Dairy

The latest milk production data from USDA shows farmers are still generating a lot of milk despite low prices. Colorado surged ahead, increasing production by 11% from last year. Kansas followed with a 7.5% increase and Texas jumped up in production by 6.6%. Overall milk production in the top 23 milk producing states last month was 17.2 billion lbs., up 1.3% from a year ago. Individual cow production climbed higher, now at 19,064 lbs. for the month of June. USDA reports this as the highest per cow average since 2003. Despite higher production numbers, the amount of dairy cattle in the U.S. remained constant, keeping at 9.4 million head for the second year in a row. The U.S. Senate will soon vote to go to conference with the House on a new Farm Bill, with lawmakers potentially meeting later this week. A formal conference is expected to begin in September. The current law expires Sept. 30, leaving little time for decisions to be made. New immigration legislation could potentially effect farmers and agricultural employers. The Ag and Legal Workforce Act would replace the current H-2A visa program and would require all employers to start using the E-Verify system to ensure employees are in the U.S. legally. While the bill is supported by more than 200 agricultural groups, including the American Farm Bureau Federation, the odds are very low the bill becomes law, according to Pro Farmer’s Jim Wiesemeyer.

The largest dairy farm in Australia is owned by an investment firm in China, but the firm is going through instability after a mass resignation on the company's board. Moon Lake Investments purchased the Van Diemen's Land Company (VDL) in 2015 for approximately $210 million (AUD$280 million). The purchase by Moon Lake's owner Xianfeng Lu was scrutinized at the time and had to win approval from government officials. VDL milks 17,900 cows on the island of Tasmania and has 17,450 acres of agriculture land. At the time of the purchase Moon Lake guaranteed 140 jobs locally while promising to create an additional 95 jobs and investing $75 million (AUD$100 million) into the local dairy industry. The Tasmanian government is allowing VDL to clear an additional 4,447 acres of native land to expand farming operations. On April 28, the Australian non-executive directors of Moon Lake Investments and its chief executive staged a mass resignation. David Crean, Rob Poole, Simon Lyons, Keith Sutton, and Bruce Donnison all resigned, while the VDL Farms chief executive Evan Rolley will not continue working past June 30. Crean says that the owner, Lu, would not take their advice on how to run the business such as buying irrigation equipment and the leadership structure. "There's inadequate irrigation, so we strongly recommended that as the number one priority that adequate water storage facilities be built to provide irrigation in future years to mitigate against drought, and that was rejected," Crean says. Under the company's restructuring VDL would be owned by a holding company, which would in turn be owned by Ningbo Xianfeng New Material Co Ltd (APlus), which is listed on the Shenzhen stock exchange. Lu would also serve as the CEO for all of the companies, including the farm. Crean and other board members disagreed with this leadership move as they believed a dedicated CEO needed to run the farm. The board had also advised fixing lanes for cows to travel from pastures in an effort to reduce lameness and building fence to keep off wallabies that were grazing down forage. "It's the largest dairy business in Australia," Crean says. "You've got to make that a sustainable and profitable business. We didn't see that happening at the time we resigned. Or we couldn't convince him to pursue that path." Andrew Wilkie, Australian Parliament representative for Tasmania, believes this is a bad sign for the foreign owned agriculture business. "Instead Australia's biggest dairy producing asset has become just another Chinese mass production center for low-value products," Wilkie says. "No wonder the Australia board is bailing out. Those who opposed the sale were right all along." Another one of the promises by Moon Lake that has yet to be delivered on is a fence that will help prevent the spread of a deadly disease amongst Tasmanian Devils.

