Wednesday, 8 July 2015

More Bigger Not Better

The on-going campaign on the business and political pages of our major newspapers to snuff out supply management continues.  President Obama now has congressional approval to negotiate the final terms of what's called the Trans-Pacific Partnership, setting the stage for final bargaining over the next couple of monthes on an 11 country trade deal that includes important emerging economies in Asia and South America.  The U.S., New Zealand, and Australia in particular want Canada to give up the high tariffs  used to shield the regulated dairy, poultry and egg industries from cheap imports.  I've written extensively about this over the last six years, and the search function at the bottom of the page will show you where those are if you wish.  

While cheaper milk and cheese is held up as justification for getting rid of supply management, there are other factors that don't get as much attention, like subsidies and the environment.  Yes U.S. dairy farmers are paid less than Canadian which is the underpinning for cheaper dairy products, but they’re also subsidized through government cheques in the mail. In Canada farmers are just paid once. Is there an appetite to add income support to put farmers here on the same footing if supply management disappears?  I doubt it. And the size of farms needed to compete in ruthlessly competitive export markets has become an environmental problem in New Zealand, Australia and the United States.  More than 50% of U.S. milk is produced on 3% of the farms, all with more than a thousand cows, and opposition is growing in states like Wisconsin  after manure spills.  “Dairy Industry Posing Pollution Threat To New Zealand's Rivers, Says Expert” is a recent headline in the International Business Times.  Bigger not always better. 

And this week more indication that the free market doesn't always bring the best results. And don't forget this is the export market the media elite think is just full of opportunity for Canadian dairy farmers.

Milk Spilled Into Manure Pits as Supplies Overwhelm U.S. Dairies

Domestic output is set to be the highest ever for a fifth straight year. Farmers are still making money as prices tumble because of cheaper and more abundant feed for their herds. Supplies of raw milk are topping capacity at processing plants in parts of the U.S. and compounding a global surplus even with demand improving.
Agri-Mark, a 1,200-dairy cooperative in New England that had $1.1 billion of sales last year, started pouring skim milk last month into holes used for livestock manure. It was the first time in five decades, and farmers so far have unloaded 12 truckloads, or 600,000 pounds (272 metric tons). While having small amounts of milk spoil or go unsold isn’t unusual, Northeast dairies dumped 31 percent more this year through May than the same period of 2014, government data show.
“Usually we’d find someone to buy it at a reduced price, or ship it to the Midwest,” said Bob Wellington, a senior vice president at Andover, Massachusetts-based Agri-Mark, which was founded in 1913. “But those plants are full. There’s no way to process it in the time needed for a perishable product.”

Global Glut

Domestic output in May reached 18.4 billion pounds, the most in any month, and is on pace to reach a record 208.7 billion pounds this year, the U.S. Department of Agriculture said June 18. Globally, production will rise 2.1 percent to a record 582.52 million tons as top exporter New Zealand sells the most ever and the European Union ends limits on dairies that had been in place since 1984, the USDA said.
U.S. farmers expanded after futures on the Chicago Mercantile Exchange surged to a record in September, fueled partly by rising cheese demand and a jump in purchases by China. Since then, warmer weather has brought a seasonal increase in supply, demand slowed from importers, and a stronger dollar eroded exports.
“The world needs less milk,” said Eric Meyer, president of HighGround Dairy, a Chicago-based broker.

Price Slump

Global dairy prices have dropped 39 percent from an all-time high in February 2014 and are the lowest in five years, United Nations data show. In Chicago, benchmark Class III milk futures, used in cheese making, are down 36 percent to $16.11 per 100 pounds from a record $25.30 in September. Prices may fall to $14.41 by the end of the year before recovering in 2016, said Tom Bailey, a New York-based analyst at Rabobank International.
New Zealand’s dollar has tumbled to a five-year low as falling milk prices amplified speculation the nation’s central bank will cut interest rates this month. The kiwi slid against almost all of its 16 major peers this year.
The milk slump has been a boon to buyers including processor Dean Foods Co. and retailer Supervalu Inc., contributing to a slowdown in the pace of food inflation.
At the same time, the dollar’s rally against most of the world’s currencies helped to spur a 10 percent drop in U.S. milk exports in the first four months of 2015, while imports rose 12 percent, compounding the domestic surplus, government data show.
The bear market has been no barrier to more supply. At Mitch Breunig’s farm in Sauk City, Wisconsin, he’s still profitable even as the value of his milk fell 26 percent. Costs have dropped for things like fuel, and wet spring weather left an abundant alfalfa harvest, providing higher-quality hay for his 420 cows to eat. The animals are producing 3 percent more milk than last year.

Feed Profitability

“I just have way more feed than a year ago,” Breunig said, adding that his eight grain silos are full. “In terms of profitability, boy, that has a huge effect.”
Demand remains strong, with Americans eating more dairy products than ever, especially cheese and butter, said Bill Brooks, a Dearborn, Missouri-based dairy economist at INTL FCStone. Futures may reach $17.57 in the fourth quarter, he said June 18. The USDA estimates global milk demand will rise for a sixth straight year to a record 582.7 million tons.
There’s also concern output is dropping in California, the largest U.S. producer. A four-year drought may be eroding feed quality and cutting into profit, said Bill Schiek, an economist at the Dairy Institute of California in Sacramento.

Shrinking Profit

Dairy profits may not last much longer. Income over feed costs will fall 38 percent to average $8.90 per 100 pounds of milk in 2015, from a record last year, FCStone’s Brooks said. Profit margins below $7.50 usually signal output will drop, according to Matt Gould at the Dairy & Food Market Analyst newsletter.
For now, there’s more than enough incentive to produce more milk. Breunig, the Wisconsin farmer, estimates his alfalfa costs will drop 26 percent to $70 a ton this year, while corn will be down 10 percent. He’s also getting top dollar from the slaughterhouse for calves and old cows at the end of their productive life, because wholesale-beef prices are near the highest ever.
Dairies in the Northeast dumped 31 million pounds of milk in the first five months of 2015, including 7.9 million in May, which was 67 percent more than the same month last year, USDA data show. Farmers are saying it is the most ever, according to the dairy newsletter’s Gould.
The 1,950 cows at Majestic Crossing Dairy in Sheboygan Falls, Wisconsin, are still making money for co-owner Dean Strauss even after revenue sank 40 percent from last year.
“There’s ebbs and flows,” Strauss said. “We have to be prepared and put money away when the times are good, for when poor markets come.”

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