type packages. In addition to that, we have a shortage of milk at the bottling plant because people are going in and cleaning out the dairy case similar to what they traditionally do just before a hurricane hits down in Florida.<br /> <br /> <br /> <br /> The normal effect of this is to have this surge in production and change, and then a week to ten days later, everybody has a lot of inventory in their refrigerator and sales start to back up and surplus begins to exist. Whether that's gonna happen this time or not remains to be seen. It could not in that everybody seems to be heading for their home and then planning on staying there for a while. And I think most people are expecting to be there at least a month. So that's gonna mean that they're gonna keep an inventory of milk, long shelf life products and so on, and they're gonna be eating those kinds of products at home as opposed to going out to restaurants.<br /> <br /> <br /> <br /> School lunch business is another issue. I understand that in some areas, the school milk is being delivered by school buses. I'm not quite sure how that works. But most of the milk being consumed now will be consumed at the kitchen table. So that also bodes well for retail milk sales. Does not bode well for people who are looking at school lunch business, school milk. So there is confusion, and how long it will play out remains to be seen. It could go on for a week or two and it could go on for a month or two, maybe longer. So we'll have to see.<br /> <br /> <br /> <br /> The dairy industry in general can handle whatever is thrown at them. Production was just announced for last month and it's up some big numbers, roughly one and a half percent depending on who you're reading. One source says 2%. That's a very bearish number with regard to milk and milk pricing under the longer term and would indicate that milk pricing, a Class III price somewhere in the $17.00, $17.50 range, pretty attractive to dairyman for them being increased production that much. Our general view of it is that anything over 1% is bearish as far as milk is concerned. And I think the markets right now in addition to the negative effects of the corona issue, I think production is also weighing heavily on the markets. Even though the cheese market went down a little bit today, the futures market went up because I believe basically that the pressure down is overdone and so it's rebounding somewhat. Ted, would you wanna weigh in on the cheese market?<br /> <br /> <br /> <br /> T3: Sure. Obviously what's happening in cheese, just like all the rest of the, not just dairy, but the food industry, T.C. Jacoby & Co. - Dairy Traders clean 38:05 Is USDA’s Dairy Revenue Protection program a good deal for farmers? https://www.jacoby.com/is-dairy-revenue-protection-program-good-for-farmers/ Fri, 03 Jan 2020 14:47:40 +0000 http://www.jacoby.com/?p=1622 It's less than a year and a half old, but the USDA's new Dairy Revenue Protection program has already led farmers across the U.S. to hedge an estimated 12% of the national milk supply. Blimling and Associates' Phil Plourd, Tiffany LaMendola and Katie Burgess join Ted and T3 to explain how this price risk management tool works and discuss why quick adoption of the program bodes well for the industry. Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Company, where we share market insights and analysis with dairy farmers in mind. T3: Hello everybody, this month on The Milk Check we have another guest on our panel, Phil Plourd is President of Blimling and Associates. And he and his team are here to help us learn about DRP or the Dairy Revenue Protection program recently created by the USDA to help dairy farmers protect downside milk price risk. Well, we're excited today to be here with Phil Plourd, Phil's got two other members of your team that have joined us. Phil: Yes. So we have on the line today Tiffany LaMendola, who's the Vice President of our risk management practice and she is based in the Modesto, California area. And also Katie Burgess, who is one of our Risk Management Leads. And the two of them have spent a lot of time over the past year working on the DRP insurance program. So been out in the field, working with dairy farmers and getting them enrolled and getting them going in the program. T3: So what I thought today would be a great topic to discuss with Phil in town was the dairy revenue protection program, which is a great program that's been set up for dairy farmers, but a program also that I have to admit I don't know a lot about. Ted: And I have to concede, I don't know anything about it either. T3: So I thought we'd go ahead and have Tiffany, and Katie, and Phil, kind of give us their view of what the program is all about, how it works. And Dad, you and I can just ask questions, and it's gonna be an educational experience for us as well as for the farmers that listen. Ted: It can't help but be educational for me. T3: Phil, Katie, Tiffany, what is it? Tiffany: It's a relatively new program for dairy producers to manage milk price risk. It was first rolled out in October of 2018. There was a slight delay while the government was shut down. And so it really is quite new. So don't feel bad if you don't know much about it. We're finding actually a lot of producers are still learning about it themselves. At its simplest terms, it is the ability to buy a milk price floor at subsidized levels, it's very customizable by... So, you know, obviously different producers in different regions have different milk price risk, you know, based on how their milk prices are determined. And this allows a producer to go in and sort of do their best to mimic how their milk is determined with some combination of Class III and Class IV. And look out into the future and set milk price floors kind of based on where the markets are at, at a quarter-by-quarter. And really kind of dial in as close as we can to, again, how their milk price is determined. It is offered through the Risk Management Agency of USDA as a crop insurance program. So you do have to buy essentially the program through a crop insurance agent, so producers kind of across the U.S. will be working with crop insurance agents to access this program. Ted: So where are these agents located, in the local extension service? Tiffany: They're kind of all over. So we have agents on our team. You know, we'd like to think we have the dairy expertise piece of it that's been quite important. So when we first got involved, we found a lot of crop insurance agents are, you know, tremendous at what they do, have long histories in insuring row crops and so forth, but maybe not as much dairy expertise. As you know, our markets are unique and so we got involved, we talked to a lot of dairy producers and can really help them kind of o... It's less than a year and a half old, but the USDA's new Dairy Revenue Protection program has already led farmers across the U.S. to hedge an estimated 12% of the national milk supply. Blimling and Associates' Phil Plourd, 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