The Teds assemble a full crew to approach the primary question on the milk market’s mind: What does a war in Europe mean for the dairy industry? To help answer that question, they’ve enlisted Norman Oldmeadow, a dairy industry veteran and current managing director of Oldmeadow Consulting.
Norman fields questions about Russia’s commercial relationship to the EU – as well as Ukraine’s – what happens to freight, and how Ukraine’s position as one of the world largest grain exporters signals more trouble ahead for milk production numbers.
Along the way, Norman discusses some of the UK’s dairy issues that hit close to home for US farmers as well.
T3: Welcome everybody to our March podcast. We have a guest speaker today. His name is Norman Oldmeadow. I’ll give Norm, in a second, a chance to introduce himself. We also have a bigger group today than our usual suspects of myself, my dad and Anna. Jacob Menge, our risk management and trading strategy director is on the line with us, Gus Jacoby, president of our fluid group; Don Street, our director of global strategy, as well as Norm have all joined us. And our topic today is: How is the conflict in the Ukraine going to affect dairy prices? Norm, why don’t you lead us off? Tell us a little about yourself.
Norman Oldmeadow: Okay. Well, I first came across Don a long, long time ago. I got involved in the food industry in the seventies when I joined what you know as M&Ms, but in the UK it’s called Mars. And that got me involved in the milk and dairy industry amongst other things, sugar and cocoa and so on. But once I left Mars, I got involved in the dairy trading world and subsequently ended up starting a business in 1992, which was called Meadow Foods. And Meadow Foods was started by me doing the trading. And I was financed by two guys, a chap called John Kerr who may be known to some of you with his company called Fairfield. And my immediate partner then was a chap called Simon Chantler, who I think at the time was milking about two and a half thousand cows on three farms. And I stayed with that business, running it for 17 years before I retired.
However, once I retired, the people that I’d been working with in various manufacturers and traders and the European market asked me if I’d like to set up a consultancy and do some additional work, which is basically what I have been doing since about the mid – well, I was 65 then, so 10 years really – and I’m trying to stop, but they keep asking me to carry on. I think I just get very interested in the topic. So that’s me. I’m doing consultancy now. So I’m in everybody’s pocket learning as much as I can and trying not to confuse too many people.
But I mean, the topic about Ukraine, the first thing you would say in Europe is: Ukraine, now, what do they do in the dairy industry? And you have to go back to the way in which the European Union is set up in the sense that nothing gets in unless they want it in and anything can get out that they can move. And for a long time, business with Ukraine was quite small, but over the last few years, the cheese business has improved, mainly from Poland and partly from Germany. And I think at the last count, they were importing about 50,000 tons. Not much else, a bit of whey probably, and I think some butter.
But in terms of absolute trade between Europe and Ukraine that’s more or less it. There are much, much bigger fish to fry with dairy, of course, than there would be there. Now, I mean, you’ve got to remember that Ukraine is a huge agriculture-based country. I didn’t realize until the other day that it’s even bigger than France, and France is quite a big place when you look at it on a map. And they are probably one or two of the biggest wheat and grain exporters in the world. I can’t think who the other ones might be, but they’re certainly either number one or number two. And again, the product doesn’t generally come into Europe, but it goes everywhere else or it was going everywhere else. They’re a very valuable country to have your toe in. And although we might think that Mr. Putin is just doing it for his own gratification, I think you’ll find it’s really about what that country is worth.
T3: Ukraine is often called the breadbasket of Europe. Is there a lot of feed imported from the Ukraine by dairy farmers in the EU?
Norm: No, not really. I can’t find any statistics that suggest much of it comes our way. That’s not to say things might not change in the future, but whereas we might offer them a NATO membership if this was all sorted, I’m not sure yet whether the European Union is ready to offer them the EU. Because I can’t get my head around why they didn’t, when you consider they voted in all the Baltic states, Romania, Bulgaria, even Croatia, and yet not Ukraine. And by the time all this blew up in our faces, it would be argued it was a bit too late to say “Well come on, let’s do it.” So the Europeans are all sitting just outside the wall, pushing quite a lot of stuff through the wall I suspect, but not wanting to be seen to be directly aggressive with Russia. The impact in European agriculture: not really. In terms of taking markets away that they had: no, not really. But inevitably it is disrupting freight channels.
