The Milk Check https://www.jacoby.com Experienced dairy traders discuss current market trends that affect payments to dairy farmers. Fri, 20 Nov 2020 21:24:56 +0000 en-US hourly 1 https://wordpress.org/?v=5.3.6 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 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.

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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’ 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, you know, why did it take so long, for example, for a big cheese plant to be built in Michigan? I mean, Michigan had that problem of having an extreme amount of surplus milk, more milk than there was dairy plant capacity in the state, you know, for a good five years before an agreement was finally made to build a cheese plant in Michigan.

Furthermore, Michigan is closer to the population centers on the East Coast than where most cheese plants are in Wisconsin or, you know, Texas, New Mexico or Idaho or California. So why did it take so long, you know, to get that plant built? It would seem it would be a no-brainer. The irony is it was because it was going to be so expensive to build a cheese plant relative to the price that they could get for the cheese within the context of the Class III formula that it was very hard to find, you know, the investment capital to build the plant. And it took a long time for the price to come down to a point and for there to be cooperatives to agree to be part of it at a low enough price point to justify building that plant.

So, there’s a balance there. And I can see how many dairy farmers get extremely frustrated because they feel that other people are profiting from their hard work. But you’re not going to be able to get that competition for your milk if there isn’t an opportunity for those who are buying your milk to profit, too. And the federal order system has become something that’s actually squeezing both sides and nobody is winning from it at the moment.

Ted: Well, we don’t know—and Michigan is an excellent example—but we don’t know what the deal is on milk supply in Michigan. Probably we don’t even want to know. But…

T3: You’re talking about what that price was for that plant.

Ted: What the price of the plant was and what the deal was for the milk going into it. Obviously, the deal for the milk going into it guaranteed the company that built the plant the margin that they required to give them a return on investment. And the dairymen will benefit from that because it will increase competition for the milk. The blend price in the area will be more tilted towards Class III instead of Class IV. Class III is normally higher. The problem that you have is that a lot of dairymen, not all of them today, but a good portion of the dairymen don’t really understand the classified pricing and what they see are these negative numbers on their checks.

Well, where do those come from? One of the provisions in the Federal Order, and we’ve had this discussion before, is that Class I plants who basically are responsible for qualifying the milk under the regulatory system are required to pay what’s called the minimum price under the Order. In addition to that, they define these classes, Class III, Class IV, Class II, by formula. These formula include, are described as make allowances, which, to me, is silly. Basically there is no such thing as a make allowance. The manufacturing costs for a guy producing Swiss and a guy producing cheddar are two remarkably different things that even between two different cheddar plants, they’re much different.

The cost of production for dairymen in Michigan as opposed to Texas is very much different. So, the idea that you have these minimum prices and these defined make allowances and so on confuses everybody, I believe. Even to the point of customers who are buying the cheese and milk and cottage cheese and whips and dips and toppings, what do they know about how in the hell those prices are constructed? And the fact that you have the minimum price under the order for Class I means basically an actual practice that the rest of the industry bears the burden of balancing and Class I doesn’t.

So, to me, this is an issue that interferes with trade and it interferes with the realities of the give and take of the marketplace. Yes, the classified pricing does mean that a fellow who produces cheese has got a price that he can hedge and look at. And he can negotiate either plus or minus for his milk supply. And a plant that produces butter and powder can do the same, either plus or minus, but for the last four or five years, it’s been minus. And the reason is, is because the make allowances are going down. They’re basically squeezed. The hauling costs have gone up. The operating costs have gone up. And regardless of whether you have manufacturing facilities or not, those costs are higher, even just for running an office, it’s higher.

So those make allowances add a lot of confusion to the whole thing. And it would be better if the make allowances were much, much higher so that you had free exchange between handlers as to what they’re willing to pay for the milk. When you have minimum price provisions under the Order, it means that co-ops who are exempt from that under the Capper-Volstead Act aren’t required to pay those minimum prices where proprietaries who are not exempt are required. And if you look at the recent phenomena in the industry with regard to Class I plants, the consortium of plants that went out of business and were absorbed into Dean Foods and Borden’s, they all went bankrupt.

And now all those are in the hands of the co-op. Not only one co-op but others, good co-ops, bad co-ops, but regardless, that’s reduced competition for the milk. The make allowances will not provide for any margin for any outside entity to get into the bottling and to the industry. So the result is going to be less competition between the handlers and less competition for the milk at the farm level.

T3: It sounds like you’re actually advocating for a higher make allowance, which on the surface, you know, if I’m, you know, a dairy farmer, my initial reaction is going to be, “What do you mean a higher make allowance? A higher make allowance would make my milk price lower. It would give more money to the manufacturer and less money to me as a dairy farmer.” Why are you saying that that’s not the way it would play out?

Ted: The make allowance is an artificial number. It’s determined by…

T3: But it’s part of the formula that creates a milk price for the dairy farmer.

Ted: Didn’t use to be. It used to be that it was a statistical service that determined what dairymen were being paid for manufacturing milk. It used to be called the MW. They called it the MW up until…what? God knows. I don’t remember. Maybe until the ’90s.

T3: Late ’90s.

Ted: Yeah. And by that time, rightfully so, the milk basically was all converted to grade A. We still have a little bit of B milk out there but it would be very inaccurate to use that as the basis for pricing today. So what they did is they came up with formulas and make allowances that determined the class price. And the higher the make allowance, the more transportation allowance you have between plants. Just taking numbers out of the air and use them only as an example. If you have a plant located in Michigan and that plant can pay whatever, $2 over for milk and the make allowance is $3, well, then he could afford to pay his farmers maybe $2 over the Class III price. That’s what we used to do, basically, years ago when it was MW-based.

Alternatively, if a plant in Wisconsin who makes a specialty cheese, if they want to pay $4 over for milk, they could reach over for Michigan and take a $2 haul and then pay the dairyman a couple of bucks over FOB of the farm. So the higher the make allowance, the more hauling you can pay and the farther out that you could reach to compete for the milk supply. And that’s what’s disappeared. When you squeeze the make allowance down to a number as low as you can get away with, you lock the dairymen into their local markets.

They haven’t got the ability or the options to reach out and pursue markets that are a little bit distance away. There are other cheese plants in Michigan, for example, that someone located in the Thumb could access if you had higher make allowances as opposed to what you have right now. So, those make allowances are artificial numbers and the more you squeeze them under a situation which has a minimum price under the order provisions, the more you drive the milk into the arms of the local market. And the local market is usually the local cooperative. Not always, but it usually is. And that doesn’t mean that the local cooperative is bad. That’s what the rules are. But you’ve eliminated the competition for the milk from the proprietary and investment-oriented entities coming into the marketplace with new ideas and new provisions that would increase competition at the farm level. I don’t know whether I’ve made my point very well, but…

T3: I think it’s going to be difficult for people to understand your point. And one of the reasons is, is because you keep calling the make allowance an artificial number, which is going to really come across confusing to the audience. Because, you know, in the formula, it’s not an artificial number. It’s a very specific number that’s taken from a survey that, you know, tends to happen every ten years or so. I think that’s gonna create more confusion than it’s going to be helpful.

Ted: No. I agree, it’s going to be confusing but it should be. The make allowance is an artificial number. It’s artificially contrived by a formula to squeeze the milk into the most local market. That’s what it’s artificial about. You don’t really need a make allowance as such. What you need is competition to go out and get your milk supply.

T3: And that I agree with, and I would even take it a step further. You know, while I don’t think I would call the make allowance an artificial number, what I would say is this. It is a very misunderstood number in a couple of different ways. And to me, the biggest way it’s misunderstood is when people make the argument that the make allowance takes the risk out of being a cheesemaker and locks in a profit for the cheese manufacturer. The reality is this, if you want to take the make allowance and double it, well, the shallow thinking way of looking at that would mean, “Oh, my God, you’ve just given all the money to the cheese plants. They’re all going to be so much more profitable now.” Well, that may be true for a year or two.

Ted: Not even true at all. What it would mean is that if a dairyman who’s getting paid, an example, $1 under, now, all of a sudden he’s going to get paid $1 over but the bottom line on his check isn’t going to change. The dollar number on the dairyman’s check has nothing to do with the make allowance. It has to do with what he’s going to get paid. It sounds a little strange. It’s true.

T3: Well, and I follow what you’re saying and I would describe it this way. If you take a make allowance, let’s say you’re going to use round numbers here but the make allowance, let’s say, is 20 cents a pound of cheese and you double it to 40 cents. Well, what would happen is the Class III price may drop from $14 a hundredweight to $12 a hundredweight. But the overage that the dairy farmer would get would have gone from $1 under to $1 over because the reality is market forces are still working. It’s just the way that they’re working through the system is a little bit different.

And so, the dairy farmer, if he was getting paid $1 under $14, he’d get $13. Well, $1 over $12 is still $13. He’d still get $13 a hundredweight, but the numbers would just move around a little bit in terms of the overages. You and I are basically arguing, you know, the same thing that the make allowances…

Ted: That’s right, we are.

T3: …don’t really matter. Even though everybody wants to say they matter, they don’t because there are still more market forces in play but the local dairy plant is going to pay what they need to pay to fill up their plant.

Ted: Let me tell you why it matters. It matters not to the cooperative what the make allowance is. He can pay whatever he wants. Under the regulatory system, the proprietary handler cannot. The proprietary handler is required to qualify the milk, which obligates him to pay the minimum price under the order. That’s the difference. So the dairyman has to make choices. Does he want to sell to the local who happens to be a cooperative, or does he want to reach out to a proprietary which might be located another 100 miles down the road who would pay him a higher price?

That’s the difference and that’s the argument that I’m trying to make is that we have eliminated competition for the milk by using minimum price under the Order provisions and make allowances and formula. And we’ve channeled all the milk into the cooperatives and we put the proprietaries out of business. They don’t compete for the milk the way they used to compete for it under the so-called Minnesota-Wisconsin series-based Orders. So that’s a big difference when you don’t have that competition out there. And it makes a difference as far as what the dairyman’s options are for selling his milk.

T3: At its core, the best way that you’re going to be able to increase competition for a local dairy farmer’s milk is to have an increase in plant capacity in that area because that means there’s, the local proprietary plants or co-op manufacturing plants, there’s more milk that they’re going to need to buy. And so they’re going to need to compete more aggressively for the local milk supply. So, what changes do you think we can make to the Federal Order that would increase the propensity for investors to build new dairy plants in various regions throughout the country and therefore increase the competition for the milk? Is the Federal Order system what’s keeping them from building more plants?

Ted: As it’s structured now, yes. Why do you think the plant in Michigan doesn’t have their own milk supply? Instead, they went out and they contracted with the cooperative side of the industry for their milk supply. There’s nothing wrong with that necessarily. The cooperatives are good cooperatives and the handler himself is a good cooperative or a good company, good corporation, but you haven’t got competition for the milk under that scenario. Basically you have cooperatives who purportedly are collective bargaining to get a price for the milk but what the hell kind of collective bargaining is that if you don’t have any other options?

You had to go low enough to convince the handler to come up and build this plant. And you had to guarantee him a return on his investment. Yeah, that’s fine. And that’s the way it should work. But by the same token, how does that benefit translate back to the dairyman? That’s the point I’m trying to make. If the handler came in and said, “Look, I could build my own milk supply and I can go buy milk directly from the dairyman,” well, now all of a sudden you’ve got the dairyman being able to sell the plant directly or the dairyman could go directly to the co-op, who may be able to negotiate and have a better situation, better hauling, and so on to get into the plant. You’ve got a much more competitive situation at the farm level under that kind of a scenario.

T3: In other words, your argument is that would add more buyers into the mix at the farm level. I mean, you could say that the plant in Michigan is going to help the dairy farmer because it’s going to swallow up a whole bunch of milk, which means there’s less milk now in the area to go around to all the remaining plants. And that may be helpful but there are no more or fewer buyers. It’s still the same people calling on the dairyman asking to be the ones who buy their milk on a daily basis.

Ted: Exactly. So you haven’t introduced any new markets for the milk. You’re still going through the same cooperatives you went through before. You have increased the utilization from Class IV to Class III, and that’s certainly something. You’re not hauling 100 loads of milk a day out of Michigan anymore. That certainly is going to be very helpful. So, I’m not trying to paint a scenario where this is a bad situation, it’s going to be an improvement over what we had before. But by the same token, it demonstrates, in my mind at least, the weakness of the overall marketing system that we have right now. And it goes back farther back than just the regulatory system, it has to do with the Capper-Volstead Act and the fact that co-ops basically have become exempt from some of the risks of the marketplace.

We have to put this thing back where we have an equal footing, where proprietary and investors who come in and make investments in manufacturing facilities and buy directly from dairy farmers have risks that are reduced from where they are right now. And that involves, as we’ve discussed here for the last half hour, that involves weakening the minimum price provisions under the order and the make allowances so that farmers can reach out further as to where they market their milk. Right now, a dairyman up in Cass City or in The Thumb couldn’t very well market his milk down in Benton Harbor or vice versa. And if you had a make allowance, which was much bigger in that particular federal order, at least he would be able to consider those options when it comes time to determine where he wants to go with it.

I don’t pretend to know that I have an exact idea of what the solution is but what we have right now are people like Farm Bureau and people like the major cooperatives in the country trying to get together and determine how to solve this problem that we have at the marketing level. Well, good luck with that because basically the structure that they’re involved in is part of the problem. And I think that’s been clearly demonstrated in the talks that have failed here over the last couple years. They haven’t got anywhere because they haven’t really acknowledged that structurally we have reached a point where we’ve limited new money and new people and new ideas and innovation to come into the industry. We’ve made it much more difficult.

