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DairyBusiness Update: February 7, 2014


President’s Signing Farm Bill Prompts NMPF Comment
   President Obama signed the Farm Bill Friday as expected, prompting National Milk President and CEO Jim Mulhern to issue the following response.
   It has been five years now since the dark days of early 2009, when the combined assault of collapsing milk prices and elevated feed costs produced a hemorrhage of red ink from America’s dairy farms. Collectively, dairy farmers lost $20 billion in net equity between 2007 and 2009, with most of that money disappearing in huge chunks during 2009, when gallon after gallon of milk left the farm at a severe loss. Five years later, the pain and memory lingers, even as balance sheets are recovering.
   The problem for farmers in 2009 was that the public policy response was inadequate to the scope of the challenge – because our policy itself was lacking. In the intervening half-decade, NMPF worked within and across the dairy industry to devise an improved policy, to better reflect the realities of how milk is produced in America today, and by whom. We knew the new program would have to deal with the fact that federal budgets are limited, and the days of billion-dollar support programs, a la the 1980s, are not going to be repeated in the future.
   After a year of deliberation, what emerged was a new risk management proposal to enable farmers to insure the margin between milk prices and feed costs. Without the limitations of the MILC program, much more of the nation’s milk supply could be covered by this voluntary program.
   But NMPF also knew that to provide the most cost-effective insurance coverage for farmers, we needed to ensure that the program wouldn’t generate too much milk and send us into a downward spiral of low market prices and high insurance program costs. Thus was born the market stabilization element, which was designed to operate in low margin situations.
   The power of that mechanism proved to be a real threat to processors, who railed against the program and disingenuously argued that our effort to prevent farm-level prices from flat-lining for month after month was equivalent to shorting the market enough to spike retail prices under normal conditions.
   This debate was ultimately decided by one man: House Speaker John Boehner, who, in an ironic turn, likened the market stabilization element to a Soviet-style program, even as he strong-armed the farm bill conferees against taking a vote that he was afraid he would lose.
   That brings us to the beginning of February, where those of us working on behalf of dairy farmers had to regroup and, using the tools at our disposal, re-craft the margin insurance program so that it can still provide an effective safety net while not encouraging excessive milk production and high taxpayer costs.
   The package that has just passed the House and Senate should do just that. Adjustments that have been made in our original margin insurance program will make it affordable and effective, and should ensure that the margin protection safety net is just that – a safety net, and not a production stimulus.
   The revised bill also will direct that, if farm-level margins again fall to 2009 levels, USDA will purchase consumer-ready (as opposed to bulk commodity) dairy foods for speedy donation to food banks. The federal budget cost of this program is likely to be higher than the program NMPF initially advocated. If that is the case, policymakers who proclaim the mantle of fiscal responsibility yet opposed our efforts to control program costs have no one to blame but themselves.
   With the signature of President Obama, we reach the end of a long, tortured path leading to a new five-year farm bill. I believe the resulting dairy program will provide an effective and reasonable safety net, one that we have been striving to create these last many years. Whatever its shortcomings, it is far better than the programs it replaces.
   2014 certainly appears, at this early stage, to be shaping up as a good year for milk producers. But the roller-coaster of pricing always cycles back down, eventually, necessitating a safety net for the bad times that follow the good. Creating such a safety net was the goal of NMPF five years ago, and while we haven’t gotten exactly what we hoped, the end result most certainly is badly needed, and will be helpful in the years ahead.

