What got us into this mess

With cheese prices up notably and milk futures edging up, we may have begun the long-awaited turnaround needed to at least get back to break even on our farms. But we still have a long way to go.
A presentation by Tom Suber of the U.S. Dairy Export Council at the National Dairy Leaders Conference helped us see what got us into this mess and what is going to have to happen to get us back to positive margins again.
As shown in the chart, the problem started back in early 2008. There was strong food and fuel inflation, which raised the prices of many commodities including dairy products. Milk output was flat in the European Union and down in New Zealand and Australia due to drought. China's dairy product consumption was soaring.
But then, milk production came back in New Zealand, Australia, and South America. As food and dairy product prices rose, demand faltered. As demand softened, product inventories began to build up.
Then there was crash of markets and the housing crisis here and around the world started what became a global financial crisis. About that time, the melamine contamination hit China, and demand for dairy products there dropped drastically. That caused further buildups of dairy product inventories around the world.
As the world's credit sources shut down, no one had any money to do anything. For example, neither the grocery store chain in Egypt nor the firm that imported products for the chain could get financing. Without the loans, there were no sales.
This combination of factors is going to have to be reversed before we can get out of this mess. There is some evidence that economies around the world are strengthening. Credit availability seems to be improving.
Things are looking brighter, although we have a long way to go. The improving outlook is the topic of an editorial on page 654 of our October 25, 2009 issue.

World dairy prices: Low and recovering slowly

There are some positive signs in the world market, according to USDA’s Foreign Ag Service. New Zealand holds periodic auctions of whole milk powder, and those prices have been rising slowly. But world dairy markets remain “frail”, says FAS, and most major economies are expected to recover slowly. This will mean slow recovery to world dairy prices . . . and U.S. milk prices.
There is no one world price for milk. World dairy trade involves various milk powders, butter, cheese, and a variety of other milk-derived ingredients. You just have to take some world market prices and try to compare them to market values here in the U.S.
For example, the skim milk powder price in Oceania (Australia and New Zealand) is about 96 cents a pound. In Europe, it is about $1.08. This compares to a recent U.S. nonfat dry milk cash price of 99-1/2 cents. Oceania Cheddar is around $1.25 a pound compared to a U.S. barrel price of $1.31. Butter is around $1.50 in Europe, 96 cents in Oceania, and $1.17 here.
After a year of severe drought, New Zealand is boosting milk output 8 percent this season, and Australia’s milk production is recovering as well.
The European Union has reactivated its export subsides, and the U.S. has reactivated DEIP (Dairy Export Incentive Program). Both actions will tend to hold down world prices. Plus, as much as higher dairy price support levels are needed here, nonfat dry milk inventories here and around the world will build, putting a damper on world dairy price recovery.
Unfortunate as the situation is, it seems it is likely to be many months before our economy and other world economies stimulate dairy product prices to any significant degree. And, sadly, Class III milk futures prices confirm this.

China's dairy industry still trying to recover

After last year’s scandal, which killed six children and affected over 294,000 people, the dairy industry in China is still on the rebound. A 2008 disclosure about the addition of the industrial chemical melamine to milk products led to company losses of nearly $140 million. The added melamine made it appear that milk from undernourished cows had higher protein levels to get a better ‘quality check’ from the milk company.

China Mengniu Dairy Company, the nation’s biggest supplier of liquid milk, was one of the hardest hit with a loss of $138 million last year after being one of the firms found at fault in the scandal.

The company is expecting a net profit this year between $102 and $117 million with large thanks to state-owned and private equity firms. State-owned firm, Cofco, and private equity firm, Hopu Investement Management Company, are joining forces to invest $780 million for 20 percent stake in Mengniu.

While other smaller dairy companies are still suffering, Mengnui will use the added funds, as advised by the government, to enhance product quality.

Don’t forget to communicate

With prices as low as they are in the dairy industry today, and no miracle on the futures horizon, it’s important to keep everyone in the loop on your farm. “Communication should not stop at the barn door,” says Julia Nolan Woodruff, Extension educator with The Ohio State University. Woodruff explains in a recent Dairy Issue Brief that you should keep the lines of communications open with your lenders, nutritionist, veterinarian, and others. They might be able to offer suggestions in this difficult time. This can also help develop a strong relationship for future business.

Woodruff says that a lack of communication sends a clear message to your family and employees of a negative outlook for the future. Communication does take some effort and time. Calling a family or business meeting can be a way to convey what the current situation is. Finally, Woodruff explains that everyone communicates differently, so it is important to adjust your message to everyone’s communication styles.

Hoard's talks to National Public Radio

Today's dire situation in the dairy industry is a result of a "perfect storm" of circumstances. That's the message the Hoard's Dairyman staff gave NPR reporter John Burnett.
On average, dairy farm families across the nation are experiencing a 50 percent drop in income from roughly $20 per hundredweight or $1.72 a gallon down to $10 per hundredweight or 86 cents a gallon. The low prices have been caused by growing dairy product inventories in the U.S. and around the world. China is importing significantly fewer dairy products in the wake of that nation's melamine scandal. Dairy product importers around the globe can't get credit to import products.
New Zealand, which exports 90 percent of its dairy products, is having trouble finding enough warehouse space for surplus product. Some of the New Zealand surplus is finding its way to the U.S. Recent butterfat imports here are the highest in four years. The European Union just announced that it, again, is going to subsidize exports of dairy products, which will put further pressure on world prices.
Dairy product use in the U.S. is down as people are eating out less and choosing lower cost items (with less cheese) when they do eat out. Pizza makers are cutting back on the amount of cheese they use.
Dairy farmers' biggest costs, Hoard's pointed out, are feed and labor. But there isn't a lot of "wiggle room" on those expenses. Regardless of the price received for milk, cows still must be well fed and well cared for every day.