T3: It sounds like what you’re saying is that a lot of the best answers are very counter-intuitive. When you first say them, it sounds like they would have the exact opposite effect of the effect that they would ultimately have. You know, by increasing the make allowance, the initial reaction would be, “What a horrible idea, all that does is make the Class III price lower.” But it actually has a different effect when you really take economic forces into account in terms of how everybody would ultimately react to that. The same probably goes true for depooling and understanding, you know, how that money plays through the system. Because initially, depooling lowers the blend price in a region.

And that would seem like a bad thing for the dairy farmer but it’s not like that money disappears. That money, the handlers and the cooperatives who depooled still actually collect that money. And so they’re able to use that money to pay the dairy farmers more. There’s a lot of those kind of counterintuitive things that the federal order system tends to cause.

Ted: Yeah, you’re right. And the emails that we’ve got, as we’ve discussed, you know, demonstrate a paranoia that somebody is stealing the money and that there’s some mysterious force out there that’s winding up with his pockets getting lined. You know, my answer to that is, is that where we are right now, 50% of the value of the price on the retail shelf is on the marketing end. And only around maybe 20% to 25% is at the farmer’s end. So, whatever it is, it ain’t working. I do think that the dairyman should be able to participate at a higher level into the price on the grocery store shelf. I don’t think there’s any question of that, but I also don’t think that there’s anyone running off and pocketing all this cash. I think it has more to do with the mechanics of the marketing environment that we’re in today.

Anna: One of the things that strikes me a lot in the conversations that I have with people, when we talk about, you know, you have a new plant come in and increases competition, it’s sucking up this amount of milk and it should make things better in that area. The one thing that I kept thinking in my head when you were talking about that is that that is very, very temporary. To me, it seems like now, the way we work. Even if we have fewer farms, you know, if we get a cue, if any producers get a cue that the price is low, they up their production to make sure they’re getting as much of it as they can. If the price is higher and they get that signal that the market needs more, they’re just going to grow.

So, no matter what, producers now get the signal that they should grow no matter what the market conditions are. And I feel like that, you know, you’ve taken a bunch of milk out of the area, which should be an improvement but I don’t know how lasting it can be anymore. I don’t think we react in a way that’s slow. I think we very quickly just make more milk.

Ted: I think you’ve identified one of the major problems and that cash flow issue for a dairyman is everything, he can’t just turn the cows on and off. Although it’s interesting to note the phenomenon here. This spring when we had our supply chain disruption, Texas and New Mexico basically put a 90% rule in and got away with it. I think even some remnants of it are still there. And that was very successful in reducing production. Where the larger dairymen and, of course, all the dairymen in that part of the country are large, all truckload shippers, basically. They can change their rations rather quickly to draw down production. They may not make a 10% change just like that but they can do it pretty fast and that enables them to make some bigger changes.

And, of course, they can also do the reverse. When all of a sudden the price, like it is right now, looks like it’s going to take off and be a big number for what? October? Now, all of a sudden they can turn on the burners and add or put a few cows down at the end of the barn, and make the rich a lot richer and the milk supply suddenly increases. So how do we deal with that? Okay? Well, I’m not sure it’s our job to deal with it. And supply management programs have been tried and tested and failed over the last 50, 80 years ever since Federal Orders came in. So, the dairyman does have to accept that risk. And the ability to be more economical and be more efficient at the farm level is something that you can’t really stand in the way of. You can’t do that. You got to realize that the efficiencies are there just like in a cheddar cheese plant that’s running 10 million pounds of milk a day. So, it is a conundrum.

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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. 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 got a lot of international sales, a lot of export sales took place and were confirmed right around that first or second week in April.

Ted: And those were based on the futures price for the next three or four months.

T3: Exactly, which was, at the time, pricing cheese at $1.30 to $1.40. It still seemed really high compared to the $1.10 that the market itself was sitting at, but it was well below the international market and certainly, an opportunity for those cheese companies that did a lot of exporting to take advantage of that and those international buyers to take advantage of that and get some good pricing. A lot of cheese sales got done internationally while our prices were really low. As we got into the latter part of April and into May, the restaurant industry started figuring it out. Now, even today, they’re obviously not back to where they were before this all started. But the sales at the restaurant level have come back. Most of it is curbside pizza delivery, other kind of delivery, eating outside but not inside. I mean, we’ve all experienced what’s going on at the restaurant level. And their sales are not all the way back to where they were pre-COVID, but they’ve still come substantially back.

Meanwhile, the supermarket sales still are running well above last year, year over year, for obvious reasons. Net-net you ended up with a situation where you had severe drops in the cheese price and then severe increases in the cheese price as the combination of government programs like the Food Box Program, increases in exports, increases in retail sales, and better than expected foodservice sales, as you were getting into May, caused the price to start to go up and then keep going up as all these pipelines, especially the food service pipeline had to be refilled, the panic of not being able to get the cheese at the expected price for the Food Box Program, and the continued strong sales through the retail channels in addition to exports. You basically had everybody trying to go through the same door at once.

But at that point, many of the buyers of cheese in all the different levels, retail, food service, industrial started changing the way they were ordering in this way. This pandemic has pretty much caused everybody to take their original sales plans and forecasts and throw them out the window. Well, the way things work in a normal year is you have your sales forecast, therefore, you have your purchasing forecast. And as you go along week to week, you’re tweaking it a little bit here and tweaking it a little bit there and you’re managing your working inventory. But the best way to describe how that has changed in this COVID environment is a conversation that I had with the dairy case manager at my local supermarket a few weeks ago.

I went up to him and I asked him how much cheese he had in inventory in the back. And he said, “We usually keep about eight cases of shredded cheddar in the back and we get our truck about two days a week.” He goes, “But back when this whole thing started,” he goes, “They were telling me they had 3,000 cases at the distribution center, but they had none to give me. So I decided to start keeping 15 cases every time I reordered in the back so that I had the extra cheese. Because sales are so good, I wanna make sure we don’t run out of cheese.” He goes, “But the funny thing is just the other day, a whole pallet, 80 cases of shredded cheddar showed up in my warehouse at my supermarket.” He goes, “Now, the purchasing manager has the ability to do that and I don’t know why he did it. But for some reason, he felt I needed a whole case of shredded cheddar, and it’ll take me forever to get through that.”

But the moral of the story was this, everybody had gotten so discombobulated by these wild swings in prices that they had decided to keep larger inventory levels at all the different levels, whether it’s the retail distributor, whether it’s the supermarket themselves, the different supermarket chains, even at the food distribution centers for restaurants, the wild swings in price and the wild swings in volume and the very volatile order patterns, the way everybody started reacting to all of that was, “I need to manage a larger inventory of cheese to make sure I have cheese for my customers.”

And so the retail pipeline, distribution pipeline really, really became swollen with extra cheese. And the foodservice pipeline probably was swollen too, because everybody was kind of expecting restaurants to go back to normal. Well, they came back a lot, but they didn’t go all the way back to normal. So on a relative basis, there was probably too much cheese at the restaurant and foodservice distribution level as well. And then you still have the Food Box program and then you still have exports. Well, that all led to the cheese price going all the way to three bucks by the middle of July.

But what happened then? Well, just as everything tried to go through the door at the same time, everybody tried to exit at the same time, too. The export orders that were booked in April and were eating up manufacturing capacity in May and in June and into the beginning of July, they finally started getting all of those orders filled, and now they had open capacity to focus back on domestic. And at $3 a pound, there was nobody ordering internationally. The second thing is the Food Box program, you’d kind of hit a window between the first and second bids and then the third group of bids, which is coming in about a month, and so there’s a window there. And then as we just talked about, at the restaurant level…excuse me, at the supermarket level, all of the supermarkets had more than enough inventory, and so the price started weakening and the price started falling.

Well, what is the natural inclination of anybody who’s carrying more inventory than usual when they start to see the price fall? “Hey, I’ve got enough inventory right now. I’m just gonna sit on my hands. I’m not gonna order this week because I have the ability to wait because I have extra inventory. Well, they had so much extra inventory, they were able to wait two weeks, and then three weeks, and the price just kept falling. And from a price of $3 on, I believe it was around July 20, we finally bottomed out a few days ago at $1.58, $1.50 a pound drop in the price of cheese, basically cutting the wholesale price of cheese in half between the peak in the middle of July and what I think is probably the bottom here in August.

And just in the last few days, we’ve had discussions with export customers who say, “Oh, I’ll buy cheese here.” So now the export orders are starting to pick up again. We have supermarkets saying, “Oh, I like this price. I’ll start buying cheese here.” We have people who need to store parmesan and hard Italian, which is a cheese that needs to be aged for eight to nine months, and this can actually be made with the same equipment that makes cheddar decide, “I wasn’t buying anything at $3 a pound, but I’ll have my manufacturer make hard Italian for me at $1.58.” Everybody who wasn’t buying at $3 a pound and then wasn’t buying as the price was falling, just in the last few days, they’ve started showing up again.

And so now everybody ran out of the room. And now what are we getting? Well, we’ve hit the bottom and my belief is that we’re gonna start running up again, hopefully not all the way back to $3. I don’t think that’ll happen. I wouldn’t be surprised if we get over $2. Everybody is trying to run back through the door again. And it’s become…the volatility, kind of, becomes a self-fulfilling prophecy. The larger the swings in the price, the more people hold back orders and then jump into the market and then jump out of the market, which just exacerbates the volatility even more. It’s become a problem not only in the way we are pricing our milk. It’s become a problem in our ability to, for example, stay in the export market on a 12 months a year, 52 weeks a year regular basis. It’s become a problem for the cheese manufacturers trying to figure out what they should make and when they should make it so that they can give all of their customers a consistent cheese and they can be running their plants consistently. It’s become a real mess.

Part of the problem, quite frankly, not the whole problem, but one element of the problem is the way the Federal Order system is set up and the way that the futures markets are set up. One of the places it is very difficult to do is be a consistent exporter 12 months a year because of the way that we price milk, and therefore, we price cheese relative to the way that our competitors do. And you’re starting to see how everything’s getting frayed because of the volatility. And I think everybody in the industry, from the dairy farmer to the cheese manufacturer to the restaurant owner to the supermarket owner, would all agree that if we could figure out a way to minimize the volatility so we can be a consistent supplier to whatever market we wanna sell to, it’s gonna make our lives a lot easier.

Ted: So you got any good ideas?

T3: Well, I think the start is to have enough people in the industry willing to have some honest and serious discussions about how we can take a look at the Federal Order system in how we price cheese and figure out if there’s a way to add stability to the marketplace. We’ve become a global player in the dairy industry, and the Federal Order system works against us as a global player. And if we can figure out ways to create more stable pricing, that would be a big help to the industry as a whole.

Ted: I agree with that and I agree that the Federal Order in this kind of volatility is a liability. What everybody has running through the back of their mind is production controls. Now, during this fiasco over the last four months, we had some of the larger organizations and cooperatives putting in programs. And the best one, for example, is like, “Oh, we’re only gonna pay for 90% of your milk during the base period.” And the base grade was probably, I think, January or February or something like that. And that did make a big difference down in Texas and New Mexico and in certain areas. But you can’t do that in a market which is divided up into a multitude of different factors. Some are gonna participate and others won’t if it’s on a voluntary basis.

We’ve had production controls in the forms of base excess programs in the Federal Order system before ostensibly to address the same problem you’ve just described. And those fell into disfavor and were discontinued over the years. And one of the reasons is, is that producers wanna be more efficient and efficiencies come with growth and economies of scale. And when producer A wants to add another free stall, or a few beds at the back of the one he’s got now, he’s not going to want somebody telling him no, he can’t do it. And, of course, probably the same line of thought, the cost of production has actually gone down if you look at it in terms of real dollars over the last 50 years. So production controls built into the Federal Order system have been tried and failed.

Now, I’ve been thinking about this too as to how we might come up with something that works. I haven’t come up with anything at this point that guarantees the dairyman an income and minimizes the volatility at the same time. It really is a knotty problem. And I think the industry needs to sit down together and try to work it out. One of the things that’s a problem with the Federal Orders right now is you have the negative PPDs, which the dairyman don’t understand. But what’s worse is they’re affecting our bottled milk end of the industry, which have no ability to de-pool milk. You know the rest of the industry, if they de-pool milk and the dairyman doesn’t get the money on June, he’ll get the money in August or September. For the bottling plant which has his own producer, he’s stuck. There’s a lot of room for revision within the Federal Order system. Maybe a consortium of some of the better minds on how this thing work is in order.

T3: If we can figure out a way to do a better job of forward-pricing milk and dairy products, to me that would be the key, ironically, to take the volatility out of the market. And the reason I say that is because at the international level, what’s happening is our competitors in Europe are able to say, “Okay, I will price you cheese delivered over the next three months at this price.” And then once they commit to that price, that price will feed back into what the farmer gets paid. And they don’t have as good a futures market as we do, but they have a better ability to forward-price and more less-volatility price product as they’re selling into various different markets. And so the volatility happens on the edges rather than the whole market. And that’s part of, I think, the issue that we have is when our market gets out of sync, the whole market shifts rather than just parts of the market. I don’t have a specific, well-detailed answer. But to me, the answer would lie within figuring out how to address that issue.