T3: Do the Russians import a lot of dairy products from Europe?
Norm: Absolutely not. I can’t remember, but I think it was when they went into somewhere probably Syria or somewhere, they put them on the naughty step. And since then they haven’t imported much. They’re still importing from New Zealand. I think they used some ruse to stop the Europeans going in, but the Europeans don’t appear to very much. Having said that, I went to St. Petersburg on a ship about three years ago, and we went into supermarkets just to look and see what was happening. And you could see European products everywhere. So it’s like, “No, we’re not having European products in here,” but they’re coming in. Like I’ve heard that the Germans are embargoing paying the Russians anything. And yet this morning, it was announced that the German gas company had sent 300 million Euro to the Russians, not yesterday to pay for the gas. So what you believe is not what you see, what you hear is definitely not what’s going on. It’s very, very difficult. Isn’t it? I think there was more exciting yesterday on GDT than it was watching the dairy market in Ukraine to be honest.
T3: I was actually rather surprised that the GDT was as strong as it was yesterday, given the conflict. It sounds like the rest of the world doesn’t think the conflict is going to affect the dairy markets that much.
Norm: I never quite understand who’s bidding to the extent that they’re pushing prices up the way they are. But if you were short of a few ton and you’re going into the trough in New Zealand and you haven’t really got a handle on what their current stocks carrying over are, although I suspect they’ll be bigger than we think they are. If you look at their milk politics, they do look as if they’ve had less, their solids look as if they’re down on where they were the year before. So they could say, “Well I haven’t got the stock. I need to buy and I’m going to get into an auction.” And we all know what happens if things are a little tight and you get into an auction. You say, “Well, I’ve got to bid another dollar and another dollar.” And before you are, you’ve got $20, maybe $50.
And yesterday, if I looked at my charts last night, I could see that the GDT price of butter is now the same as AMF. And Don will tell you, I used to make 30,000 tons of AMF, and I’d be astonished to find you could buy 100% fat for the same price as 82. But yes, you can. I’ve just written to one of my ice cream companies this morning and said, “It’s about time you stop using butter in your ice cream and switched to AMF. Tell your UK supplier that it should be the same price and see what he gets.” It’s very odd, but I personally don’t know where Ukraine is going to end up in terms of food and feed, but certainly those people who buy wheat are going to be a bit longer waiting.
Don Street: Is there much of a corn impact from the Ukraine or is it primarily wheat?
Norm: No, I think it’s both. They really are big. If you get onto FAO statistics, Don, which I used to take every six months, their food printout, you can look in there for feed and food and you’ll find pretty much all of that lot will be in there as it is from milk as well. So it is definitely a go to book. I mean, okay, it’s three months out of date, maybe, but you’ll get a feel of kind of volumes in a normal year that, they’re pushing out. But it won’t be coming to Europe, I’m afraid.
Don: In terms of Russia’s imports earlier this week, Fonterra said they were stopping all trade with Russia. And from what I understand on the statistics, it’s primarily butter. It looks like about 2000 tons a year, but that would be a winter consumption product. So it really doesn’t impact nearby trade until you get towards, well, the new season in New Zealand.
Norm: I haven’t read anything about Turkey in this debate, but they’re supposed to be members of NATO, or at least associated. And they are one of the suppliers to Russia these days, as is India, I believe, which is why maybe India abstained the other day, didn’t want to get caught on the wrong side. But New Zealand would be one of their biggest. It won’t be us and it won’t be the U.S. Because the countries that are in conflict are in such close proximity to each other, it isn’t really going to affect freight movements from U.S to the South, Southwest, Southeast Pacific. So it’s a very close little operation. The people that are affected are along the line of the European Union. And they may very well be moving product into that part of the world for humanitarian grounds, but it won’t be normal trade.
T3: Do you think you could make the case that it’s almost bullish EU dairy prices because you don’t move a lot of EU dairy into Russia, but you may use it to feed the refugees?