Dairy trade continues to be a focus for Senate Minority Leader Charles Schumer (D-N.Y.) who just announced that he is working with Speaker of the House Paul Ryan (R-Wis.) in an effort to fix dairy trade problems in the North American Free Trade Agreement (NAFTA). Schumer made the announcement on April 27, saying that Ryan and Sen. Tammy Baldwin (D-Wis.) are all urging U.S. trade officials to resolve unfair dairy trade tactics implemented by Canada. "With Speaker Ryan's and Senator Baldwin's help, we now have a real opportunity to churn the tide and hopefully fix the unfair Canadian dairy trade barriers that have plagued dairy farmers and producers from the Finger-Lakes to Central New York to Wisconsin," Schumer says. In the past few weeks Schumer has visited dairy processors and farmers in his home state of New York. While on the tours he alleges Canada has effectively put up a "Dairy Wall" with its "Class 7" pricing program which places a 270% tariff on milk. During the time that Class 7 has been implemented, Canada has built up its own domestic supply and dumped powdered milk on the global market. "As trade officials near a deal to renegotiate NAFTA - a bipartisan issue President Trump, Senator Baldwin, Speaker Ryan and I agree on - we must make it a top priority to begin reversing restrictive dairy pricing policies in Canada that are hurting our dairy producers at their core, and now is a real opportunity to do just that," Schumer says. Last year, both Ryan and Baldwin were part of a bipartisan Wisconsin delegation that sent a letter to trade officials asking for similar considerations in NAFTA talks. "Exports are critical to the viability of Wisconsin's dairy farms. These families rely on them for their very livelihood. I am encouraged by this bipartisan effort and will continue to work with my colleagues and impacted stakeholders to break down these trade barriers and reach a practical solution," Ryan said of the 2017 effort.

Despite modifications to the dairy safety net earlier this year, the House version of the Farm Bill, which was released on Thursday, modifies the programs further. In addition to modifying the safety net program, the House draft changes to the formula used to calculate Class I milk prices. According to Pro Farmer policy analyst Jim Wiesemeyer, several changes were made to the dairy safety net including the following: Changes the name from Margin Protection Program for Dairy Producers to Dairy Risk Management Program (DRMP) for Dairy Producers; and Authorizes DRMP through 2023. Requires the USDA Secretary to report on the accuracy of the data used to calculate the average cost of feed used by dairy operations to produce a hundredweight of milk and on the costs of using corn silage as a feed and the difference between feed cost of corn silage and feed cost of corn; Requires NASS to revise monthly survey reports to include prices for high quality alfalfa hay in the top 5 milk producing states as measured by milk produced in the previous month; Permits a multi-producer dairy operation to exclude information from the registration process regarding an owner who holds less than 5% interest in the operation; Allows a dairy to participate in both DRMP (MPP) and LGM, just not on the same production; Continues to base production history on the 2011, 2012, and 2013 calendar years through 2023; Eliminates the annual adjustment of production history going forward; Eliminates the annual election of coverage levels and percentage of coverage, instead requiring producers to make elections that are binding for the entire effective period of the program; Adds higher coverage levels of $8.50 and $9.00 for the first 5 million pounds of production (Tier I); Eliminates the current 25% minimum coverage level, allowing producers to elect levels in 5% increments from 5% to 90% of production history; Provides new premiums for coverage levels under Tier I (first 5 million pounds); Jim Mulhern, president and CEO of the National Milk Producers Federation praised the draft bill adding that the organization has worked closely with Agriculture Committee Chairman Mike Conaway as well as other members of the committee in the development process. "As the House developed its Farm Bill, we have worked closely with the leaders of the Agriculture Committee, including Chairman Mike Conaway, Ranking Member Collin Peterson, Vice Chairman Glenn Thompson and others to make further improvements to the Margin Protection Program and enhance farmers’ ability to use the Livestock Gross Margin program and other risk management tools," he said."The bill introduced today includes several changes we have advocated for, particularly in improving coverage levels and providing greater coverage flexibility for dairy producers. It also includes important language on price risk management, which NMPF has worked on closely alongside the International Dairy Foods Association." Mulhern said NMPF will continue to"work with our allies in Congress on a bipartisan, bicameral basis to further strengthen the dairy safety net for producers of all sizes."