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Ted: One thread to pull in this knotty problem might be the fact that our pricing right now is on a monthly basis. You know, noodling on this thing, if we had some sort of a basis for rolling prices over a longer period of time instead of monthly, maybe quarterly or a rolling quarterly or something like that, so that we could react to price stimuli that maybe not…we might give up being able to react as quickly, but you could keep the futures market in there. Now, who’s gonna bankroll that kind of a system? I have no idea who could do that. Maybe the Federal Order might be in a position to bankroll it. In the longer run, it would be revenue-neutral. In the shorter run, it would provide for less volatility if the prices were averaged over, say, a three-month period. It certainly would have made a lot less volatility in the system that we have that we’ve just been through.

T3: That’s an interesting way to look at it. I’ve never thought of it that way. So in other words, let’s say we had a monthly price for cheese for the month of August, but then that price of cheese would be applied one-third to August, one-third to September, one-third to October. And then in September, it would be applied one-third forward so that on the milk price level, there’s a smoothing effect. Even though on the cheese level, maybe there’s not. And one of the reasons I kind of like that disconnect is it will make things a lot easier for the dairy farmer on a month-to-month basis. It’ll have a smoothing effect.

And I can actually even imagine how some domestic cheese customers could back into the same type of system. Let’s say you’ve got a big pizzeria delivery company, one of the big ones, who wanna see much more stable pricing as well could take advantage of the same thing. But then you’d still have a market that would move for those who are buying week to week, or in an inconsistent basis, even in an export basis. That’s not a bad idea.

Ted: Well, it would take a lot more thought than just this phone call. But I think there’s some meat there to get our teeth into. We need to eliminate the volatility and perhaps most of all at the farm level. The reality is today, the dairy farmers don’t trust it. They don’t know where the hell all the money is going. And I don’t blame them for not understanding. It takes a trio of guys who have been in the Federal Order system their whole lives to figure out what’s going on in the kind of circumstances that we’re going through. So something that smooths it out without sacrificing the risk management opportunities that we need. People need those risk management facilities.

And, actually, as you say, they’re better here than anywhere else in the world right now. But when it comes time to pay dairy farmers, we don’t have a way to really smooth it out over a period of time so that he knows what’s coming and he gets a little bit better idea what his milk check’s gonna be. I think there might be a way to do that, but it’s gonna take some pockets, some deep pockets to do it. And that, I think, is where the Federal Order system might be able to come in.

And I don’t think it would really take government action. It would probably take…if somebody would come up with a viable methodology, it would probably take a hearing to adopt some sort of a program like that where there might be assessment on the frontend at the appropriate time out of a particularly high-price PPD or high-price level and where money is put aside and accumulated for smoothing purposes. I can see a lot of discussion about that where people right now have their tongue hanging out and then somebody wants to take money and put it in the bank to hold it for the next time the roof comes down. So it would be a big problem that needs to be solved, but there may be some way to do it if you get the right people at the table.

T3: I agree. Another thing that I think ultimately could be helpful is one of the things that happens when you have a huge disparity between Class III and Class IV prices, outside of a negative PPD or excessive positive PPD, if you will, is that you get milk not moving to the best value to the farmer. And what I mean by that is if you’re pricing Class III milk at $24 a hundredweight, which July was up there higher, and Class IV was at $14 a hundredweight, but the cheese price was weakening or at least you did not know where you were gonna able to sell cheese. Because of everything nets back to a blend price, I think we’re actually gonna be able to get a better value relative to the blend price going into a Class IV plant than a Class III plant.

But the reality is you still would have achieved better value for the milk if you actually went into a Class III price at a lower value than, let’s say, the $24 for Class III milk. And that was causing milk to move away from a cheese plant into a Class IV plant when cheese was priced high and very tight and actually exacerbated the problem. It’s one of the inefficiencies of the Federal Order system. And I’m not 100% sure how you solve that problem, but there has to be a way to always encourage milk to go to its highest value and the blend price can work against you. It does do a good job of making sure we properly allocate capacity investment so that we don’t over invest in one or the other, but it doesn’t necessarily do a good job of allocating the milk properly when markets are stressed.

Ted: No question about it. That’s been a problem forever. But on the other hand, the government signs contracts, most of them on an annual basis. They sign it with someone who is producing a certain product, who probably is gonna qualify the milk that’s used to produce that product. If he had to put in a dryer and if he’s making cheese to protect himself against a change in market conditions, it certainly changes the whole dynamics of the dairy industry. The financing to put in facilities like that would put him out of business.

So that also is a problem on how you do it. You direct milk to the highest return, yeah, that’s what you wanna do. And the Federal Order system doesn’t necessarily do that, but it does…when cheese is strong, generally the cheesemakers are paying a premium against future sales to make sure they’ve got enough to cover their needs. So to that extent, milk is directed towards the higher return. And there have been times, not as frequent perhaps, but times when butter and powder were Class II products were premium products that paid premium prices, also. They, too, pay premiums to do it. So the current system doesn’t necessarily not direct. It just doesn’t direct it as much as we would like to see.

I guess, we have to be careful if we get into some of these creative ideas that we don’t wind up throwing out the baby with the bathwater. A lot of people who don’t really see the dynamics of this whole thing, they wanna throw the whole system out. Well, 50 years ago or 30 years ago, I used to sort of feel the same way, but I don’t today. I see that it would be chaotic to do that. And a much better solution would be to have the right people at the table to figure out how to have what we’ve got put back on the rails, and this is a good time to do it.

T3: Anna, I’m gonna ask you a question. Now that the cheese price has dropped down into the cellar, what happens to the PPD? How are things gonna play out for the dairy farmer in the next couple of months?

Anna: I think that’s a really hard question to answer right now, at least for me, because there’s more than just the change in prices to take into consideration. It isn’t just what the Class III price does, what butter does. It’s also what everyone did in terms of de-pooling and how they bring it back and the impact that that has. I still don’t think we’re looking at good PPDs for any amount of time here really. We’re looking at, minimum, three to six months of still probably negative. Well, will they be what they were this month, $8.69, $8.02, $4.86? I mean, those were huge negatives. I don’t think they’ll be that bad. But then also, I mean, without knowing what the prices are actually gonna do, where it’s gonna settle, I don’t know. I mean, it’s not a good answer.

Ted: I was gonna chastise you, Anna, but unfortunately, I do understand the problem, part of it. Well, maybe I understand the problem, but it’s gonna be pretty hard for the dairymen to understand it. You know, how could things get so catawampus and where does the money go?

Anna: I think one of the things that is the hardest is that when that PPD is negative and it gets pulled off of your check, you feel like that is your money that is going to somewhere and it has to end up somewhere. The reality is that that number is just a plus or minus to get back to the blended price, and that is just the value of everything in that pool. There are some orders that just do…they do a blend price. Like order five gives you a blend price and that’s what the producers get paid on. To me, that is a lot less confusing from a producer’s perspective. This is the value of the butterfat at the blended price. This is the value of the skim at the blended price. That makes a lot of sense. It’s a lot less confusing than, “This is the amount we had to add or take off to get you to the average.” I kind of wish they all did that. I never used to feel that way. But especially over the last few months, I feel like that would make a lot of things clearer for a couple of people.

Ted: Yeah, it’s true. And I think we’ve probably addressed the problem of the outhouse to the penthouse to the outhouse again, so we’ll just have to see where it’s gonna from here. I think Teddy is probably right. We’re probably headed back to maybe not the penthouse, but somewhere around the 15th floor.

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

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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 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., that those restaurants are running probably at levels similar to where they did it this time last year, at pre-pandemic levels, let’s say. Meanwhile, the data we’re seeing out of the retail side of the business is that while we are still running ahead of last year on a week-to-week basis in terms of demand, that number is dropping. What was 20% a month, a month and a half ago, dropped to 10% and is now dropping to about 5%. So you’re seeing let’s call it a normalization of the curve in terms of demand and pull through sales at the supermarket level.

Ted: Let me interrupt a minute. We’ve talked about the demand side of the ledger, which is not something we normally talk about too much. But isn’t the key to the situation, the other side this time? I mean, what is milk production doing? I mean, the bottom fell out of it in, was it April and May? It was down big numbers. If milk comes back, where’s it gonna go? It looks to me like if milk comes back, given the current market situation, the milk is gonna go into cheese. Regardless of whether or not you pool or what the margins are, and so on cheeses where it is. So pooling is irrelevant as far as your option of which direction you’re gonna go. You’re gonna head towards cheese with whatever additional milk comes to the table.

T3: I’m gonna completely disagree with you and here’s why. This is what we are hearing right now, this week, the week right after the Fourth of July. The cheese plants, especially the big cheese plants do not want the milk. They do not want the milk for three reasons. First, Class III milk is gonna price itself in July at almost $25 a hundredweight, close to all-time highs. Two, unless they have a guaranteed sale for that cheese, they are not interested in paying that much for milk in speculating that the price is gonna stay up here. The third and I think probably the most important component of all of this is that whey protein sales, whey protein prices, whey protein demand right now, is not very good. And keep in mind, somewhere between 65% and 75% to 80% of all profits for most cheese plants, comes from their whey plant, comes specifically from producing various kinds of whey proteins. That is the market that’s driving profits in cheese making right now. So if your whey protein market is not very good, and nobody feels like they’re making money with whey, combining that with close to all-time high prices for cheese, combining that with a, very large uncertainty in demand for that cheese at these price levels, those Class III plants right now are doing the exact opposite of what you would expect a normal economic situation to be. They’re actually pushing that milk away. They don’t want it up here. Unless they have a guaranteed sale for the cheese they don’t want the milk. The milk is going to Class IV. You talk to any Class IV plant in the country right now every single one of them is gonna tell you they’re running full. And they’re not running full because we’ve got too much milk, they’re running full because the cheddar plants don’t want it.

Ted: Well, how are you gonna correct that problem? Who’s sitting on cheese right now that can meet the specs that the market? Is that the only thing holding it up is CME specs?

T3: Well, let’s talk about this. You’re a cheese plant that can produce cheddar that could be sold on the exchange on the CME. But when you’re looking at the profitability of your plant, there’s no guarantee you’re gonna make money on the cheese because you just don’t…because keep in mind they’re usually somewhere between five and 10 days between the day you make the cheese and the day you can sell it on the CME, because it has to age out a little bit, it has to settle down a little bit. The tests have to come back before it can be cleared for a sale. Well, when you’re sitting at 270, there’s this feeling “I’m sitting at the edge of a cliff.” Tomorrow, this cheese market could be $2. A couple of moments ago in this conversation, I was saying demand seems to be pretty good and we’re staying up here. It becomes a question of why though? What we’re sensing out there is there’s just not enough cheese to really push this market down because everybody’s afraid to make the cheese. Unless they know they have the sale, they’re afraid to make the cheese.

And what’s the incentive for the cheese plant right now? They’re not making any money on the whey. A lot of times what happens is they’re making so much money on the whey, that they’ll go ahead and risk losing money on the cheese because they can cover that in the profits of their whey. Well, if they’re not making any money on the whey, if the whey protein market isn’t very good right now, and everything we’re hearing is it’s a difficult market at the moment, there’s no incentive for them to take that risk. So unless they have a contract that they can’t get out of, which is the case in many places, if they can push that milk away, they’re gonna do it. They’re gonna take that risk off the table.

Ted: Let me ask a question. If you sell a load of cheese on the CME today, how long do you have to deliver it?

T3: Let me give you the simplified methodology. The cheese that you sell on the CME has to be between five and 30 days old when you sell it. On day one, you sell the load on the exchange. Within 24 hours, you have to provide the certificate of analysis to the CME who then forwards it to the buyer for that load of cheese. When we are a buyer on the CME, we assume that it’s gonna take us between at least three and more realistically five days before we can pick up that cheese once we’ve bought it. So if we buy it on a Monday, we can probably get it out of there by Thursday or Friday the same week. But more often than not, let’s say we’d be out by it on Wednesday, Thursday, or Friday of a week. It’s gonna be the following week, Monday or Tuesday of the following week before we can move it. Now, you can stretch that out maybe to a week and a half to 10 days, 10 business days, you know, there’s some flexibility in those rules. But usually, the rule of thumb is that cheese is gonna move between five and 10 days after the transaction has taken place on the CME. But that loaded cheese has to be ready, it has to be tested and it has to have testing results pretty much immediately when you sell it because you’re gonna be expected to provide that CMA within 24 hours of when you sold it. Now, if you sell it on a Friday, maybe you’ve got, you know, three days’ worth because you can wait till Monday to provide the CMA. But what we always do because we’re not actually an owner of a cheese plant, we’re a trading company, is we make sure we have a CMA on that load before we sell it so we don’t break the rules. And if you break the rules, the CME does not take kindly to people who try to make a transaction that they’re not fully prepared for and they can come down pretty hard on you.

Ted: In order for the market to go down, you’ve got to have somebody sitting there with cheese with CMAs in hand, and facing the prospect of buying milk down the road. He’s already got July underneath his belt so he’s got to be worried about his August price, right?

T3: I look at it this way. If you’re a cheese manufacturer and you wanna know whether or not you’re gonna buy that extra load of milk, well, if you buy that extra load of milk the question is gonna be “What would I need to pay for that milk in order to make sure that I am profitable on my whey stream, whey protein and lactose, and I’m profitable on my cheese?” Well, the first thing you’re gonna do is yes, the market’s at $2.70 but I’m not going to make the assumption that it’s gonna be at $2.70 in two weeks, because it could easily be at $2.20 in 10 days. Do I think that within the next three weeks this market will move lower? I do because I don’t think we’re sustainable at $2.70. But it’s this weird dichotomy right now where because everybody’s anticipating this market’s gonna drop, everybody’s that can avoid making cheese is doing so, and it’s actually making it a longer period of time until this market actually drops.