Norm: Yeah, but it won’t be a significant quantity. I think, as far as Europe is concerned, it’s been the decline in milk production in Germany and France that has had a pretty important impact. Germany, 30 something billion liters, and France, about 25. They represent over 40, 45% of the European milk volume. So they’re pretty important, those two. And if they’re not hitting base, then people are moving milk around all over the place to fill the gaps. The Netherlands is another one that’s been down actually, but Netherlands is a bit more complicated because the government brought in some kind of rule about how many cows or how many cows you could have on a piece of land. And they brought in phosphate licenses. You know, you’d have to get a book out to work out what the heck that’s got to do with milk, but believe me, you can trade phosphate licenses to produce more milk and it’ll have something to do with effluence and management of the whole. So the Dutch of being down, and I think there’s a good possibility that one or two others are going to get caught.
Ted Jr: Norman, given the time of the year and so on, and given the effect of the feed prices on milk production, is the Ukraine going to be able to get their crops in the ground?
Norm: That’s a very good question. It’s also a question of whether they’d be allowed to, with the Russians racing about here. You’ve seen the map that comes out almost every day. You see how much penetration there is of the Russians in Ukraine. There’s still three quarters of it that don’t appear to have any Russians in there. And that’s the middle belt where there’s probably most of their cereals are grown. I can’t imagine too many farmers going out, riding around on a tractor planting seed while somebody’s over their head with a chopper trying to blow them up. So I don’t think anything’s going to happen until we get some resolving of what’s going on. And that will be a problem if we lose that amount of volume, it’ll pick up somewhere.
Ted Jr: So the milk production, if that scenario does play out that way, let’s say, for example, this thing develops into a protracted guerrilla war, it’s hard to imagine that the feed prices won’t be headed up.
Norm: Absolutely, no doubt about that. Anything else that’s involved like even oil and gas I did hear yesterday that the U.S has released some of your reserve stock of oil, but it’s hard to see. And anyway, I mean, you know what traders are like if they see there’s an opportunity to make a buck by pushing the price up, they’ll do it. You never quite know what the headline price is do you? Well, you know that somebody’s paid X for are a ton, but you don’t know what the other thousands and thousands of tons have already been sold at. And it’s very difficult when you’re a trader to know, that’s why I like the way the GDT does it when it says the average price increase was 5.1%. Well, how relevant is that to putting 10% on a cheddar price? The devil is always in the details, Don taught me that.
Don: You’re too kind.
T3: From a dairy perspective, the biggest effect this conflict will have on the dairy markets is an increase in feed costs.
Norm: Yeah, but it’s been bad already. And I can’t think it’s going to get any better. We are very short of people to work on farms and fields in agriculture, in Britain. As soon as we signed up to Brexit, I don’t know how many it was five or 600,000 people went home thinking that we didn’t want them here. They’re all coming back now, big time, that’s the law of unintended consequences. We now have far more people to do the work that we didn’t have. You looked at the same thing, I was going to say with Mexico, without that labor coming across to work in these industries, it’s difficult to see how they function. And that’s a serious problem here. Firstly, for sollid crops, any kind of cabbages, potatoes, fruit, we just don’t have people to process and pick them.
T3: Mexican immigrants are a large portion of the labor force on a lot of dairy farms, so we certainly understand that here. But it sounds like when you look around the world, milk production is down in New Zealand. Milk production is down in most of Europe, as we just discussed, down here in the U.S. And if feed prices are going to remain high, and that’s the big take away from the conflict in the Ukraine, it’s hard to imagine a scenario where we reverse course and we start seeing milk production put up positive numbers anytime in the near future.
Norm: I have a very simple philosophy for that in this country because 50% of our milk goes into a container and is sold through a supermarket, and the supermarket buyers are not deaf in one ear, they’re deaf in all of them. And while the price of feed has been going up and the spot price of milk’s been up at 50 pence a liter, can’t imagine what that would be in dollars, but take $1.30, you’d be pretty close. People who are short of milk because it’s dropped off, I was talking to one person the other day, who’s lost £300,000 in the last four months because he’s not got enough milk to fulfill his contracts. He’s had to go into the market and leverage it from cheese makers who don’t want to let it go. So he says, “I’ll pay you another penny.” They say no. “I’ll pay you another penny.”