December Dairy Product Commercial Disappearance “Very Strong”
   USDA reported November dairy product commercial disappearance was up 5.4% from a year ago but Jerry Dryer, editor of the Dairy and Food Market Analyst, is a step ahead, working on December, according to Friday’s DairyLine interview.   
   “December disappearance, driven primarily by exports, were very strong,” Dryer said, adding that he likes to look at three month numbers instead of single month data. Fourth Quarter was very good, according to Dryer, and while American cheese disappearance was only up about a half percent, other than American cheese was up almost 4 percent, “so the total cheese category was up 2.6 in the last three months of 2013,” he said.
   Butter was up about 11 percent, according to Dryer’s data, nonfat dry milk/skim milk powder was up almost 16 percent, and dry whey was up from a year ago for the first time in over a year, up about 1 percent in the Fourth Quarter. He has also started to track whole milk powder and it was up almost 40 percent, he reported, “as the U.S. wades into that export market.”
   The “dark cloud” moving in may be the record high prices but Dryer says not in the near term. “Much of these exports were hedged,” he said. “The Cheddar cheese that left U.S. ports in December had an average price of $1.86 per pound so those customers overseas had hedged themselves against $2 plus cheese.” Orders are typically placed well in advance, Dryer said, and manufacturers have told him they have cheese exports sold through Second Quarter and almost all of that is hedged “so those exports will keep moving.”
   The high prices will eventually come home to roost and affect retail sales, according to Dryer. He pointed to pizza makers who are probably already trimming cheese use here but he quickly adds “There’s still good hedging opportunities in the futures market for the second half and there’s been quite a bit of trading activity there. It looks like some of our customers overseas are protecting themselves again higher prices in the second half of the year,” he concluded.

Record Exports Make U.S. Key Player Globally
   U.S. dairy exporters took another stride forward in 2013, according to the U.S. Dairy Export Council (USDEC), shipping record levels of milk powder, cheese, whey products, lactose and fluid milk, and gaining share among the world’s leading suppliers
   Overseas sales, worth $6.7 billion last year, were up 31 percent from the year before, according to USDEC data. On a volume basis, exporters sold 3.91 billion lbs. of milk solids, 19 percent more than 2012.
   “Exports were more important to the U.S. dairy industry than ever,” according to USDEC, “accounting for 15.5 percent of U.S. milk production, a step up from the 13.1-percent average achieved in 2010-12.”
   “U.S. exporters were able to capitalize on favorable market conditions for most of the year, as well as their increasing attention to the needs of the global market,” explains Tom Suber, president of the U.S. Dairy Export Council (USDEC), the trade group that leads the industry’s overseas market development. USDEC is funded primarily by the dairy farmer checkoff.
   “Overseas demand remained strong, led by China and Russia. Production from Oceania, Europe and South America was shorted by weather issues. And world prices rallied significantly in the second quarter, making U.S. prices more attractive by comparison. Faced with these factors, overseas buyers turned to the United States like never before, and U.S. suppliers responded,” he says.
   Exports played a key role in clearing the domestic market, notes Paul Rovey, a dairy farmer from Arizona and chairman of USDEC.
   “In 2013 we had our second-best milk price ever, and we accomplished this in a year when commercial inventories of cheese, butter and powder climbed to record highs in the first half of the year. But from Memorial Day to Thanksgiving we reduced stocks by a third, mostly to fill orders from overseas customers. Our strong export sales at historically high prices are a major contributor behind the tight markets and strong commodity and milk prices we see today.”
   U.S. suppliers gained share of the world market in 2013 as well. Among the world’s top nine exporters, U.S. share of volume of milk powder, cheese, butterfat and whey products was 19.0 percent, up from 16.1 percent the year before. U.S. share of nonfat dry milk/skim milk powder trade among the world’s top nine climbed to 31.5 percent (vs. 26.1 percent in 2012) and cheese trade among the world’s top nine increased to 16.6 percent (vs. 13.9 percent in 2012).
   “2013 caps a transformative decade for the U.S. dairy industry,” says Suber. “Over the last 10 years, exports grew nearly every year. They increased 21 percent per year by value and 13 percent per year by volume. A decade ago the United States shipped less than 6 percent of its milk production overseas. Today that figure approaches 16 percent.
   “Beyond the numbers, we’ve seen a dramatic shift in the way U.S. suppliers approach the export market,” he continues. “Exports clearly hold a more important place in the strategic plans of our industry. In addition, manufacturers, processors and traders are becoming increasingly attuned to the needs of overseas customers, producing more of the right product, with the right specifications, in the right package, for buyers in dozens of markets around the world. That’s great news for the dairy farmers and industry members who fund USDEC.”

Weather Driving Milk Sales
   Dairy Market News (DMN) reports that the Southeast region is experiencing yet another severe winter storm. Milk transports are experiencing delays and logistic problems with bottling plants being shorted loads. This situation is occurring, as many bottlers and manufacturers were playing catch-up after last week's storm.
   Portions of the Mid-Atlantic and Northeast regions are also experiencing numerous weather related problems, causing interruptions in manufacturing schedules. Class I demand is strong as retailers are experiencing runs on dairy products. Class I demand in Florida is good, but not strong enough to clear all the carryover supplies following last week's storm. There were 80 spot loads exported this week. Milk production is increasing as weather conditions have improved.