Ted: Well, what would probably happen under these circumstances is somebody who is making cheese every day, 24/7 is looking at this and he’s stacking up cheese and he’s looking at a $2.70 price and he’s looking at the Class III where it is, and he’s got the fresh cheese with the CMAs, you know, it’s in his interest for the milk that he’s buying to get the market down to something more reasonable. When that guy comes to the table, the markets gonna drop. And the question is, where is it gonna drop to? And I tend to agree with you, Teddy. I think the place where it’s gonna end up at probably a jaw-dropping level is probably about $1.90 or so, $1.90 to $2. And now all of a sudden everybody will be very happy to buy milk and put it into cheese at that level. And that’ll then sharpen up the butter powder end of the spectrum.

T3: Yeah. If it drops, you’re right. It’s gonna be interesting to see how easily this market gets there, though.

Ted: Yeah, it will be interesting. But the guy who’s sitting there piling up cheese at this Class III price has got a vested interest in changing it. And we’ll see whether or not he comes to the table here in the next week or so. The next week or so is critical because unless they’ve changed the rules, the August pricing starts on the 16th, right?

T3: More or less, yeah. You’ve got this week, you’ve got the remainder of this week and next week, and then you’re essentially pricing August. That’s correct.

Ted: He’s gonna have a vested interest in making sure the market gets to the point where he’s comfortable with taking and making the cheese and so he can move forward with August.

T3: Yes. Now, let me throw another element into this conversation. Have you looked at the weather map lately for the next 10 days in just about any part of our country?

Ted: It’s hot.

T3: This heat is gonna have an effect on milk production, but just when we’re expecting that they’ll probably a shift lower and cheese prices, the lack of milk may shift that. And what could happen usually about this time of year what the heat tends to do is it tends to drive up…it tends to shorten up the butter power market and the cheese plants stay full. But with this situation we have where there’s almost a $10 difference between Class IV and Class III and the protein market being weak, what you may have happen instead is the Class IV plants stay full and the Class III plants are able to take on less milk and they’re gonna be able to resolve their problem that way, and that might actually keep the Class III price up.

Ted: Well, it could. However, you know, let’s consider the differences between plants located in Texas and New Mexico and plants located in Idaho. I mean, these people are dedicated to cheese. They don’t have butter powder options, and the milk’s coming at them. And just because let’s say production gets hit because of the temperature, and it’s, probably it will. But what’s it…what effect is it gonna be? Two percent, 3%, something like that? That’s not gonna solve the dichotomy of the problem we discussed just a second ago. For the fella that’s got this milk coming at him, it’s gonna end up in cheese because it’s got no place else to go.

T3: I don’t know. A 3%, change in milk, you know, that’s the thing about dairy, Dan. It’s a pretty inelastic market. Small changes in production can have big changes in price.

Ted: Well, that’s true, but the change is already there. So I would argue that under that scenario, what would probably happen is that when this price goes down prior to the August price, either early on the August pricing, it would go down less, or maybe step it down less. You know, we’re speculating on this whole scenario, but it is hot. That’s gonna have a big effect on milk production.

T3: Nope, I agree.

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

T3: Let’s talk about the Federal order system. Is the Federal order system doing the dairy industry a service in an environment like this? To me, it almost seems like because of the blend price, you’re actually encouraging milk moving away from where its highest value would be, which is, cheese towards where it’s lower value would be, which is butter and powder. Is that what the Federal order system is designed to do?

Ted: Obviously not, but by the same token I don’t see why the Federal order system has a big impact on the current dichotomy. I mean, the advantages of the pooling means for the cheese manufacturer he doesn’t have to put money into the pool because his Class III price is higher than the blend. It’s not a normal scenario. So he’s gonna do what he’s doing. He’s gonna avoid putting any milk into $2.70 cheese right now. Regardless of what the federal order says, he’s just not gonna do it. Now, I agree that there’s kinks of the Federal order that need to be ironed out, and they’re getting bigger every year, but most of them relate to Class 1 pricing and how that relates to the overall situation with regard to qualification. The current pandemic dichotomy is very unusual, and, of course, greatly exaggerated because of it. But I think when this thing settles down, and let’s just suppose that the cheese market drops to two bucks here next week. Well, guess what? All of a sudden gone and dog it’s just business as usual. And then the question is gonna be how much milk production is gonna be coming at us during the third quarter? So that’s the way I’m looking at it. And I think the Federal order system has plenty of problems, but this situation with the pandemic and so on, isn’t really a problem that needs to be solved.

Anna: I think the biggest issue really is just that you had a lot of producers get very excited about a really high Class III price. And I think a lot of them have been warned, and we’ve been getting questions from everywhere so I think they’re paying enough attention to know. But some people probably will be surprised that how big the negative, the PPD is when it hits their checks. I think that’s gonna be a shock for some and it’s also just a big letdown when you were expecting as $21 milk price and that’s not at all where you’re gonna come out.

Ted: And I agree with you, Anna, and that’s a public relations issue that cooperatives are gonna have to deal with including the ones that we support. And but most of the sophisticated dairymen would have a pretty good idea of how this is gonna work.

T3: So Anna, where do you think the blend price is going to be for June?

Anna: I was really hoping you weren’t gonna ask me that because it really depends on what everyone decides to do. You know, if somebody decided that they were just gonna get off for a month or two and play it safe, that’s a very different number at the end than if everybody decided they didn’t care if they weren’t back for five or six months. The estimates that I had were even if everyone pooled like they did in May, which is unlikely, it would be a minus five, somewhere in that neighborhood. I think it is possible…probable that it will be much worse than that. I’ve seen some people say as low as minus nine and it is possible. I don’t think that’s quite likely.

T3: Well, let’s talk this through a little bit about how that happens. So you basically have $10, let’s just round them up and say there’s about a $10 difference between the Class IV price and the Class III price. Your Class I price, that’s halfway between, the move is halfway between the two correct? In effect, so you’ve got some of the milk going in, you know it $20… I don’t even remember what the question price ended up being in June, $21.50. So you’ve got some of the milk at, you know, $22, you got some of the milk at $12 to $13. And then you’ve got the Class I mover halfway between the two. And then you’ve got a Class II price that’s more derived from the Class IV, you know, that’s how you end up with a $5 PPD. But it would be $9 which means it would be a lot closer to Class IV than Class III, as a result of everybody be pooling and so there’s almost no Class III milk in the pooling report. And so the blend price basically becomes a Class I in Class four average, because all the Class III is gone from the order. Correct?

Anna: Yeah. Now, you know, and part of the equation is how aggressive did people wanna be knowing that you would get some benefit in having your two pools, you know. Are you really gonna lose all of your two, to take the three off? And depends on your utilization, how much, you know, what percentage is in each one, whether or not that was a risk worth taking. But the more that’s pooled off, the lower this number goes, the more three comes off, the lower that PPD gets.

Ted: Even I have trouble getting my head around the situation, the Class III price where it is and during…and the timeline of it getting there just really makes a mess of any calculations for the month of June.

Anna: Unless you knew what everybody else wanted to do. Every other co-op, plants, how they were gonna pool their milk, it’s impossible to know where that number is gonna show up. And this month is really strange, you know, normally you’ve got order five higher than 33 and it is not, it is lower. You know, that blend difference between the two is usually, I think we have an average, you know, with component loss and things like that, that’s around 50 cents, and I think it’s $1 under this time, which is very unusual.

T3: So this is just gonna be a weird month, probably a weird couple of months.

Ted: Yeah, that’s what I was running through my mind too, is you’re gonna have the same problem with July.

Anna: Well, you’ll have to be trying to bring things back on. We still are looking at probable negative PPDs in July so people are probably giving themselves at least two to three months to get back on. You know, even if you had a positive quarter three months from now for the PPDs probably wouldn’t mind losing that if you were gonna pick up five bucks here. So I think that, you know, knowing what people are gonna do especially with qualification coming into the mix in August is it’ll be months before we kind of get back to normal, if we get back to normal.

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

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

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

T3: Okay.

Anna: Good luck.

T3: I’m assuming you mean me.

Ted: Yeah.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

T3: Okay. So, probably about 500 cows.

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

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

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

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

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

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

Anna: I would agree.

T3: And I would agree with that too.

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

T3: Yep.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

T3: Okay.

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

T3: Well, and that to me that’s….

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

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

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

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

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

T3: Yep. Okay, well we’ll see.

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

Anna: I say go ahead leave them in.

T3: I do too.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

T3: I think it is already.

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

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

Anna: All the different co-ops.

T3: All the different co-oops.

Anna: Yeah.

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

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

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

T3: Mm-hmm.

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

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

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

T3: Right.

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

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

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

T3: Fifteen, yeah, 15.

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

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

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

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

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

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

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

Ted: Well, they got to feed these cows.

Anna: Yeah.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ted: It was true as of last Friday.

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

Ted: We’re actually under a dollar.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

T3: Mm-hmm. We’ll see.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Anna: I would think but…

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

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

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

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

T3: Right.

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

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

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

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

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

Ted: Yeah, that’s a good point.

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

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

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

Anna: Very true.

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

Anna: I could see that.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Phil: It’s just…

Ted: Is that a delivered somewhere price?

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

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

Phil: Correct.

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

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

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

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

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

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

Phil: More or less, sure.

Ted: Okay.

T3: But think of it this way…

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

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

Phil: Yes, more or less, yes.

Ted: Yes.

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

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

T3: Right.

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

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

Phil: Anywhere else.

T3: Right.

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

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

Ted: I think it’s higher than that.

Phil: It’s a little higher now.

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

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

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

Phil: 75 cents.

T3: …75 cents right now a bushel?

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

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

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

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

Katie: More or less.

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

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

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

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

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

Phil: Nope.

T3: Both programs are in existence?

Phil: Correct.

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

Phil: No.

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

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

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

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

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

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

Phil: Nope.

Ted: How do you pay for it?

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

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

Phil: Yeah, basically.

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

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

T3: It has to be the whole quarter?

Phil: Average for the quarter.

T3: So it’s the whole quarter?

Phil: Average for the quarter.

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

Phil: Correct.

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

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

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

Phil: Correct.

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

Phil: Correct.

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

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

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

Phil: Correct.

T3: …because this is a great program.

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

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

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

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

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

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

T3: Right.

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

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

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

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

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

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

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

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

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

Tiffany: Yes.

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

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

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

T3: So they’re pushing it.

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

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

Phil: Yeah, I think that’s legit.

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

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

Ted: Sure it’s legal.

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

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

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

Ted: Yeah.

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

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

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

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

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

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

Phil: I have a better idea?

T3: Okay.

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

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

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

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

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

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

Tiffany: You bet. Thanks, guys.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

T3: Well, you’re still up almost 1%.

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

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

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

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

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

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

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

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

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

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

Eric: Correct.

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

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

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

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

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

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

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

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

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

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

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

T3: You mean for American cheese.

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

T3: Oh, into the U.S.

Eric: Into the U.S.

T3: Okay.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Eric: Correct, correct.

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

Eric: Exactly.

T3: “Give me the block.”

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

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

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

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

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

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

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

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

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

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

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

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

Eric: Correct.

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

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

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

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

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

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

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

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

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

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

Eric: It was awesome. Yeah, thank you.

T3: Thank you so much for joining us.

Eric: Always fun.