For Johnson County, Ind. farmer Joe Kelsay, it's not just another day on the farm. He's continuing to pump milk while a cloud of uncertainty hangs over his farm. "Right now it's a bit difficult to be a dairy farmer," said Kelsay, standing in his milking parlor. As a fifth-generation dairy farmer, his job just became even more difficult. He was notified in February from Dean Foods that he has 90 days to find a new home for his milk "It was a little surprising to have this market and this market partner for so long and that relationship to look to be ending," he said. Kelsay not only received a letter in the mail, but has also be in constant contact with the company he did business with for more than 25 years. "In our conversations with both field staff and top leadership, they're very frustrated that this the reality that they're dealing with," he said. Kelsay is one of 27 producers in Indiana and more than 80 reported across the country who received the same notice from Dean Foods. In the letter, Dean's is calling it a "difficult decision," but once based on two main factors: the first is the new Walmart milk processing plant scheduled to come online near Fort Wayne, Ind. in May. The second is the dairy market flooded too much milk "We're caught at a time when there's just too much milk," Mike North, president of Commodity Risk Management Group, explained to U.S. Farm Report. "There's more than what the market can bear at this moment." "I equate to corn harvest with the elevator being full," said Luke Minich, a dairy farmer in LaPorte, Ind. "There's just nowhere to put the milk." North says producers ramped up production in response to an increase in overall dairy demand. "Demand grew, especially at the world level and our producers made the investment, put their best foot forward, and they really rose to the occasion, and they really brought a lot more milk to the table," said North. While overall demand has climbed, with appetites for items like chees and milk growing, consumer continue to drink less milk. That trend is adding to the oversupply pain. According to Dean Foods, since 1975, fluid milk consumption has dropped 11 gallons per person. That's as the U.S. dairy industry continues to pump out more milk, at a rate of 350 more gallons of milk each year. It's that combination that's been lethal to the dairy industry, hitting farmers in the form of suffering milk prices. "A lot of producers' cost of production is exceeding what they're getting in their milk check," said Matthew Lange, a business consultant with Compeer Financial. North says higher milk prices hinge on what happens this spring. "If we can eliminate enough supply this spring that we become short in that supply as we approach fall, we do set the stage for that to happen," said North. That may be easier said than done. In the dairy industry, eliminating supply isn't an easy fix. "It takes two years to get an animal up to size to start milking, and then once you're rolling in that process, it's really hard to adjust that to the exact needs of the market," said Kelsay. Adjusting supply is hard, and that's one reason why he was overcome with concern when he got the letter from Dean Foods this winter. It's that concern shared among many producers. "The cows are making milk," said Kelsay. "We're milking three times a day, and hauling a trailer load every other day out of our farm, so where that has to go and how we can find a new market certainly rushes right in." While concerns still weigh on his shoulders, he doesn't blame Dean Foods for the difficult decision the company had to make. "Dean Foods has been a great partner of ours for 25 years, and they have been nothing but professional about their approach," said Kelsay. It's those business decisions having an impact on farmers like Kelsay, but North agrees with the Indiana farmer: it's not healthy to condemn Dean Foods or Walmart. "This isn't just a Walmart issue, this isn't just a Deans issue, this is an industry wide experience where processors are overwhelmed by milk supply," said North. Kelsay says that's not stopping him from continuing to fight the challenges, searching for a new buyer; however, the reality is some producers may not find a new home. "In some situations, some dairy producers are going to have to sell not only their herd, but considering selling machinery, equipment, selling real estate as well, just to be able to cover their debts," said Lange. As debts rise while milk prices don't budge, he says it's a harsh reality that's set in. "They're looking at how many dollars they've lost, or how much additional debt they've had to take on while looking at those 2018 budgets and saying, "˜Boy, we're really going to be putting our business or our equity in a position that we don't feel comfortable with.'" It's that dilemma starting Kelsay in the face . "We're negative margin and we have been for a bit, how much more equity are we willing to invest to wait for these prices to improve," asked Kelsay. "I think that's a question our family and many other families are asking and those difficult conversations are happening around the dinner table as they come to grips with these changes are real." Whether a farmer is forced out of milk production"”or does so voluntarily"”Lange says leaving the business isn't a mark of failure. "Failure to me is when you see the writing on the wall that this isn't working anymore, but you just hope things get better," said Lange. "While I try to be as optimistic as anyone else, hope is a poor business plan." It's not just hope that's worked into Kelsay's plan, as he remains determined a new market will surface, just like it did for another Indiana farm family this year. "We were always very positive that we would find a market for the milk," said Minich. His family received a letter from Dean Foods in the fall that they had 90 days to find a new home for their milk. "We received notice in October and were able to find a new buyer based in Ohio," he said. It was a search that took nearly the entire 90 days, but he says it's positivity that got their family through. "We've farmed for six generations now, and it's the best way I know how to raise a family," he said. It's that same positivity carrying the Kelsays through this difficult time. "Long-term I'm really bullish U.S dairy," said Kelsay. "I think that our ability to grow feed, and take care of animals, produce and then process milk and then distribute that milk and those dairy products is second to none in the world." As an eternal optimist, he knows he also has to balance it with being a realist. The reality is it's not only his family, but employees whose livelihoods pivot on the success of the Kelsay's dairy. "It's really a family, it's extended family," said Kelsay. "The folks that work on our farm are absolutely critical to what we do every day." As one door closes, he's hopeful another door will open, as he works to keep his family's legacy alive.

