Dairy’s landscape in changing, making planning more difficult. In this new dairy business era, forecasts and business decisions made just 12 months ago obsolete.
By Dave Natzke
I recall, as a youth, reading the occasional article in National Geographic about elephants that indulged on fermented berries, then stormed African villages, flattening everything. A herd of drunken elephants is headed toward dairy producers in 2009:
1) Economics: On Jan. 14, 2009, Chicago Mercantile Exchange 2009 Class III futures prices averaged about $11.94/cwt. (including just $10.50/cwt. for the first six months of the year). That compares to a federal order 2008 Class III average price of about $17.44/cwt. USDA’s latest outlook is even more bearish. The agency forecasts a 2009 all-milk price of $11.80-$12.60/cwt., down from $18.34/cwt. in 2008. Spread out over an estimated 2009 U.S. milk production total of 190 billion lbs., the burden of -$6/cwt. will have a major impact on producers and beyond.
California’s February 2009 Class 1 milk prices – at $11.27/cwt. for the North and $11.55/cwt. for the South, are down about $6.15 from January 2009 and about $10.44 less than February 2008. The monthly prices are the lowest since March 1979.
This elephant is looking even uglier than the one that came through our village in 2006.
2) Supply-demand balance: Tied to economics is the supply-demand balance – or imbalance. Preliminary total U.S. milk production grew by just 2.2% in 2008, about equal to 2007. California milk production actually declined in the second half of 2008 compared to a year earlier, and ended the year up just 1.2% from 2007.
During the past year, Cooperatives Working Together (CWT) retired 86,000 cows with a milk equivalent of about 1.6 billion lbs. U.S. dairy exports hit a record $4 billion in fiscal year 2008, and CWT’s export assistance program helped move about 2 billion lbs. of milk to export markets.
Yet, finding a home for milk – beyond the typical holiday- and weather-related challenges – has been and continues to be problematic in some regions. If domestic and global markets constrict in a weak economy, and investment dollars for increased processing capacity get tighter, this elephant may hang around a while.
3) Enviro-social: John Elkington was credited with coining the phrase “triple bottom line” in 1994, incorporating environmental and social aspects with the economic bottom line for businesses.
Regulation of air and water – both federal and state – will crash further into dairy’s business in 2009. Those elephants can be very subjective, and watch out when environment and social pachyderms are crossbred for marketing purposes.
In his new book, “Hot, Flat and Crowded,” Thomas Friedman writes that “green” was the single most trademarked term with the U.S. Patent and Trademark office in 2007. While I’m skeptical over which “green” everyone is seeking, it’s obvious dairy will need to reckon with this elephant – or get run over.
Charlie Arnott, president of CMA consulting and CEO for the Center for Food Integrity, reminds us the pressure from economic, environmental and social forces must be in balance, or the triangle faces possible collapse.
Economics is pushing back, especially in light of the recent downturn in the global economy. Since Elanco purchased Posilac from Monsanto in early October 2008, Elanco’s Dennis Erpelding has been visiting dairy retailers and processors. What he’s hearing is that the economic leg of the “triple bottom line” is gaining more attention. Companies indicate the social/environmental wishes of some consumers must be balanced with the economic needs of other consumers, as well as their own milk procurement costs.
A webinar hosted by Rabobank found economics is impacting how consumers view their own sustainability. Products carrying a premium price are taking a back seat to affordability.
4) Labor: Dairy faces big labor issues. Beware the tusks of immigration reform and political pressures. Two important decisions at the end of 2008 concern immigration policy:
• The Department of Labor (DOL) posted a final rule change for the H-2A temporary ag worker program. The new rule does not provide the dairy industry with an exemption from the seasonality requirement. Therefore, the dairy industry remains excluded from the H-2A program. It is noteworthy that DOL referenced the number of comments they received from the dairy industry, according to the National Milk Producers Federation (NMPF), which said it will continue to lobby to address dairy labor issues.
• NMPF’s immigration counsel, Glen Wasserstein, confirmed that the dairy industry is not subject to Executive Order 12989, which requires most federal contractors and subcontractors to participate in the E-Verify program. At issue was whether companies that supply dairy products to government feeding programs, such as the school lunch program, would have the farms supplying them fall into the “contractor” designation specified in the E-Verify rule.
Regardless, government enforcement of labor is on the rise, according to the law firm of McCormick Barstow LLP. For example, the California Economic and Employment Enforcement Coalition visited 47 ag businesses in northern California in December 2008, including dairies. Almost two-thirds of the businesses were found to be violation of various labor law violations, included failure to maintain workers’ compensation insurance; failure to provide itemized deductions to employees; and failure to provide worker’s permit documentation for minors.
5) Biosecurity: New Food and Drug Administration (FDA) animal health and food safety rules set to begin in April will impact how you deal with cattle that die on your dairy. The rule is designed to protect all animals from the spread of bovine spongiform encephalopathy (BSE). Renderers will be required to verify an animal’s age in an FDA audit.
In addition, removing prohibited tissue is most successful in fresh carcasses. Rapid decomposition, especially in summer, may mean many carcasses cannot be picked up or processed. Some renderers may stop picking them up altogether; others will charge more. Visit www.fda.gov/OHRMS/DOCKETS/98fr/FDA-2008-D-0597-gdl.pdf for details.
Some states allow composting of dead animals; others don’t. Learn about your options.
I hate to start the year off on such a negative tone, but I’ve been to the circus, and elephants leave big droppings. All these elephants are changing the landscape of the dairy village, making planning more difficult. In this new dairy business era, forecasts and decisions made just 12 months ago obsolete.
But don’t be overwhelmed. The joke is old, but carries wisdom: How do you eat an elephant? One bite at a time.
MILC Update: Visit your FSA office
Milk Income Loss Contract (MILC) payments will begin in February. If you produce more than 2.985 million lbs. of milk annually, you’ll have to designate a starting month for payments to begin. Current forecasts place the lowest milk prices – and highest MILC payments – from February through June of 2009.
Annual payment caps are based on a USDA fiscal year calendar (October 2008-September 2009), not the calendar year. There were no MILC payments in the first four months (October 2008-January 2009) of fiscal year 2009. Dairy producers who expect to produce more than 2.985 million lbs. of milk in the eight months remaining in fiscal year 2009 can pick a later month to begin receiving payments, if they believe that will increase their total payout.
National Milk Producers Federation’s (NMPF) Roger Cryan calculates monthly MILC payment projections weekly. The projections are updated on the NMPF web site (www.nmpf.org/milk_pricing/milc_payments) and can be found each week in Dairy Profit Weekly (www.dairyprofit.com/) or DairyLine Radio’s web site (www.dairyline.com).
So, it’s time to have a discussion with your USDA Farm Service Agency (FSA) official. Meeting sooner is better than later, because there appears to be some confusion among some FSA field offices about MILC rules, including sign-up deadlines before payments begin, non-farm and farm-based adjusted gross income limits, and paperwork requirements. Get the confusion cleared up, before it affects your individual MILC payment.
To offer your own opinion or response, contact Dave Natzke, editorial director, DairyBusiness Communications, e-mail: email@example.com.