Dairy Processor/ Producer Organizations Urge South Dakota to Reject Raw Milk Easing
   Citing significant public health risks associated with the consumption of raw milk, the two organizations representing the nation’s dairy farmers and dairy companies jointly urged state lawmakers in South Dakota to reject efforts easing regulations surrounding raw milk sales directly to consumers.
   In a letter sent Wednesday to South Dakota state senators, the International Dairy Foods Association and the National Milk Producers Federation said that the risks inherent in raw dairy products are not worth any purported benefits to either consumers or producers of unpasteurized milk products. The two associations urged lawmakers to reject Senate Bill No. 126, legislation designed to further ease the sale of unpasteurized milk in South Dakota. The measure is the subject of a hearing in Pierre, S.D. on Friday.
   Federal law prohibits the interstate sale of raw milk, but allows states individual discretion to regulate raw milk sales within their borders. Several states in recent years have considered legislation expanding the sales of raw milk, even as the product has been repeatedly linked to serious illnesses from coast to coast.
   The two dairy groups mentioned in the letter that “the Centers for Disease Control (CDC) has reported that nearly 75 percent of raw milk‐associated outbreaks have occurred in states where sale of raw milk was legal. Legalizing the state‐wide sale of raw milk in South Dakota increases the risk to public health, opening up the state’s consumers to the inevitable consequence of falling victim to a foodborne illness. No matter how carefully it is produced, raw milk is inherently dangerous. Americans have become ill after consuming raw milk obtained from farms of varying sizes, from cow‐share programs, and from licensed, permitted, or certified raw milk producers.”

Farm Bill is Step in the Right Direction for Dairy
   So said Jerry Slominski, IDFA Senior Vice President of Legislative Affairs and Economic Policy, in Wednesday’s DairyLine. “The long fight over federal dairy policy has finally ended,” Slominski said. “A new five-year farm bill, which enjoys bipartisan support, will be sent to President Obama, who has indicated he will sign it.”
   There is no doubt that the dairy title in the Farm Bill is a historic reform of our dairy programs and clearly a step in the right direction. It is the end of over two years of debate. And it reflects the fact that despite our disagreements over the stabilization proposal, there was broad agreement across our dairy industry that the current programs should be retired and replaced with a new revenue insurance program based on margins.
   That has been accomplished. The new insurance program in the final Farm Bill will protect producers against losses if milk prices drop too close to feed costs. All dairy producers will be eligible for the program and will be able to choose the amount of production to be covered as well as the margin threshold. Premiums will be lower for the first 4 million pounds of production. The legislation also authorizes a new "Dairy Product Donation Program" that allows USDA to buy dairy products, when margins are low, for immediate donation to organizations that serve low income populations.
   Dairy programs are clearly one of the winners in the new farm bill. Although the bill cuts over $23 billion over the next ten years, support for dairy farmers was increased in the final bill above what was passed by both the House and Senate. And those proposals had already increased support for dairy above current levels. Yet, even with this substantial increase, spending for dairy programs will still be only about 3 percent of our government's support for all agriculture commodities.
   Congress is to be commended for finding the middle ground on the dairy title. While some may be unhappy that Congress did not impose a supply management program on the industry, the compromise was supported not just by IDFA but also by the National Milk Producers Federation and many producer groups. That's a good thing. There are many challenges facing our industry today and we need to start working together again to solve them, he concluded.

Processors Weigh in on Food Labels
   The International Dairy Foods Association (IDFA) has joined the newly formed Coalition for Safe Affordable Food (www.CFSAF.org) and urged Congress to quickly enact federal standards for the labeling of food and beverage products made with ingredients that contain genetically modified organisms (GMOs).
   “Dairy companies are committed to providing consumers a wide array of nutritious products along with the information they are looking for on our product labels,” said Connie Tipton, president and CEO of IDFA. “But we need one set of labeling guidelines so that the food industry can effectively share information with consumers.”
   IDFA stated that a federal GMO labeling solution would eliminate confusion, inform consumers, and provide consistency.
   The FDA will define the term “natural” for its use on food and beverage products so that food and beverage companies and consumers have a consistent legal framework that will guide food labels and inform consumer choice. IDFA believes that our nation’s food labeling laws should be set by the FDA, the nation’s foremost food safety agency.
For more details, log on www.FactsAboutGMOs.org.