There seem to be two theories swirling around farm country right now. One says milk prices will come back up by the end of the quarter, the other is that they stay suppressed. Mike North of Commodity Risk Management says milk prices will face strong headwinds throughout the spring. “The reality is we have a lot of milk and it's not just a U.S. story,” he told AgDay host Clinton Griffiths. “We've watched, you know, year over year growth for the last five years, more milk in the system every single month. That probably doesn't end very quickly.” According to North, the bullish milk price theory is centered on the drought in New Zealand and Australia and how production is falling there. Still, he says for every pound that they're losing, we're gaining seven and a half pounds of new production in Europe. “So there's massive milk coming into the equation,” he explains. “Big powder supplies, both here and in Europe. We're looking at massive inventories of cheese and butter and whey concentrates and dry way.” Can we eat through supplies? Significant growth in consumption is the only way North sees getting in front of the huge supply of products we have in the U.S. “I don't see that coming anytime quick,” he says. “Even [if China buys more] we can't get through that inventory fast enough with the added Chinese demand. We're going to be behind the eight ball on that for a while.” North says getting ahead of the supply will rely on other categories like butter and cheese. “What kind of other opportunities do we have and how can we draw on some of those other supplies?” he questions. “Because at home our biggest influencers are cheese and butter and then to a lesser degree some of the other products. Can we draw those inventories down? That will be a big conversation point.” As we head into Spring flush, North says it will be very difficult to get ahead of supplies. “I see some really strong headwinds for milk prices as we go through the spring,” he says. Could we price see improvement soon? “If we go down far enough and if we hold there long enough, maybe then we can retract cow numbers, we can retract supply and ultimately give us a little brighter picture as we talk about the second half of the year going into 2019,” North says. He advises farmers to take advantage of rallies as they come.

Last week, at least two dozen producers who ship milk to Dean Foods in Pennsylvania, Indiana, Kentucky, Tennessee, North Carolina and Ohio were told they have until May 31, 2018 to find a new home for their milk. "Unfortunately, Dean Foods has made the difficult decision to end milk procurement contracts with a number of farmers in about 90 days," says Reace Smith director of corporate communications at Dean Foods."We regret this decision had to be made." If this sounds familiar that's because, almost one year ago, producers in Wisconsin were told by their processor, Grassland Dairy, that they had 30 days to find a new home for their milk. While that wave of milk rehoming was due to export market woes, Dean says their issue is purely domestic. According to Smith, many factors lead Dean to this place, including"a surplus of raw milk at a time when the public already is consuming less fluid milk and companies assertively entering or expanding their presence in the milk processing business, have exacerbated an already tenuous situation in a highly competitive market." Is Walmart To Blame? Dean is not pointing a finger at Walmart. Still, farmers are doing their own math to piece the puzzle together. For decades Dean has had a private label contract with Walmart for their Great Value branded milk. In many parts of the country, they still do. But in the region where these contracts have been lost, Walmart built their own bottling plant. The plant, which is in Ft. Wayne, Ind., is expected to be fully operational and running at capacity by the end of May. While Dean has made it clear they aren't blaming this situation on the new Walmart plant they do cite"the introduction of new plants at a time when there is an industry-wide surplus of fluid milk processing capacity" and losing milk volume at "higher levels than anticipated" during a time of increased volume competition as reasons for terminating producer contracts. More Contract Losses Ahead Unfortunately, this could only be the first wave of Dean suppliers that will lose their contracts in 2018. “We expect to consolidate our supply chain by a meaningful amount over the next 18 to 24 months while also making sure that we deliver the same great quality, value and service that our customers have come to expect from us," Ralph P. Scozzafava, chief executive officer at Dean Foods told the Food Business News."For this important reason, we'll implement our supply chain changes in phases with targeted completion in 2019." Smith says Dean field representatives are working with producers to find solutions and that the company is offering resources for counseling to any farmers who might need it. As spring flush arrives and milk continues to flood the market, analysts say this scenario could play out with other processors as well. Is There A Way Farmers Can Be Proactive? Independent shippers like those who sold milk to Grassland, or the producers who ship milk to companies like Dean carry a substantial amount of risk. Unlike cooperative members who have some level of certainty a truck will pick up their milk every day, albeit sometimes for a discounted price, independent shippers can be dropped within the amount of time specified by their contracts. It is critical farmers understand their milk contract completely, says Todd Janzen of Janzen Ag Law. Farmers must know how much time they would have if the company that buys their milk decided to walk away.

