Last year didn’t end up being too bad for the dairy industry. Even still, a massive milk supply and reduced processing have caused terrible premiums, and some producers are starting to feel the pain.
While strong export numbers show growth for the industry, it’s little solace for many farmers. A big reason exports are up is because domestic pricing is so low.
Can the industry turn increased exports into healthy competition for milk from the farm or is market volatility too much to reign in?
This is the second of a two-part episode. If you haven’t listened yet, hear how the labor market is affecting the dairy industry in part one.
T3: I think most dairy farmers would agree that 2020 and the pandemic was actually pretty good for the dairy farmer. Not only did a number of farmers have pretty high milk prices, especially in Class III markets, but there was also some government money, whether it’s PP money or other money that went directly to the dairy farmer. So, their equity, most of them have pretty good balance sheets. And by the way, the real estate market right now is really hot also. And so, you know, the banks are probably looking at most dairy farmers and are more than happy to lend them money. To me, that’s a little bit scary because it means there’s no financial pressure right now on dairy farmers to reduce supply. And as much as nobody wants to talk about how dairy farmers going bankrupt would be a good thing, because it never is a good thing, that’s usually what needs to be happening for us to reduce our milk supply. And right now I don’t think that’s happening, which means even if we have a lot of farmers talking about how they’re not increasing their herds, it’s unlikely that there are a lot of dairy farmers leaving the business, or maybe the best way to put it is cows leaving the business. There may be some dairy farmers selling out, but the cows are probably just moving down the street.
Anna: I think it was fair to say that a lot of people were in really good shape. I don’t know that that’s as true now. I think that the pain is starting to make its way down the pipeline.
T3: What are the silver linings? Exports have been good. And I’ll be honest, we’re recording this podcast on July 7th and just lately, we’ve made a number of good and high volume export deals, which is good, but there’s a downside to that. I believe exports are very, very important for the future of the dairy industry so I want to make sure everybody understands what I’m about to say. Exports are necessary if we want to keep growing our dairy industry, but there is definitely a relationship between lower milk prices, especially futures prices and higher exports. The lower the prices in the U.S. typically, the more competitive we are in the international market. We’re really competitive in the international market right now because prices are low. And so, we’re exporting a lot. Well, that’s great we’re exporting a lot, but we’re exporting a lot because prices are low, especially relative to other parts of the world. We are pricing our exports delivered to various parts of the world a lot higher relative to U.S. prices than we used to because our freight costs to get it there are a lot higher too. You know, whereas maybe we used to be able to get powder to Asia for 4 cents a pound. Right now we’re pricing it at 8 cents or 9 cents a pound. Ultimately, that backs into what the dairy farmer gets for his milk, but that’s where we need to be in order to be competitive. And so, even if you priced it differently ultimately, the dairy farmer would receive the same value for his milk. It would just maybe look like a different equation. So, exports are good, that’s great, but they’re good because prices are low.
T2: Well, exports are going to continue to be the driver, and maybe the solution to the problem is for us to do a little better job dealing with the exports. I think we have been, I think particularly the U.S. sec has made a major contribution getting us conversing with the international marketplace, but I also think there’s a lot more that needs to be done. We don’t have the personal relationships in the marketplace that the Europeans do at this point. They’ve been doing it for generations and we’ve been doing it for, what, starting from scratch 20 years ago.
T2: That’s true. I would also say this, there are a number of relationships between importers of dairy, let’s say in Asia, though, it can apply to a lot of different parts of the world, and producers of dairy products in places like New Zealand and Europe and Australia, where they’re able to figure out ways to price those dairy products year-round at a competitive price. One of the things that’s holding U.S. dairy exporters back is the volatility of our markets and the way that we’re set up in terms of the four classes of milk that we have, make it difficult for us to be competitive 12 months a year in international markets. There’s two sides to this argument, and I apologize if it sounds like I’m talking out of both sides of my mouth, but on one side, the argument would be, well yeah, what that means is we’re always going to get the higher price we can get because if the international market is too low, we’ll be able to charge higher prices for our milk by keeping that milk in the U.S., that’s true. But the flip side of it is we have lower exports because we’re not in that market 12 months a year a lot of the times, and that forces us to be players on a commodity level in international markets rather than on a value-added level. And that’s the second part that I think hurts the U.S. dairy farmer, because we are not able to put ourselves in a position to be competitive 12 months a year in the international markets in various dairy products, it’s very hard for us to establish value-added branded opportunities in those markets at the same time.
T2: So, why are we not able to have a consistent export business 12 months of the year? We commented lately on the difference between the cash price and the futures price, and the fact that when we make an export deal two and three months out, it has to be based on the futures price, and the futures price is often at odds with the cash price, sometimes, at least measured in milk pricing, $2 and $3 a hundredweight different than what the milk price would be. Synthetically, what the exports price would be measured against the milk price is often off, I guess, is what I’m trying to say.