In the end, he gets to 50/51 pence and he buys his milk, but he can’t get any more from his market. So he’s just losing to stay in the game. And until the supermarkets push their price up, which they’re very reluctant to do, although they have every opportunity now, because every time you pick up a newspaper or listen to the television, everyone’s telling you that inflation is not 1%, but it’s 5, 6, 7 – where do you want to put it? So now if they want to put the price up, they could do it. And if you could put the kind of price on to the raw base, you could pay the feed price. And don’t forget for the next six months most, well, not so much for you because you have store based cattle, but here, a lot of cows are out.
Where I live partly here in near Southampton, I also live down in the west country in Cornwall and their cows have been out there for a month. In fact, some of them never went in and the grass in my field next to my house is eight, ten inches and this is beginning of March. So, if we’d had cattle on those fields, we wouldn’t be feeding them additional. It’s really, how do you get the market — the retail market we talked earlier about what is the headline price? Well, the headline price doesn’t mean much to supermarkets because they’re all looking over each other’s shoulder at each one saying, well, if I pay another penny, I’ll lose 5% of my trade.
T3: We have the same issue here in the United States. The best way to describe what’s going on here is inflation may be up 7%, but on the dairy farm, inflation’s probably up more like 20%. And between increase in feed costs, increase in labor costs, increase in construction costs, increase in logistics costs, they all add up. Well that increase isn’t translating all the way to the supermarket shelf. And so the demand is still there.
Norm: I do occasionally go on the supermarkets here just to see what’s happening. And if I just cast my mind back to the plant milk case, if you compare what you have to pay for a pint of milk off the farm compared to what you’re paying for a pint of oat milk, almond milk and all the other silly milks, I think you’ll find they’re quite a lot more expensive. The supermarket seem to be happy to sell these plant products at a higher price because hey, it’s better for you. Most of these supermarkets regard bread and milk and few other things as total loss leaders. And it’s only important to how expensive it is for the guy because if he can’t get the price here, we’ll go around the corner to, we won’t go to Wegmans. It’s too expensive, but there’ll be other places.
You’ve got them and we’ve got them here. And if you can’t get the price to represent what the value of those products is, you’re going to lose farmers. And it takes a while, takes maybe a few years, but you’re gradually seeing more and more farmers quitting. And also of course they sell their farm to their mate who sells his farm. And eventually you have one farmer with 10,000 cows. We haven’t got many of those, but it’s going in that direction. Our herd size in this country used to be 50 or 60, was a family farm. Everyone worked on the farm. Then it became a hundred. The average size now is probably getting towards 200 and that’s all designed to try and minimize the costs. But if you can’t get the price up of the product you’re trying to sell, that’s why a lot of people have changed over to cheese, I think. That’s it. No simple answers to it.
Gus Jacoby: I’d like to ask a question of if it’s okay. We have 15 to 18%, more like 18% over the last couple years of dairy solids being exported out of the U.S, this whole global situation right now has I think increased the already frustrating freight prices. I mean, I read an article here, I think yesterday about them saying that we may go from 10,000 per container to 20, maybe even 25 or something like that for a period of time. Obviously that’s going to have a significant impact on our ability to export. And I’m curious, how do you see the export piece settling out over the next couple years as we work through this issue?
Norm: Well, I think first of all, people think that the high freight prices is a blip because we’ve had two, well, I don’t know how many lockdowns you’ve had but, we’ve had several here when nothing moved and everything was in the wrong place. And then we lost a lot of people who were self-isolating, if that’s the expression. So when you wanted to move a truck, you suddenly found we couldn’t. And as we came out of COVID, we realized we were 20 to 25% short of truck drivers. Where did they go? Well, some of them went home after Brexit started here, but a lot of them just didn’t go back because it was happier taking the money and looking like they got COVID. And if you spread up widely enough, it caused absolute chaos. I’ve heard stories that the Chinese send containers to the west coast, they empty it and take it straight back to China because they haven’t got time to fill it out with stuff to go back with. You know, how mad is that?