Growing milk production worldwide and increased competition for export sales all point to a bleak six-month forecast for milk prices. Key to this price outlook are changing trade dynamics, particularly with Canada’s aggressive approach to dairy protein exports with its Class 7 program. Third quarter 2017 U.S. exports of skim milk powder were down nearly 26,000 metric tons, or about 16%. Whole milk powder exports were off 10%, and whey protein concentrate and isolate exports were down 5%. The only positive export in the protein category was dry whey, up 5%. Nevertheless, U.S. dry whey inventories are now up more than double of what they were a year ago, with whey prices now at 30¢ per pound, down from 50¢ in May. That’s coincidentally when Canada started its Class 7 program. This drop of 40% in whey prices has lowered the U.S. Class III price by $1 per cwt, says Bob Cropp, a dairy economist with the University of Wisconsin. Mexico, for example, is now sourcing more of its milk powder ingredients from the European Union (EU) and Canada. In the past, Mexico imported as much as 90% of its milk powder from the U.S. But with the EU sitting on mountains of powder in inventory, it has aggressively priced sales to Mexico. Canada is also up 10-fold in its dairy ingredient sales to Mexico with the creation of its Class 7 program, which subsidizes exports. The result is Mexico is now taking just 70% of its milk powder from the U.S., Cropp says. In October alone, U.S. milk powder sales to Mexico were down nearly 20,000 metric tons, or 44%. China Only Bright Spot But Mexico is not the only problem where milk powder sales are soft, reports the U.S. Dairy Export Council (USDEC). Shipments to the Philippines were also down 45% in October, and shipments to other countries in southeast Asia were down by a third. The only bright spot was China, with powder sales there doubling in 2017 over year-earlier levels. All these softer sales are despite lower prices. Skim milk powder prices are down some 30% from last summer. “The global oversupply of skim milk powder has pushed prices near their lowest level in 14 years,” says Alan Levitt, USDEC vice president of communications and market analysis. The good news is U.S. prices for powder and cheese are still competitive on world markets. And some of the export losses were offset by sharp jumps in cheese and butter exports in the third quarter of 2017. Both cheddar and American-type cheese were up 84%, and butter was up 50%. Still, these strong increases were not enough to offset the decline in dairy protein sales. In the third quarter, the percent of milk solids exported by the U.S. was down to 14.2%. Last year, that percentage stood at 15.1%. U.S. Trade Policy Over-shadowing all of this turmoil is U.S. trade policy. “We’re still working with the Trump administration and trying to figure out what its trade policy is,” says Jaime Castaneda, senior vice president of strategic initiatives and policy with the National Milk Producers Federation. “What seemed to be logical before might not be logical anymore.” But Castaneda believes the solution to the Canada Class 7 program lies in the North American Free Trade Agreement (NAFTA). Milk protein concentrates (MPCs) and isolates were not part of the original NAFTA agreement because they had not yet been invented when that agreement was signed. That is also the reason U.S. dairy processors were able to export MPCs to Canada without violating NAFTA. Nevertheless, Castaneda hopes the Class 7 controversy will be solved through the current NAFTA negotiations. Taking the issue to the World Trade Organization would be too expensive and would take years to resolve, he says.