T3: That is a loaded question for this reason if due to government regulation or government influence, a company were to sell any product, in this case, we’re talking about dairy products, in another country at a price below the prevailing market price of the manufacturing country, in this case, the U.S., that would be considered dumping. And that is illegal. You know, we’re members of GATT or the WTO, and so that would be something that other countries would cry foul and we’d probably get penalized for it. It’s illegal for a government to influence that. It isn’t illegal for a private organization or company to make a decision to have a flat price for the year of a product in order to ensure a market share 12 months a year. There are cooperatives in Europe that are big enough that when they make international deals, they will commit to a 12-year price, or they will commit to a price that essentially is below the prevailing market price, but they’re doing it because that’s a great way to get rid of dairy products.
And so, they want to make sure it gets moved year-round, and so they’re willing to price that product aggressively to make sure it keeps their plant running at full capacity, to make sure that they’re getting rid of all the milk that they’re taking in in their plants and in their co-op and they’ll do it. And so, there are times where even if the international price says it’s, you know, $1.80 for cheese, we have the EU price everybody’s talking about as $1.80 for cheese, yet we find yourselves competing against $1.60 in certain markets. And the reason is, is because there’s going to be an organization, whether it’s in Europe or it’s in Australia or somewhere where it’s important enough to make sure they have that business, that they get very, very aggressive on price. And they technically end up selling that price below the prevailing market prices in their home manufacturing country. In the U.S., because of our federal order system, it’s very difficult for the U.S. to do that.
T2: Well, I’m not so sure it’s that difficult. You know, we have a private organization that subsidized exports now, and on a voluntary basis, dairy milk are assessed 4 cents a hundredweight, which is a pool of money that national milk accumulates, which is called the CWT program. And they subsidize exports of products, you apply for a subsidy and you get it. In my mind, paying for the buck on that to the subsidy program is huge. You know, I think for our 4 cents a hundredweight, it’s going to affect milk price at certain times, a buck a hundredweight, at other times almost nothing, but it’s inconsistent, they admitted that, but the basic effect of the 4 cents is huge. So, what about 10 cents or 20 cents? If we had that program, we could obviously control the money that’s available depending on market conditions. As long as it’s privately based, I think it could make a huge difference in the ability of the manufacturing facilities to compete for milk supply in order to service the export market.
T3: I think the people who are running the CWT program do a really good job. We’ve been able to take advantage of CWT monies at times for exports, and there are a lot of good organizations in the country that do. And so, I’m not opposed in any way to CWT. CWT, though, doesn’t necessarily lend itself well to the consistency that can come from organizations in some other countries.
T2: That’s true. And the marketplace, in general, is inconsistent, by its very nature it’s inconsistent. What you’re trying to do here is increase the price of the dairy milk. That’s the objective. And we have an export market right now where if we could subsidize at greater extents than we currently do, we could sell one hell of a lot of product on the international market, and we could compete with the Europeans in the kind of programs that they have based on their marketing proclivities, which are admittedly much different than ours. They don’t have a federal order system and they also have multipurpose plants which we don’t have. I think it would be hard for the dairyman to see, but if we increase that CWT allowance with the idea of increasing exports in a major way, that could beat up a lot of inventory and greatly increase the competition for milk on the farm, which is I think what our objective should be.
T3: Well, I wouldn’t be opposed to that. I would argue to a certain extent, not fully, but to a certain extent it’s like pushing against a string. All you’re going to do is move the whole market. But I do think it will have an effect of increasing exports. Believe it or not, right now, the biggest limiting factor we have for exports is the international shipping market is a mess. There’s a shortage of containers. It’s just very difficult to get products from point A to point B. And I do think over time, the market itself will take care of that. More containers will be made. Some of the prices that shipping companies are charging, they’re going to be profitable enough that they’re going to expand, and at some point that will be addressed. I think the same thing is true of our domestic shipping market. It’s just going to take time.
T2: And I think it will too. And I also have to say that if the scenario that I’ve tried to describe isn’t handled properly, it could wind up being a waste of money. The question is, how do you increase prices on the farm? And if it’s handled properly, I think you could do that. But then it could go the other direction in a hurry when we’ve exported everything and all of a sudden the market would collapse around us. Obviously, it could have an adverse effect, but it would create less milk for domestic consumption. It would cement the exports as a major source of sales for the U.S. dairy industry if we did it properly.
T3: I agree with that. I think so too. You know, the good news is on exports is my hunch is exports are going to be really, really good for the next 12 to 24 months. I think international demand for U.S. dairy products is solid. We’re seeing a lot of really strong, solid demand throughout the world for both cheese and powder and that’s exciting. And so, I do feel very good about the U.S.’s prospects for exports in the coming months. But I will also add that one of the reasons that I am very optimistic about exports is I do believe that U.S. prices will remain competitive in the international marketplace for the next 12 to 24 months as well. And those competitive prices you can read between the lines, but it probably means that our milk prices are going to be on the low end of the range. And that is probably not what the dairy farmer wants to hear. And let me be fair, I tend to be the most bearish Jacoby, and so you can take what I have to say with a grain of salt, but I do think we’ll be competitive in the export market, but I also think U.S. dairy prices are going to be a little bit lower than expected over the next 12 months.