But, and then we had that damn great ship, that blocked of Suez Canal, but I don’t know how long. So I think there were lots of issues around the freight business. It’s hard to imagine having to pay 10, 12 or $14,000 for a container from the far east. But if nothing changes then whatever it was we were buying from the far east, we’ll start making it a lot closer. If you put the price of a container with whatever is in it, onto the cost of the goods and then say, well, I could have made that in wherever. You could say I could have made it somewhere in the U.S, but you don’t.
Gus: I guess trying to think this through one time we looked at the discrepancy between our powder price and the powder price on the other side of the globe. We’re going to need a 12 cents just to get it there. Now we’re looking at what, 20, 25 Don, right? At some point it might get to 35 or whatever for a stretch. I mean, that’s going to either A: push the discrepancy more – I mean in a tight market though, maybe not, maybe it just keeps a lot of solids home. Right?
Norm: So who are you competing with over there? Is it in New Zealand, Australia?
Gus: Well, I’m looking at New Zealand, Australia, but I’m also looking at the EU as they start to expand again after they get out of this little rut. I’m just trying to see how this is going to impact. Because we’ve depended on pretty strong import or exports for two years now.
Norm: How much cheaper is the average price of your goods to what’s happening in Europe or in New Zealand? And when I plot these graphs for my clients, the U.S always comes out lowest, which I think is very charitable of you, but I don’t know why you do it. There must be a reason.
Gus: Certainly for the last couple years. Yeah, that’s right.
Norm: You see people over in Europe say it’s not fair the U.S are exporting more skim to the global market now than we are. We always did that. Why are they doing it? Well, the answer is because you’ve been 10 to 15% cheaper. And eventually people said, “Oh, I’ll give it a try. I won’t buy their product because I don’t know if I like it.” Then in the end you say, “God, if it’s going to be that cheap for that long, I’ll give it a try.” So now you’ve got to get the price up. It’s extraordinary. I mean, don’t forget you think New Zealand’s damn close to places in the far east. I’d give you, get your map out and have a look. If you’ve got to take every container to New Zealand empty because there’s nothing else to go there for, and then you got to bring it out with logs in it or sheep in it or milk, that is not cheap.
And they’ve got no God-given right to containers any cheaper than anybody else I suspect. So you are loading out stuff – Don always was used to say me, in the good old days we could send lactose to China for nothing. Because all we were doing was using the same containers that they were sending the junk to us for. You didn’t pay anything for them. So paying something for them is something and you’ll still be paying less than New Zealand. You must be. Two arguments there: They’re not going to have any cheaper freight than you are, actually. And you are selling the stuff a bit cheaper than they are as well. Now of course they’ve built up this idea that they’re super-super, so they can always get it a little bit more than the rest of us. Probably not true.
Don: Yeah. I would characterize it Norman, that U.S pricing – and let’s just talk skim – were perpetually 50 to $75 a ton cheaper than Europe and more like $200 a ton cheaper than New Zealand.
Norm: Yeah. I’ve always looked at your prices and thought, I wonder why you can’t sell more. And I suspect it’s because you get the skim off the back of your fat business, which is going into ice cream or whatever and butter and so on. So maybe you just can’t make any more, but if you could, I’m sure you could sell even more.
Don: I think there’s a lot of reasons including plants that can make and hit tight, medium heat specs or thermal stability. And so those are maxed out. So you wind up with a lot of low-heat nonfat. Thank goodness Mexico likes it because that’s where it all goes.
I had a question I wanted to ask going back to the Russia Ukraine conflict, because one of the things that is impacted is oil, natural gas. Well natural gas, as those prices go up, will that influence how milk is processed in Europe, meaning less powder and more cheese, or…?
Norm: Well, you would’ve thought that would be the case, but we’re only really comparing after we’ve made the concentrate: What does it cost to dry it compared to the other processes? Somewhere in there, there has to be an increase in cost, but it’s a question whether you can get it back out of the market or whether you have to reduce the incoming price, you might be able to do with your gas, but you might tell your farmer he’s got to have another penny less because you can’t afford it. So I don’t know where the value will come, but it has to cost more. No question about that, I think.
Ted Jr: So we tend to keep our cheese plants filled because the operating cost of the cheese plant is greater than a butter/powder plant. The tendency to keep the cheese plants running to capacity at the expense of powder and butter.