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

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In this episode, Ted and T3 are joined by Eric Meyer, President of HighGround Dairy in Chicago. Eric explains the CME's new block cheddar futures contracts, which will begin trading on Jan. 13. The panel also reacts to surprising NDPSR data for the ... In this episode, Ted and T3 are joined by Eric Meyer, President of HighGround Dairy in Chicago. Eric explains the CME's new block cheddar futures contracts, which will begin trading on Jan. 13.<br /> <br /> <br /> <br /> The panel also reacts to surprising NDPSR data for the month of November. Eric is reminded that the St. Louis Blues won the 2019 Stanley Cup.<br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to "The Milk Check," a podcast from T.C. Jacoby & Company, where we share market insights and analysis with dairy farmers in mind.<br /> <br /> <br /> <br /> T3: Welcome everybody to the T.C. Jacoby & Company Milk Check podcast. Today, we have a guest speaker: Eric Meyer, President of HighGround Dairy. And we thought we'd talk about the milk production report and a little bit about markets, and then also talk about the new cheddar block futures contracts that are going to be introduced on the CME in the middle of January. Eric, welcome.<br /> <br /> <br /> <br /> Eric: Thank you very much. It's great to be here in a cold and snowy St. Louis. It's almost colder here and snowier than up in Chicago, so I feel for you.<br /> <br /> <br /> <br /> Ted: How about the St. Louis Blues who played Chicago on Monday night?<br /> <br /> <br /> <br /> Eric: Oh, do we need to talk about that? I was also told, I think, four or five times since arriving last night that you guys are currently the Stanley Cup champions. That's always nice to hear after three of them in the previous five years.<br /> <br /> <br /> <br /> T3: I'm glad you know that. It's Wednesday, December 18. It just so happens the milk production report was released not ten minutes ago, before we started this, recording this podcast. Milk production in November came in at up 0.9% in November for the country and up 0.5% in the 24-state. And that's a bit of a surprise to the downside. I think most people were expecting something up about 1.5%. Eric, what are your thoughts on that?<br /> <br /> <br /> <br /> Eric: So we were in that same camp, so we thought that the all U.S. number was gonna be in the 1.2 range with the 24 states that have been trending a lot higher. And we'll talk about that. I think there's a big shift in the last year of the 24 states straying from the all U.S. number, a big dichotomy between the larger farms in the dairy-centric states and the rest of the country. So we were in that camp, 1.5% was what we were thinking. Those were the numbers from both September and October, and so these numbers are definitely below expectations, a bit of a change in trend from the previous two months. With that number being up 0.9%, we also had a 60 million-pound downward revision in the October number, which represented a 0.3% decline.<br /> <br /> <br /> <br /> So USDA originally reported a 1.3% all U.S. gain and now it's down to just 1% higher. We are getting more milk. I think there is, from a fundamental perspective, the first half of this year, we were down on milk production. And we hadn't been down on milk production since 2013. I mean, it's been four, five-plus years that we've been growing milk production. And so the poor economics in 2018 and in the early 2019 kinda did the market in. Farmers finally responded, which, you know, we rarely see. That said, the large scale farming communities, the ones that are larger that are more apt to hedging that have brought costs of production down, economies of scale, we feel like they've maintained, and are now starting to pick up that growth.<br /> <br /> <br /> <br /> So one of the items in this production report that we saw that is notable, we didn't have any change this month from October to November from a herd perspective. But we now are in the 24 states which represents right around 96% of total milk production in the country. We're now above previous year on the overall milking herd while the all U.S. is down 27,000 head. T.C. Jacoby & Co. - Dairy Traders clean 36:03
The Milk Check interviews DMI’s Tom Gallagher https://www.jacoby.com/the-milk-check-interviews-dmis-tom-gallagher/ Mon, 25 Nov 2019 15:36:50 +0000 http://www.jacoby.com/?p=1580 A special guest joins The Milk Check this month: Tom Gallagher, CEO of Dairy Management, Inc. Ted, T3 and Anna ask about how DMI allocates the funds it collects from the Dairy Checkoff program; Gallagher explains why recent changes to DMI's advertising strategy position the industry to interact with today's consumers. (Spoiler: There's a reason you don't see "milk mustache" commercials on TV anymore.) Gallagher also urges farmers to band together against aggressive animal rights groups who he says want to put dairy farms out of business.   Anna: Welcome to "The Milk Check," a podcast from T.C. Jacoby & Co. where we share market insights and analysis with dairy farmers in mind. Today on "The Milk Check," we interview Tom Gallagher, CEO of Dairy Management, Inc. DMI is responsible for increasing sales and demand for dairy products by spending the money generated through the Checkoff program. T3: First, I'd like to say thanks for joining us today. We really appreciate you taking the time to discuss DMI and some of DMI's activities and the Checkoff program. And I think the best place to start this conversation would be Tom, tell us about the Checkoff program and how the money is used and where DMI is spending Checkoff dollars today. Tom: Okay. Well, on the Checkoff money we get money, $0.15 per hundredweight that is provided by dairy farmers by law to the Checkoff. And $0.05 of that goes to the National Dairy Board and $0.10 goes to local promotion groups. So let me start there and also state that the Checkoff's been in place since 1983 when dairy farmers approached Congress and said, "Look, the government is sitting on 17 billion pounds of excess product. That's not good for the government, it's not good for taxpayers, it's not good for dairy farmers. We have had a voluntary Checkoff for years. We'd like a mandatory Checkoff and we will fund it. We will pay for USDA oversight because we believe farmers need a voice in the marketplace." And since that time, we have seen per capita consumption grow 75 pounds per person in the United States. And prior to that, which really shocks a lot of people, in the early decades of the 1900s, per capita consumption was on a straight decline until just about the time the Checkoff went into place. So we take that money that we receive and we do a number of things with it. We have an export company that is run by former secretary Vilsack from USDA. And there are 120 members of that company that export dairy products. And through that company, the Checkoff funds about $20 million in marketing activities. The 120 members fund about $1.5 million that can be used for policy, trade policy, so the dairy in the street speaks with one voice, which is really a very, very powerful and important thing to do as an industry to make sure that we're unified. And it's necessary to have those member dollars because Checkoff cannot do lobbying. So with that, that company was created in 1995 by processors, manufacturers, traders, farmers. And then the Dairy Management organization itself focuses on increasing sales and trust. So maybe I should stop there and let you take it deeper. Ted: Roughly what percentage of the Checkoff money goes to USDEC? Keeping in mind that Jacoby & Co. is one of the original members of the USDEC. And we greatly value the assistance that USDEC has given our company in marketing products overseas. Tom: Yeah. Well, and we appreciate that you were an early member. And so Dairy Management, Inc. was formed by the National Dairy Board, which gets the nickel, and that's about $100 million. And then state and regional organizations that get the $0.10 but not all of them are members. So they have about $100 million to $120 million. Not all state and regionals are members. We have about $200 million or $220 million in total and we fund, of that, about $21 million to $25 million. You know, when I think about it, it's about $25 million. A special guest joins The Milk Check this month: Tom Gallagher, CEO of Dairy Management, Inc. - Ted, T3 and Anna ask about how DMI allocates the funds it collects from the Dairy Checkoff program; Gallagher explains why recent changes to DMI's advertis... A special guest joins The Milk Check this month: Tom Gallagher, CEO of Dairy Management, Inc.<br /> <br /> Ted, T3 and Anna ask about how DMI allocates the funds it collects from the Dairy Checkoff program; Gallagher explains why recent changes to DMI's advertising strategy position the industry to interact with today's consumers. (Spoiler: There's a reason you don't see "milk mustache" commercials on TV anymore.)<br /> <br /> Gallagher also urges farmers to band together against aggressive animal rights groups who he says want to put dairy farms out of business.<br /> <br /> <br /> <br /> <br /> <br />  <br /> <br /> <br /> <br /> Anna: Welcome to "The Milk Check," a podcast from T.C. Jacoby & Co. where we share market insights and analysis with dairy farmers in mind. Today on "The Milk Check," we interview Tom Gallagher, CEO of Dairy Management, Inc. DMI is responsible for increasing sales and demand for dairy products by spending the money generated through the Checkoff program.<br /> <br /> T3: First, I'd like to say thanks for joining us today. We really appreciate you taking the time to discuss DMI and some of DMI's activities and the Checkoff program. And I think the best place to start this conversation would be Tom, tell us about the Checkoff program and how the money is used and where DMI is spending Checkoff dollars today.<br /> <br /> Tom: Okay. Well, on the Checkoff money we get money, $0.15 per hundredweight that is provided by dairy farmers by law to the Checkoff. And $0.05 of that goes to the National Dairy Board and $0.10 goes to local promotion groups. So let me start there and also state that the Checkoff's been in place since 1983 when dairy farmers approached Congress and said, "Look, the government is sitting on 17 billion pounds of excess product. That's not good for the government, it's not good for taxpayers, it's not good for dairy farmers. We have had a voluntary Checkoff for years. We'd like a mandatory Checkoff and we will fund it. We will pay for USDA oversight because we believe farmers need a voice in the marketplace." And since that time, we have seen per capita consumption grow 75 pounds per person in the United States. And prior to that, which really shocks a lot of people, in the early decades of the 1900s, per capita consumption was on a straight decline until just about the time the Checkoff went into place.<br /> <br /> So we take that money that we receive and we do a number of things with it. We have an export company that is run by former secretary Vilsack from USDA. And there are 120 members of that company that export dairy products. And through that company, the Checkoff funds about $20 million in marketing activities. The 120 members fund about $1.5 million that can be used for policy, trade policy, so the dairy in the street speaks with one voice, which is really a very, very powerful and important thing to do as an industry to make sure that we're unified. And it's necessary to have those member dollars because Checkoff cannot do lobbying. So with that, that company was created in 1995 by processors, manufacturers, traders, farmers. And then the Dairy Management organization itself focuses on increasing sales and trust. So maybe I should stop there and let you take it deeper.<br /> <br /> Ted: Roughly what percentage of the Checkoff money goes to USDEC? Keeping in mind that Jacoby & Co. is one of the original members of the USDEC. And we greatly value the assistance that USDEC has given our company in marketing products overseas.<br /> <br /> Tom: Yeah. Well, and we appreciate that you were an early member. And so Dairy Management, Inc. was formed by the National Dairy Board, which gets the nickel, and that's about $100 million. And then state and regional organizations that get the $0.10 but not all of them are members. So they have about $100 million to $120 million. Not all state and regionals are members. T.C. Jacoby & Co. - Dairy Traders clean 35:46 These market anomalies are worth watching https://www.jacoby.com/market-anomalies-worth-watching/ Tue, 15 Oct 2019 13:38:31 +0000 http://www.jacoby.com/?p=1510 As the industry preps for the holiday buying season and looks forward to 2020, some abnormal market conditions—both domestically and internationally—caught our attention. Ted, T3 and Anna discuss market anomalies that might set the tone for markets in the new year. Anna: Welcome to "The Milk Check", a podcast from T.C. Jacoby & Co. where we share market insights and analysis with dairy farmers in mind. We're going to talk about dairy markets today but this isn't just another discussion of markets. That's because there are several anomalies we're watching that we think will impact the way markets behave through the end of this year and into 2020. Ted, let's start with you. Milk production in Europe has caught your attention. Why? Ted: As far as Europe is concerned, production seems to be starting to come up and the question is why. The reason is the Dollar has been so strong and the Euro has been relatively weak. Their production costs have reflected that also. We look at currency valuation as—we have in the past—we've looked at it as what's the cost of putting milk powder into China or the Philippines or wherever. And the Euro is one value, the Dollar is another value and it reflects on the landed price of the product. Well, if you look at the mailbox price in Europe relative to the mailbox price in the United States, the European prices, you know, 15%, 20% lower than ours depending on the country and so on. So what that means is that our currency valuation is a hell of a lot more... T3: It's having a negative influence on our ability to export. Ted: Well, it reflects on the producers' costs in a way that we really haven't acknowledged up to now. Their cost of production has got to be a lot lower than ours in order for them to be increasing production at the price level that they have. Their production's going up, not down and these are basically smaller dairymen than ours, less efficient than ours. And their production is starting to bottom out and go up. What I'm conjecturing on this is that...or concluding on this is that the value of the currency affects their production costs in ways that we haven't really come to grips with. You know, we tend to think in terms of landed price of product somewhere in the world but it also affects their production cost. If their production costs were quid pro quo with ours, they wouldn't be increasing production. Europe is a lot bigger than we are and if we're gonna be competing for markets particularly in the trade discussions, with the trade discussions going on and so on we're gonna be competing for markets. In this kind of environment we're gonna have a tough time doing it. T3: I think we were...I think last year feed quality was very poor and I think this year feed quality is better. So when you're talking about a 1% change in milk production levels, feed quality is enough to change that dial about 1%. I think the more relevant question may be, "is it sustainable?" And I haven't heard anyone that strongly believes European milk production is going to be growing at that, you know, 2%, 3%, 4% rate that it has in the various years, in the last five years because as you say, I don't think the numbers are there. Ted: Well, maybe not. But, you know, we also have to factor in our feed quality which right now is on the edge. This is one of the anomalies. We have not had a good growing season. If we're looking at our frost here in the northern...in the upper Midwest in the next week or two, it's gonna greatly affect the feed quality for the next year. Anna: Dairy markets move on an international scale. Buyers and sellers thrive when they think globally. Put T.C. Jacoby and Co.'s 70 years of market expertise to work for your organization. If you're looking for someone to help you market your products or you're looking to source supply, get in touch with us now. Email info@jacoby.com or dial 314-822-5960. T3: Domestic dairy prices are pretty high. As the industry preps for the holiday buying season and looks forward to 2020, some abnormal market conditions—both domestically and internationally—caught our attention. - Ted, T3 and Anna discuss market anomalies that might set the tone for markets ... As the industry preps for the holiday buying season and looks forward to 2020, some abnormal market conditions—both domestically and internationally—caught our attention.<br /> <br /> Ted, T3 and Anna discuss market anomalies that might set the tone for markets in the new year.<br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to "The Milk Check", a podcast from T.C. Jacoby & Co. where we share market insights and analysis with dairy farmers in mind. We're going to talk about dairy markets today but this isn't just another discussion of markets. That's because there are several anomalies we're watching that we think will impact the way markets behave through the end of this year and into 2020. Ted, let's start with you. Milk production in Europe has caught your attention. Why?