Dairy Farm Consolidation Happening Across U.S.
Just as we examined a column yesterday reporting of the demise of dairy farms in California, National Public Radio reports that “In the past decade, half of the dairy farms in the U.S. have gone out of business, but thanks to technological advances and selective breeding, the dairy industry is more efficient than ever. It produces 20 percent more milk than it did ten years ago.”
   Harvest Public Media's Abbie Fentress Swanson reports that economists are even predicting that U.S. farmers will export an unprecedented amount of dairy products this year. Still, this ramped-up production has made it difficult for smaller operations to compete.” Read her story from Missouri at http://www.npr.org/2014/02/06/272638096/even-as-dairy-industry-booms-there-are-fewer-and-fewer-farms.

Mielke Market Daily
(A daily wrap-up of dairy markets and the things affecting them, from DairyBusiness Update associate editor Lee Mielke)
   The loud crash heard this morning was at the Chicago Mercantile Exchange where the blocks and barrels of Cheddar cheese came crashing down. The blocks plunged 9.75¢, following a 0.5¢ rise Thursday and a 3.5¢ drop Wednesday. Six cars traded hands this morning, the first at $2.31/lb. and the price dipped to $2.26/lb. but 3 offers pulled it lower, to the close of $2.2325/lb. The barrels, after losing 2¢ yesterday, dropped 9.5¢ today on 2 sales at $2.2050/lb. A bid at that price went unfilled.
   The plunge ended gains in the block price that occurred in seven of the previous eight weeks and are down 12.75¢ on the week but are still 58.25¢ above a year ago. The barrels are down 11.5¢ on the week, ending four consecutive weeks of gain, but are 64.5¢ above a year ago. Eight cars of block traded hands this week and two of barrel.
   Cash butter dropped another 3¢ this morning, duplicating yesterday’s 3¢ loss, plus a 1¢ loss Wednesday. Two sales took the price down today, the first car sold at $1.83/lb., the 2nd at $1.82/lb., and an offer at $1.82/lb. was left on the board. The Double A price is down 6¢ on the week but 26.5¢ above a year ago. Twenty eight cars traded hands on the week.
   FC Stone market analyst Ryan Cox wrote in this morning’s Insider Opening Bell that "We've seen a little inventory rebuilding, but cream supplies are tight."
   The Cash Grade A nonfat dry milk roller coaster paused again today after heading up yesterday, pausing Wednesday, and losing 4¢ on Tuesday. A bid at $2.01/lb. this morning was unfilled. The cash powder is down 2.25¢ on the week. Eight cars sold this week at the CME.

Today’s market closing prices:
Butter: Down 3¢, to $1.82/lb.
Cheddar blocks: Down 9.75¢, to $2.2325/lb.
Cheddar barrels: Down 9.5¢, to $2.2050/lb.
Grade A nonfat dry milk: Unchanged, at $2.0175/lb.
Class III milk: Feb. $22.87, -34¢ (+6¢ on the wk.); Mar. $20.72, -33¢ (-10¢ on wk.); Apr. $19.44, -25¢ (-3¢ on wk.), May $18.81, -15¢, & Jun. $18.78, -7¢. Based on today’s CME settlements, the Second Quarter 2014 average now stands at $19.19.01, -16¢ from Thursday. The 2nd half average is $18.35, -1¢ from Thursday.
Looking ahead:
   The Agriculture Department releases its monthly World Agricultural Supply and Demand Estimates report Monday afternoon, detailing the Department’s latest 2014 milk production estimate and milk price projections. The California Department of Food and Agriculture announces the Golden State’s March Class I milk prices on Monday and USDA issues its latest Livestock, Dairy, and Poultry Outlook Friday afternoon.
Monday on DairyLine:
   DairyLine’s weekly “DMI update”  
   Team facilitator Kristy Pagel helps you “Make the Connection”