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 And, is Washington relying on outdated methods to solve a uniquely 21st century problem?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.
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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.
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.
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