<br /> <br /> Ted: As far as Europe is concerned, production seems to be starting to come up and the question is why. The reason is the Dollar has been so strong and the Euro has been relatively weak. Their production costs have reflected that also. We look at currency valuation as—we have in the past—we've looked at it as what's the cost of putting milk powder into China or the Philippines or wherever. And the Euro is one value, the Dollar is another value and it reflects on the landed price of the product.<br /> <br /> Well, if you look at the mailbox price in Europe relative to the mailbox price in the United States, the European prices, you know, 15%, 20% lower than ours depending on the country and so on. So what that means is that our currency valuation is a hell of a lot more...<br /> <br /> T3: It's having a negative influence on our ability to export.<br /> <br /> Ted: Well, it reflects on the producers' costs in a way that we really haven't acknowledged up to now. Their cost of production has got to be a lot lower than ours in order for them to be increasing production at the price level that they have. Their production's going up, not down and these are basically smaller dairymen than ours, less efficient than ours. And their production is starting to bottom out and go up.<br /> <br /> What I'm conjecturing on this is that...or concluding on this is that the value of the currency affects their production costs in ways that we haven't really come to grips with. You know, we tend to think in terms of landed price of product somewhere in the world but it also affects their production cost. If their production costs were quid pro quo with ours, they wouldn't be increasing production. Europe is a lot bigger than we are and if we're gonna be competing for markets particularly in the trade discussions, with the trade discussions going on and so on we're gonna be competing for markets. In this kind of environment we're gonna have a tough time doing it.<br /> <br /> T3: I think we were...I think last year feed quality was very poor and I think this year feed quality is better. So when you're talking about a 1% change in milk production levels, feed quality is enough to change that dial about 1%. I think the more relevant question may be, "is it sustainable?" And I haven't heard anyone that strongly believes European milk production is going to be growing at that, you know, 2%, 3%, 4% rate that it has in the various years, in the last five years because as you say, I don't think the numbers are there.<br /> <br /> Ted: Well, maybe not. But, you know, we also have to factor in our feed quality which right now is on the edge. This is one of the anomalies. We have not had a good growing season. If we're looking at our frost here in the northern...in the upper Midwest in the next week or two, it's gonna greatly affect the feed quality for the next year.<br /> <br /> Anna: Dairy markets move on an international scale. Buyers and sellers thrive when they think globally. Put T.C. Jacoby and Co.'s 70 years of market expertise to work for your organization. If you're looking for someone to help you market your products or you're lo... T.C. Jacoby & Co. - Dairy Traders clean 29:14 Killing off minimum price under the order—too controversial? https://www.jacoby.com/killing-off-minimum-price-under-the-order-too-controversial/ Tue, 03 Sep 2019 19:25:37 +0000 http://www.jacoby.com/?p=1478 What would happen if Federal Milk Marketing Orders' minimum price provisions were eliminated? Would it increase returns to dairy farmers? And even if it did, would it wreak too much havoc in the industry to be worth trying? Ted, T3 and Anna dive into what might be The Milk Check's most controversial conversation yet. Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market analysis and insights with dairy farmers in mind. The topic of Federal Order Reform is never far from our minds. Whether it's a conversation on The Milk Check or a chat around the office, we talk about it all the time. Today, we’re addressing it head-on. And we assume the industry will have strong opinions about this. Email us your thoughts at podcast@jacoby.com, or submit a question to www.jacoby.com/askted. Do minimum price provisions still make sense? What would happen if we got rid of them? Would conditions on dairy farms change for the better? Or is Federal Order reform of this sort not worth the chaos it would likely cause? Ted: What's the objective of Federal Order Reform? From the dairy farmer standpoint and from the industry standpoint, from my perspective, the objective is to increase the price to the dairyman. The objective... T3: We're not talking about what the objective was 90 years ago when it was started. Ted: Well, be it... T3: But what it would be to change what we have now into something else. Ted: Ninety years ago, it was started to monitor the veracity involved in weights and tests in butterfat and protein—well, we didn't even have protein. We had butterfat and skim. And the perception in the '20s and early '30s was that everybody was cheating the dairy farmer on butterfat tests. And so they requested a Federal Order that monitored the tests. Eight or ten years later, it morphed into a price mechanism. And over the years, we've had classified pricing. So now we have basically two regulatory systems. And you have the Capper-Volstead Act, which allows dairymen to band together, similar to a labor union and bargain collectively. And then you have a regulatory system, which allows cooperatives to pay less than the mandated price, or the minimum price under the Federal Order into a pool plant. You have two regulatory issues involved here. You have collective bargaining, and the second issue is the classified pricing system, which prices fluid milk at one price, and yogurt and cottage cheese, and whips and dips at another, ice cream. And then you have the cheese at one price and you have butter / powder at another price. In order to participate in the classified pricing system, you have to participate in the regulatory system. T3: But there's not a rule that says you have to. Ted: You can go unregulated if you want, unless you're a bottling plant. If you distribute milk, quote-unquote, in the marketing area, in the defined marketing area, by law, you are going to be a pool plant. There are certain percentages involved that by law, you have no choice, you're gonna be a pool plant. And anyone who sells milk into that pool plant is gonna be qualified. And it's against the law to sell milk into that pool plant at less than the minimum price under the order. T3: And the pool plant would basically be a plant that's bottling milk that is sold as fluid milk at a store, gallon of milk, or a quart of milk, or whatever. Ted: No, that's the distributing plant. T3: Okay. Ted: A pool plant can be anything, it can be a silo down at the end of the string of silos, it can be a whole plant, it can be anything that you wanna make it. It depends on how you pipe it and how it's approved by the regulatory system. The distributing plant is a bottling plant that distributes milk in the marketing area. T3: And a pool plant can really be any plant that is also participating in the federal order. Ted: Right, you could have a bank of silos that's a half a mile long, What would happen if Federal Milk Marketing Orders' minimum price provisions were eliminated? Would it increase returns to dairy farmers? And even if it did, would it wreak too much havoc in the industry to be worth trying? - Ted, What would happen if Federal Milk Marketing Orders' minimum price provisions were eliminated? Would it increase returns to dairy farmers? And even if it did, would it wreak too much havoc in the industry to be worth trying?<br /> <br /> Ted, T3 and Anna dive into what might be The Milk Check's most controversial conversation yet.<br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market analysis and insights with dairy farmers in mind. The topic of Federal Order Reform is never far from our minds. Whether it's a conversation on The Milk Check or a chat around the office, we talk about it all the time.<br /> Today, we’re addressing it head-on. And we assume the industry will have strong opinions about this. Email us your thoughts at podcast@jacoby.com, or submit a question to www.jacoby.com/askted.<br /> Do minimum price provisions still make sense? What would happen if we got rid of them? Would conditions on dairy farms change for the better? Or is Federal Order reform of this sort not worth the chaos it would likely cause?<br /> Ted: What's the objective of Federal Order Reform? From the dairy farmer standpoint and from the industry standpoint, from my perspective, the objective is to increase the price to the dairyman. The objective...<br /> <br /> T3: We're not talking about what the objective was 90 years ago when it was started.<br /> <br /> Ted: Well, be it...<br /> <br /> T3: But what it would be to change what we have now into something else.<br /> <br /> Ted: Ninety years ago, it was started to monitor the veracity involved in weights and tests in butterfat and protein—well, we didn't even have protein. We had butterfat and skim. And the perception in the '20s and early '30s was that everybody was cheating the dairy farmer on butterfat tests. And so they requested a Federal Order that monitored the tests. Eight or ten years later, it morphed into a price mechanism. And over the years, we've had classified pricing. So now we have basically two regulatory systems. And you have the Capper-Volstead Act, which allows dairymen to band together, similar to a labor union and bargain collectively. And then you have a regulatory system, which allows cooperatives to pay less than the mandated price, or the minimum price under the Federal Order into a pool plant. You have two regulatory issues involved here. You have collective bargaining, and the second issue is the classified pricing system, which prices fluid milk at one price, and yogurt and cottage cheese, and whips and dips at another, ice cream. And then you have the cheese at one price and you have butter / powder at another price. In order to participate in the classified pricing system, you have to participate in the regulatory system.<br /> <br /> T3: But there's not a rule that says you have to.<br /> <br /> Ted: You can go unregulated if you want, unless you're a bottling plant. If you distribute milk, quote-unquote, in the marketing area, in the defined marketing area, by law, you are going to be a pool plant. There are certain percentages involved that by law, you have no choice, you're gonna be a pool plant. And anyone who sells milk into that pool plant is gonna be qualified. And it's against the law to sell milk into that pool plant at less than the minimum price under the order.<br /> <br /> T3: And the pool plant would basically be a plant that's bottling milk that is sold as fluid milk at a store, gallon of milk, or a quart of milk, or whatever.<br /> <br /> Ted: No, that's the distributing plant.<br /> <br /> T3: Okay.<br /> <br /> Ted: A pool plant can be anything, it can be a silo down at the end of the string of silos, it can be a whole plant, it can be anything that you wanna make it. It depends on how you pipe it and how it's approved by the regulatory system. The distributing plant is a bottling plant that distributes milk in the marketing area. T.C. Jacoby & Co. - Dairy Traders clean 39:05 Feed, milk production, market psychology and more: A conversation about everything https://www.jacoby.com/feed-milk-production-market-psychology-and-more-a-conversation-about-everything/ Tue, 20 Aug 2019 14:59:48 +0000 http://www.jacoby.com/?p=1461 It's a traditionally slow month for the dairy industry, so Ted and T3 take a whirlwind tour of the state of the industry. Topics include potentially bad crop yields, slowing milk production, the trade situation with China and a dose of market psychology. Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market analysis and insights with dairy farmers in mind. It's early August and things are slow in the dairy industry. We're taking a step back to look at markets as they stand today and discuss where things might go from here. We'll start by discussing feed. You don't need to be a feed expert to know it's been a hard year. T3, what's your understanding of the feed situation? And how might this year's issues affect milk production? T3: You know, my understanding of the issues with feed are, you know, we've had a lot of rain, the corn that's in the ground is, for the most part, running behind and in some cases, we'll probably never catch up, they're just gonna run out of time. Ted: It's running behind, the question is where it's running behind. T3: Absolutely. You know, where we live in, in St. Louis and in the parts of Missouri and Illinois down by us is actually in pretty good shape. We're hearing that there are parts of Illinois that are not in as good as shape but the fields that I've seen are in good shape around here. A couple of weeks ago though, I was up in Wisconsin, eastern side of Wisconsin between Madison and the lake and I saw a lot of really bad fields that were just in bad shape for, you know, for the second to last week in July, they weren't even up to my waist yet and they certainly weren't anywhere near getting ready to tassel. Ted: Michigan is the same way. Northern Ohio, same way. Northern Indiana, same way. T3: And I'm hearing Minnesota is the same way too. I'm hearing that northern Iowa might be struggling a little bit, but southern Iowa was in pretty decent shape. Here's where I'm going with that discussion. You know, a lot of the corn that turns into being feed for dairy cows is actually silage. What I'm actually hearing is the silage is not gonna be a problem, the dairy farmers are gonna have enough silage, and also due to tariffs and other things, brewer's grains and some of the other things that dairy farmers feed their cows, there's also gonna be an ample supply of. And so, ironically, even though the corn is not looking good, the corn directly is not gonna be the problem, the problem is going to be that the same weather that's caused the corn to be behind has caused the pasture, whether it's hay or alfalfa or whatnot, is a major problem. That whether they're gonna get one or two fewer cuttings this year, and the quality of the cuttings they do get, it's a pretty big problem. And so it's very safe to say that feed quality is going to be an issue but the issues probably gonna be more an issue of feed quality than feed price. You know, the basis has gone up and so maybe the feed costs a little bit more in various places but the bigger issue for the dairy farmer is gonna be feed quality in most parts of the country. Ted: Well, that's a price-related factor. T3: So that eventually will have a negative effect on milk production per cow. And so you've got cow numbers down, you know, I'm not ready to say milk production per cow is gonna be down because it's usually up a little bit every year but heifer numbers are down. We know that a lot of dairy farmers are breeding with Angus and other beef cows rather than Holsteins or Jerseys. The sense I get is that there's more, they're replacing out the Holsteins much more than they're replacing out the Jerseys. Ultimately, you're gonna have a smaller number of heifers in the pipeline to eventually go into their first lactation. So between poor feed quality, fewer milking cows, lighter heifer pipeline, there's reason to believe that milk production is gonna stay relatively flat to maybe ... It's a traditionally slow month for the dairy industry, so Ted and T3 take a whirlwind tour of the state of the industry. Topics include potentially bad crop yields, slowing milk production, the trade situation with China and a dose of market psycholog... It's a traditionally slow month for the dairy industry, so Ted and T3 take a whirlwind tour of the state of the industry. Topics include potentially bad crop yields, slowing milk production, the trade situation with China and a dose of market psychology.<br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market analysis and insights with dairy farmers in mind. It's early August and things are slow in the dairy industry. We're taking a step back to look at markets as they stand today and discuss where things might go from here.<br /> <br /> We'll start by discussing feed. You don't need to be a feed expert to know it's been a hard year. T3, what's your understanding of the feed situation? And how might this year's issues affect milk production?<br /> <br /> T3: You know, my understanding of the issues with feed are, you know, we've had a lot of rain, the corn that's in the ground is, for the most part, running behind and in some cases, we'll probably never catch up, they're just gonna run out of time.<br /> <br /> Ted: It's running behind, the question is where it's running behind.<br /> <br /> T3: Absolutely. You know, where we live in, in St. Louis and in the parts of Missouri and Illinois down by us is actually in pretty good shape. We're hearing that there are parts of Illinois that are not in as good as shape but the fields that I've seen are in good shape around here.