Norm: Yeah. And once you start running a powder plant for six hours a day or seven hours a day, it costs money. Because you got to get it up to temperature, you got to run it, get it, get it started balanced and then you shut it down again. Then you’ve got to wash it out. So your costs go out of control fairly quickly when you don’t run it.
Norm: I went to see a caseinate plant up in Michigan on one occasion when they were processing our casein and that was making 10 tons an hour. I’ve never seen anything like it, but it was just absolute feeding it from morning, noon, and night. And that way you’re going to get your best cost price. But if you start, stop, start, stop, it never works, does it?
T3: No it doesn’t.
Norm: But you can see Europe is pushing for more cheese. I mean their exports have risen again this year. I’ve been pushing a lot of people in the UK to say, why are we importing 470,000 tons of cheese a year when we’ve got farms, we’ve got grass. Why can’t we make it? It’s a conundrum. We are the biggest cheese importer in the world. And yet we’re supposed to be a dairy country. I could understand it if we were a desert. It’s nonsense.
T3: Do you think it’s possible that you’ll actually get so short in natural gas that some people won’t be able to use it to run their plants?
Norm: I mean, we get our gas from you in these pressurized containers, which started up recently again. We get it from the Middle East. We get some gas out in the North Sea, and the residual amounts from Holland, although there hasn’t been that much of that recently. If anything, we are exposed I think. And this, I mean the idea that you can cut off the entire gas supply from Russia. Germany, 60% of their heating is gas from Russia. I have no idea how they’re going to cover that.
T3: And that’s kind of where I’m going is outside of homes, drying things like milk powder is a big use of that natural gas. I think it’s fair to say that they’re going to cut off the natural gas supply to a milk plant before they cut off the natural gas supply to somebody’s home. So it’s easy for me to imagine a scenario where Germany’s in a situation where they can’t process the milk.
Norm: Most big factories in this country now have what we call an interruptible supply. They get a cheaper price, but they get it interrupted. And so they’ve got a diesel generator or a gas fire generator from a local gas supply in the back to keep things going. All the hospitals are the same and so on. So it’s well understood, interruptible supply, but no one ever thought it would be.
T3: There’s a lot of places where that’s true in the U.S, too, but it’s one thing to switch your power source so that your vats continue to turn, but you need the natural gas to run those dryers. And that’s the issue.
Norm: The people who are in the industry know it, but we’re only a pinprick on the population. So we can shout what we like, no one hears us.
Norm: And it’s not just, not just… drying sugar, for example, how are you going to get sugar to the stuff you buy in a bag and put it in your coffee if you can’t evaporate it and somehow or other. I mean, there are lots and lots of things like that that need energy.
T3: Well Norm, I’m going to quickly sum up my takeaways from this conversation from a dairy markets’ perspective. It sounds like the two places where things would be most affected by a continued conflict is one: feed prices simply because Ukraine is a large exporter of feed. Even if it’s not to dairy farmers in the EU, it still doesn’t drive up those costs. And then the second is gas supplies from Russia. If those gas supplies get cut off, that’s going to drive up processing costs for a lot of drying plants in the EU. From an import/export perspective, it’s going to be relatively minimal. New Zealand may have a little extra product to sell elsewhere that they’re not selling to Russia. But other than that, it’s probably not going to be a significant effect.
Norm: Well, if it’s extremely bad in April, we’re hoping this is over a couple weeks, but I’m not convinced of that. When Don listens to the podcast I just sent him from this guy, Rory Stewart, who’s quite a character, one wonders whether you would even bother to dry milk because you can’t afford to. What you’re going to end up with is such an expensive product that it won’t work, people will look for other ways, maybe. To some extent we dry milk because we want to ship it long distances and we don’t want to put water in it. Otherwise why dry it for most processes? I suppose you’d still to dry caseinate for non-dairy creamer in the states, but wouldn’t work very well otherwise. Try to mix fat glucose and a soggy amount of caseinate, don’t think it would work.
T3: Well, okay. Norm, I really appreciate you joining us today. Thank you very much. This is really informative, really helpful. Thank you. I really appreciate it.
Norm: That’s no problem. I enjoyed it.