<br /> <br /> A couple of weeks ago though, I was up in Wisconsin, eastern side of Wisconsin between Madison and the lake and I saw a lot of really bad fields that were just in bad shape for, you know, for the second to last week in July, they weren't even up to my waist yet and they certainly weren't anywhere near getting ready to tassel.<br /> <br /> Ted: Michigan is the same way. Northern Ohio, same way. Northern Indiana, same way.<br /> <br /> T3: And I'm hearing Minnesota is the same way too. I'm hearing that northern Iowa might be struggling a little bit, but southern Iowa was in pretty decent shape. Here's where I'm going with that discussion. You know, a lot of the corn that turns into being feed for dairy cows is actually silage. What I'm actually hearing is the silage is not gonna be a problem, the dairy farmers are gonna have enough silage, and also due to tariffs and other things, brewer's grains and some of the other things that dairy farmers feed their cows, there's also gonna be an ample supply of.<br /> <br /> And so, ironically, even though the corn is not looking good, the corn directly is not gonna be the problem, the problem is going to be that the same weather that's caused the corn to be behind has caused the pasture, whether it's hay or alfalfa or whatnot, is a major problem. That whether they're gonna get one or two fewer cuttings this year, and the quality of the cuttings they do get, it's a pretty big problem. And so it's very safe to say that feed quality is going to be an issue but the issues probably gonna be more an issue of feed quality than feed price.<br /> <br /> You know, the basis has gone up and so maybe the feed costs a little bit more in various places but the bigger issue for the dairy farmer is gonna be feed quality in most parts of the country.<br /> <br /> Ted: Well, that's a price-related factor.<br /> <br /> T3: So that eventually will have a negative effect on milk production per cow. And so you've got cow numbers down, you know, I'm not ready to say milk production per cow is gonna be down because it's usually up a little bit every year but heifer numbers are down. We know that a lot of dairy farmers are breeding with Angus and other beef cows rather than Holsteins or Jerseys. The sense I get is that there's more, they're replacing out the Holsteins much more than they're replacing out the Jerseys.<br /> <br /> Ultimately, you're gonna have a smaller number of heifers in the pipeline to eventually go into thei... T.C. Jacoby & Co. - Dairy Traders clean 26:55 Should dairy farmers be concerned about milk without a cow? https://www.jacoby.com/should-dairy-farmers-be-concerned-about-milk-without-a-cow/ Wed, 10 Jul 2019 19:29:34 +0000 http://www.jacoby.com/?p=1430 Recent advances in gene editing technology have made the production of dairy proteins in lab settings viable and potentially scalable. If the techniques can scale cost-effectively, and if consumers buy in, the dairy industry as we know it will change. Ted, T3 and Anna discuss what's at stake and ask: Should dairy farmers be worried? Anna: Welcome to "The Milk Check," a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. We want to discuss something today that we think will cost significant issues for the dairy industry in the coming years. You've probably heard of Burger King's Impossible Whopper, beef made in a lab, not from a cow. Well, it's happening in dairy too. But before we discuss milk without a cow, let's spend a few minutes on markets and pricing. Over the last several months, we've predicted that prices would continue to strengthen. Since we last spoke, persistent wet weather across the country has made it very tough going for farmers getting crops planted. Ted: Looking at the pricing today, I think we're on a slow trajectory up. I think it's gonna continue for a period of years. I don't see a change even next year and next spring. I think we may have a little bit of cycling. But given the crop situation, and so on, and the forage situation, 2020 looks like a continued strong year. Do I see an explosion? No, but a steady move up. The butter fat situation, probably, is not gonna be as explosive as we thought before, because I noticed an article come through the other day, that the average test is now reaching 3.8, the standard of identity on milk is 3.67. So, it's almost 1.3% up. Imagine what a big difference that's gonna make for the demand from ice cream, and cream cheese, and butter, and so on, is concerned. So, I suppose we'll see. Do you think we'll break $20 by the end of the year on the Class III price? I doubt it, but I think we could come fairly close. I think $19 is probably doable. That would mean cheese at $1.90 at some point, maybe in September, October. T3: I'm less bullish cheese in Class III than I am Class IV, because I think the continued lack of growth in the milk supply is going to affect the Class IV market more than the Class III market. I think the cheese plants will get their milk. But there’ll be some Class IV that won't. I'll add this to it, though. What I think is going on with the weather right now, and how wet it is, and how much people are struggling to get corn into the fields and things like that. It's already had its effect, and it will continue to have its effect. You may not see the effect of it in milk prices, or I should say in milk production, before this year's harvest. So, between now and September, I don't think you'll see much. But that higher feed cost may force some dairy farmers who are on the bubble out of the business. So, it may increase or continue to support, even at higher prices, the exodus of dairy farmers we've been seeing over the past couple of years. And so, I would say that it does have a bullish effect on 2020. Ted: The slaughter numbers that I've been following for the last couple of months, we were at about 70,000 per week, now it's 58, 59, 57. T3: A lot of that is seasonal, though. Ted: It is seasonal. But the bottom hasn’t fallen out of it. Even with the increase in price, we've seen the Class III price and the blend prices go up a couple of bucks, a hundredweight. Big numbers. And still the slaughter numbers are staying up there. It sort of follows along with the predictions that we've been hearing, and that the smaller dairymen are, given the good job market and so on, are going into a different line of work. Anna: I think the really small guys are, but we say that small farms are leaving, and I think that that's true, and I think that will continue, like we've always said. But I think the net impact, I don't feel from where I'm sitting at my desk, like, Recent advances in gene editing technology have made the production of dairy proteins in lab settings viable and potentially scalable. If the techniques can scale cost-effectively, and if consumers buy in, the dairy industry as we know it will change. Recent advances in gene editing technology have made the production of dairy proteins in lab settings viable and potentially scalable. If the techniques can scale cost-effectively, and if consumers buy in, the dairy industry as we know it will change.<br /> <br /> Ted, T3 and Anna discuss what's at stake and ask: Should dairy farmers be worried?<br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to "The Milk Check," a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. We want to discuss something today that we think will cost significant issues for the dairy industry in the coming years. You've probably heard of Burger King's Impossible Whopper, beef made in a lab, not from a cow. Well, it's happening in dairy too. But before we discuss milk without a cow, let's spend a few minutes on markets and pricing. Over the last several months, we've predicted that prices would continue to strengthen. Since we last spoke, persistent wet weather across the country has made it very tough going for farmers getting crops planted.<br /> <br /> Ted: Looking at the pricing today, I think we're on a slow trajectory up. I think it's gonna continue for a period of years. I don't see a change even next year and next spring. I think we may have a little bit of cycling. But given the crop situation, and so on, and the forage situation, 2020 looks like a continued strong year. Do I see an explosion? No, but a steady move up. The butter fat situation, probably, is not gonna be as explosive as we thought before, because I noticed an article come through the other day, that the average test is now reaching 3.8, the standard of identity on milk is 3.67.<br /> <br /> So, it's almost 1.3% up. Imagine what a big difference that's gonna make for the demand from ice cream, and cream cheese, and butter, and so on, is concerned. So, I suppose we'll see. Do you think we'll break $20 by the end of the year on the Class III price? I doubt it, but I think we could come fairly close. I think $19 is probably doable. That would mean cheese at $1.90 at some point, maybe in September, October.<br /> <br /> T3: I'm less bullish cheese in Class III than I am Class IV, because I think the continued lack of growth in the milk supply is going to affect the Class IV market more than the Class III market. I think the cheese plants will get their milk. But there’ll be some Class IV that won't. I'll add this to it, though. What I think is going on with the weather right now, and how wet it is, and how much people are struggling to get corn into the fields and things like that. It's already had its effect, and it will continue to have its effect.<br /> <br /> You may not see the effect of it in milk prices, or I should say in milk production, before this year's harvest. So, between now and September, I don't think you'll see much. But that higher feed cost may force some dairy farmers who are on the bubble out of the business. So, it may increase or continue to support, even at higher prices, the exodus of dairy farmers we've been seeing over the past couple of years. And so, I would say that it does have a bullish effect on 2020.<br /> <br /> Ted: The slaughter numbers that I've been following for the last couple of months, we were at about 70,000 per week, now it's 58, 59, 57.<br /> <br /> T3: A lot of that is seasonal, though.<br /> <br /> Ted: It is seasonal. But the bottom hasn’t fallen out of it. Even with the increase in price, we've seen the Class III price and the blend prices go up a couple of bucks, a hundredweight. Big numbers. And still the slaughter numbers are staying up there. It sort of follows along with the predictions that we've been hearing, and that the smaller dairymen are, given the good job market and so on, are going into a different line of work.<br /> <br /> Anna: I think the really small guys are, but we say that small farms are leaving, and I think that that's true, T.C. Jacoby & Co. - Dairy Traders clean 23:25 Does dairy product marketing need an overhaul? https://www.jacoby.com/does-dairy-product-marketing-need-an-overhaul/ Thu, 23 May 2019 14:15:52 +0000 http://www.jacoby.com/?p=1270 In a follow-up from our previous episode, Ted, T3 and Anna discuss the state of dairy product marketing. Plant-based milk alternatives are on the rise. Fluid milk sales have been in decline for decades. Is dairy falling behind? Does the way the industry markets its products need a makeover? And if it does, what would it look like? Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. In our last episode, we talked about changing consumer expectations and how those have impacted the dairy industry. But that discussion is incomplete without also talking about the ways dairy products are marketed. Before we ended the previous episode, T3 alluded to the difficulty the industry has had in marketing to consumers whose expectations have changed. We'll pick up where we left off. T3: Where are the greatest growth opportunities for the dairy industry today? Every single one of them is small and I don't mean that in a negative way. It's more specialty cheese, more unique products, more local products. I think that's where the opportunities are for the dairy industry. Smaller farms, smaller plants, smaller demand for products and things like that. That's where all the growth opportunities are. I think there's a ton of opportunities there, but I think our industry, for a couple of reasons, is really struggling with how to access that market, how to successfully meet the consumers' request there, and I think it's because we're so overwhelmed by, you know, we need to clear more milk. We need to clear a lot more milk. Let's build a big plant and that we're focusing on move the big things to solve this problem we've had about dairy demand and oversupply that we're not focusing on where the true opportunity is which is in the smaller opportunities. Anna: I would imagine that's harder to do too because with all the government regulation on food safety and everything, that's pretty cost-prohibitive for some of the small plants as well. T3: Yes. Ted: And if you look at the fact, switching to the demographics, you know, the population is not growing that fast anymore and our consumption has flattened out a little bit. Certainly, we're negative in Class I milk, which is probably a marketing issue more than anything else, but we're negative in Class I milk, but we're still growing in cheese, specialty cheeses and fractionated products and pizza cheese and so on. Yogurt has flattened out. So, the question, then, is building a 10-million-pound plant to produce a small piece of cheese where the industry needs to go? And my answer would be no. We need to adopt a different strategy, a strategy where you set up an environment where small producers who produce a highly specialized product can take advantage of the infrastructure that a group might develop, and I think that's where we're probably going to go because we certainly have a limited ability to continue to build 10-million-pound plants that produce one product and chew up that much milk in one product. It isn't going to work. You're going to hit the wall eventually with that approach and that, to some extent, might be where a little bit where we are right now. If we look at the cheese market and the way that cheese market is developed and so on, we're continuing to crank out barrels and blocks and mozz. Unless the population is going to continue to grow, our market isn't going to grow to accommodate all the production that these plants can throw out. So, the increase then comes from the smaller specialized, which is more difficult and certainly marketing is more of an issue. T3: And the cost per pound is much higher. Ted: It's higher, but on the other hand, you look at the variations of parmesan now that we see in the dairy case, in the cheese case with horrible marketing, it's just in there, it looks almost like somebody dumped a basket in there and didn't bother to e... In a follow-up from our previous episode, Ted, T3 and Anna discuss the state of dairy product marketing. - Plant-based milk alternatives are on the rise. Fluid milk sales have been in decline for decades. Is dairy falling behind? In a follow-up from our previous episode, Ted, T3 and Anna discuss the state of dairy product marketing.<br /> <br /> Plant-based milk alternatives are on the rise. Fluid milk sales have been in decline for decades. Is dairy falling behind? Does the way the industry markets its products need a makeover? And if it does, what would it look like?<br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. In our last episode, we talked about changing consumer expectations and how those have impacted the dairy industry. But that discussion is incomplete without also talking about the ways dairy products are marketed.<br /> <br /> Before we ended the previous episode, T3 alluded to the difficulty the industry has had in marketing to consumers whose expectations have changed. We'll pick up where we left off.<br /> <br /> T3: Where are the greatest growth opportunities for the dairy industry today? Every single one of them is small and I don't mean that in a negative way. It's more specialty cheese, more unique products, more local products. I think that's where the opportunities are for the dairy industry. Smaller farms, smaller plants, smaller demand for products and things like that. That's where all the growth opportunities are.<br /> <br /> I think there's a ton of opportunities there, but I think our industry, for a couple of reasons, is really struggling with how to access that market, how to successfully meet the consumers' request there, and I think it's because we're so overwhelmed by, you know, we need to clear more milk. We need to clear a lot more milk. Let's build a big plant and that we're focusing on move the big things to solve this problem we've had about dairy demand and oversupply that we're not focusing on where the true opportunity is which is in the smaller opportunities.<br /> <br /> Anna: I would imagine that's harder to do too because with all the government regulation on food safety and everything, that's pretty cost-prohibitive for some of the small plants as well.<br /> <br /> T3: Yes.<br /> <br /> Ted: And if you look at the fact, switching to the demographics, you know, the population is not growing that fast anymore and our consumption has flattened out a little bit. Certainly, we're negative in Class I milk, which is probably a marketing issue more than anything else, but we're negative in Class I milk, but we're still growing in cheese, specialty cheeses and fractionated products and pizza cheese and so on. Yogurt has flattened out. So, the question, then, is building a 10-million-pound plant to produce a small piece of cheese where the industry needs to go? And my answer would be no.<br /> <br /> We need to adopt a different strategy, a strategy where you set up an environment where small producers who produce a highly specialized product can take advantage of the infrastructure that a group might develop, and I think that's where we're probably going to go because we certainly have a limited ability to continue to build 10-million-pound plants that produce one product and chew up that much milk in one product. It isn't going to work. You're going to hit the wall eventually with that approach and that, to some extent, might be where a little bit where we are right now.<br /> <br /> If we look at the cheese market and the way that cheese market is developed and so on, we're continuing to crank out barrels and blocks and mozz. Unless the population is going to continue to grow, our market isn't going to grow to accommodate all the production that these plants can throw out. So, the increase then comes from the smaller specialized, which is more difficult and certainly marketing is more of an issue.<br /> <br /> T3: And the cost per pound is much higher.<br /> <br /> Ted: It's higher, but on the other hand, you look at the variations of parmesan now that... T.C. Jacoby & Co. - Dairy Traders clean 20:25 Consumer expectations are changing. How does dairy fit in? https://www.jacoby.com/consumer-expectations-are-changing-how-does-dairy-fit-in/ Thu, 16 May 2019 13:50:06 +0000 http://www.jacoby.com/?p=1265 Changing consumer expectations pose one of the most dynamic challenges facing today's dairy industry. More and more, consumers seek organic products from smaller farms in pursuit of healthier food. The irony? Newer, larger dairy farms and processing plants are more efficient and are better equipped to deliver "cleaner" products. So what do consumers really want? And how can dairy meet their needs? Ted, T3 and Anna discuss. Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. In this episode, we want to discuss whether the dairy industry has some catching up to do in terms of addressing consumers' attitudes about nutrition. We'll get to that in a few minutes. But first, let's discuss the recent spike in cheese prices over the last few weeks. T3, you've said that you think the rally is "hollow." What do you mean by that? T3: Cheese inventories are still very high. There have been a couple of pieces of data who have indicated that maybe demand has picked up a little bit but when you're sitting on a large amount of inventory, it takes a long time to really change the supply and demand balance. Just because a couple of data points say, "Hey, things might be getting better," doesn't mean you've solved the problem. It just means that maybe if you stay on this course for another six to 12 months, you might get to a point where you've solved the problem. And everybody's reacting to it by saying, "Hallelujah, the cheese price can go up," and I can tell you as a someone who has to go sell cheese every day, in the last three weeks as we've gone from $1.45 cheese to $1.73, more and more buyers have backed off and said, "I don't need this cheese today. I don't need this cheese anymore. I've got more than enough in inventory." I was just in Chicago in an industry meeting and the comment I heard from multiple converters of cheese was, "I'm pretty happy with where my inventory is right now." Because they saw the cheese market go from $1.45 to $1.73 and they're like, "Sweet, my inventory value just went way up." So, now what are they gonna do? They're gonna stop buying, they're gonna run their inventories down into the market. And so, we could easily go the other way. That's why it's hollow. Ted: And I tend to agree with that. Although I do think that most of the cheese inventories are hedged so they really carry the inventory is of nominal concern to them. And that's a change that's occurred over the last few years that will change how quickly this can change. It used to be, all of a sudden you get to a point that like somebody has flipped the light switch and, boom, it would take off one way or the other. It seems like the cycle has flatted out and lengthened because of the risk management, because of the storage ability, because of the flattening of demand and also, it's probably flattened on the dairy side too, on the supply side. People are breeding for beef right now and not for milk. T3: But that'll be—we won't feel the effects of that for another two years. Ted: Well, that's my point. It's gonna be what? Once it turns around… I don't think it'll turn around this summer and go the other way. It may not go as fast as a lot of people like to see but it'll continue for a long time. T3: It could. Ted: That's what I'm sort of thinking it'll turn out to be, which will be a change from what we had before. Anna: Let's move on. We talk about changing consumer expectations all the time. It comes up in pretty much every episode we do. Obviously, the food we buy and the reasons why we buy it always evolve over time. But right now, the dairy industry seems to be struggling with how to get people what they want. T3, start us off. In your opinion, what's going on? T3: We're dealing with a market environment today of rapidly changing... Ted: Expectations? T3: Expectations. That's a good way to put it. Changing consumer expectations pose one of the most dynamic challenges facing today's dairy industry. More and more, consumers seek organic products from smaller farms in pursuit of healthier food. - The irony? Newer, Changing consumer expectations pose one of the most dynamic challenges facing today's dairy industry. More and more, consumers seek organic products from smaller farms in pursuit of healthier food.<br /> <br /> The irony? Newer, larger dairy farms and processing plants are more efficient and are better equipped to deliver "cleaner" products. So what do consumers really want? And how can dairy meet their needs? Ted, T3 and Anna discuss.<br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. In this episode, we want to discuss whether the dairy industry has some catching up to do in terms of addressing consumers' attitudes about nutrition. We'll get to that in a few minutes. But first, let's discuss the recent spike in cheese prices over the last few weeks. T3, you've said that you think the rally is "hollow." What do you mean by that?<br /> <br /> T3: Cheese inventories are still very high. There have been a couple of pieces of data who have indicated that maybe demand has picked up a little bit but when you're sitting on a large amount of inventory, it takes a long time to really change the supply and demand balance. Just because a couple of data points say, "Hey, things might be getting better," doesn't mean you've solved the problem. It just means that maybe if you stay on this course for another six to 12 months, you might get to a point where you've solved the problem. And everybody's reacting to it by saying, "Hallelujah, the cheese price can go up," and I can tell you as a someone who has to go sell cheese every day, in the last three weeks as we've gone from $1.45 cheese to $1.73, more and more buyers have backed off and said, "I don't need this cheese today. I don't need this cheese anymore. I've got more than enough in inventory."<br /> <br /> I was just in Chicago in an industry meeting and the comment I heard from multiple converters of cheese was, "I'm pretty happy with where my inventory is right now." Because they saw the cheese market go from $1.45 to $1.73 and they're like, "Sweet, my inventory value just went way up." So, now what are they gonna do? They're gonna stop buying, they're gonna run their inventories down into the market. And so, we could easily go the other way. That's why it's hollow.<br /> <br /> Ted: And I tend to agree with that. Although I do think that most of the cheese inventories are hedged so they really carry the inventory is of nominal concern to them. And that's a change that's occurred over the last few years that will change how quickly this can change. It used to be, all of a sudden you get to a point that like somebody has flipped the light switch and, boom, it would take off one way or the other. It seems like the cycle has flatted out and lengthened because of the risk management, because of the storage ability, because of the flattening of demand and also, it's probably flattened on the dairy side too, on the supply side. People are breeding for beef right now and not for milk.<br /> <br /> T3: But that'll be—we won't feel the effects of that for another two years.<br /> <br /> Ted: Well, that's my point. It's gonna be what? Once it turns around… I don't think it'll turn around this summer and go the other way. It may not go as fast as a lot of people like to see but it'll continue for a long time.<br /> <br /> T3: It could.<br /> <br /> Ted: That's what I'm sort of thinking it'll turn out to be, which will be a change from what we had before.<br /> <br /> Anna: Let's move on. We talk about changing consumer expectations all the time. It comes up in pretty much every episode we do. Obviously, the food we buy and the reasons why we buy it always evolve over time. But right now, the dairy industry seems to be struggling with how to get people what they want. T3, start us off. In your opinion, what's going on?<br /> <br /> T.C. Jacoby & Co. - Dairy Traders clean 28:01 SPECIAL REPORT: African swine fever virus https://www.jacoby.com/special-report-african-swine-fever/ Mon, 06 May 2019 08:33:43 +0000 http://www.jacoby.com/?p=1263 In this special episode, Ted and T3 enlist the help of Richard Bradfield, General Manager of St. Louis-based International Ingredients Corporation, to discuss the impacts of the African swine fever virus on dairy ingredient export sales to China. Jeff Johnson, T.C. Jacoby & Co.'s Vice President of Dairy Ingredients, also sits in. Nearly half of the hogs in the world are raised in China, but the combination of fatalities from the virus and preventative culling has sent herd numbers plunging down as much as 35%. It's drastically reduced demand for whey permeate, a crucial part of hogs' diets. Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. T3: Welcome to "The Milk Check." Today we have a special guest in Richard Bradfield. Richard runs International Ingredient Corp? Richard: Am part of the team. T3: And part of the team for International Ingredient Corp. International Ingredient Corp is the second largest whey permeate manufacturer in the United States, and with everything that we're hearing about with African Swine Flu and what is going on in Asia, we thought it would be a great topic to talk about. And so, we wanted to find somebody who is an expert who can tell us a little bit about what is going on in Asia, what is African swine flu, and how it's affecting our dairy markets and our whey markets. And so, Richard, thank you for joining us today. Richard: Thank you. T3: Why don't we start, why don't you tell us a little bit about International Ingredient Corporation and what you do, and why you got...why we would think of you as an expert in whey permeates? Richard: I have no idea, but... So, thank you very much. So, again, Richard Bradfield with International Ingredient Corporation based here in St. Louis. We are an animal feed ingredient company, so we have 10 facilities throughout the U.S. About half of our business is in the dairy side of things, so it's an important part of our business. We also export—about half of our production is exported, so the export markets and what's going on in China is obviously very important to us. I've been with the company for about 25 years, and I am currently the General Manager of the group there. T3: About half of your production is exported? Richard: Yes. T3: For the whey permeates that you produce, is that about a 50/50 split as well? Richard: I would say, overall under whey it's about 50% is exported, for the permeates it would be a larger percentage of the production is exported. I would say probably more like two-thirds exported. T3: And of that two-thirds that's exported, what percentage would you say goes to China or Southeast Asia? Or, just...let's just talk about in terms of the general permeate market in terms of your best guess. Richard: Of our business? T3: Mm-hmm. Richard: Our business, basically, we've always felt strongly that you needed to have…you know, be in certain regions, so we're obviously here domestically. We've focused on, you know, Mexico, Latin America, and also then China, Southeast Asia. Of the three components, I would say Southeast Asia is the largest part of our business, followed by domestically, then followed by the Latin American region. T3: When did you guys first start hearing about the African swine flu, and I guess, why don't you just tell us a little bit about what is going on right now in China, and what is going on in Southeast Asia, and what is this virus we're hearing about? Richard: So, it's the African swine fever, because there's also the avian flu to something totally different, and we just recently heard of some cases popping up there as well. So, African swine fever, it's been around for a number of years, predominantly, a lot of problems have been in Russia, Eastern Europe, and we're hearing about cases in the wild boar herd in Europe as well. So, In this special episode, Ted and T3 enlist the help of Richard Bradfield, General Manager of St. Louis-based International Ingredients Corporation, to discuss the impacts of the African swine fever virus on dairy ingredient export sales to China. In this special episode, Ted and T3 enlist the help of Richard Bradfield, General Manager of St. Louis-based International Ingredients Corporation, to discuss the impacts of the African swine fever virus on dairy ingredient export sales to China. Jeff Johnson, T.C. Jacoby & Co.'s Vice President of Dairy Ingredients, also sits in.<br /> <br /> Nearly half of the hogs in the world are raised in China, but the combination of fatalities from the virus and preventative culling has sent herd numbers plunging down as much as 35%. It's drastically reduced demand for whey permeate, a crucial part of hogs' diets.<br /> <br /> <br /> <br /> <br /> <br /> Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind.<br /> <br /> T3: Welcome to "The Milk Check." Today we have a special guest in Richard Bradfield. Richard runs International Ingredient Corp?<br /> <br /> Richard: Am part of the team.<br /> <br /> T3: And part of the team for International Ingredient Corp. International Ingredient Corp is the second largest whey permeate manufacturer in the United States, and with everything that we're hearing about with African Swine Flu and what is going on in Asia, we thought it would be a great topic to talk about. And so, we wanted to find somebody who is an expert who can tell us a little bit about what is going on in Asia, what is African swine flu, and how it's affecting our dairy markets and our whey markets. And so, Richard, thank you for joining us today.<br /> <br /> Richard: Thank you.<br /> <br /> T3: Why don't we start, why don't you tell us a little bit about International Ingredient Corporation and what you do, and why you got...why we would think of you as an expert in whey permeates?<br /> <br /> Richard: I have no idea, but... So, thank you very much. So, again, Richard Bradfield with International Ingredient Corporation based here in St. Louis. We are an animal feed ingredient company, so we have 10 facilities throughout the U.S. About half of our business is in the dairy side of things, so it's an important part of our business. We also export—about half of our production is exported, so the export markets and what's going on in China is obviously very important to us. I've been with the company for about 25 years, and I am currently the General Manager of the group there.<br /> <br /> T3: About half of your production is exported?<br /> <br /> Richard: Yes.<br /> <br /> T3: For the whey permeates that you produce, is that about a 50/50 split as well?<br /> <br /> Richard: I would say, overall under whey it's about 50% is exported, for the permeates it would be a larger percentage of the production is exported. I would say probably more like two-thirds exported.<br /> <br /> T3: And of that two-thirds that's exported, what percentage would you say goes to China or Southeast Asia? Or, just...let's just talk about in terms of the general permeate market in terms of your best guess.<br /> <br /> Richard: Of our business?<br /> <br /> T3: Mm-hmm.<br /> <br /> Richard: Our business, basically, we've always felt strongly that you needed to have…you know, be in certain regions, so we're obviously here domestically. We've focused on, you know, Mexico, Latin America, and also then China, Southeast Asia. Of the three components, I would say Southeast Asia is the largest part of our business, followed by domestically, then followed by the Latin American region.<br /> <br /> T3: When did you guys first start hearing about the African swine flu, and I guess, why don't you just tell us a little bit about what is going on right now in China, and what is going on in Southeast Asia, and what is this virus we're hearing about?<br /> <br /> Richard: So, it's the African swine fever, because there's also the avian flu to something totally different, and we just recently heard of some cases popping up there as well. So, T.C. Jacoby & Co. - Dairy Traders clean 32:27