DMI circles wagons around Net-Zero’s new hire

By Sherry Bunting, Farmshine, Friday, August 7, 2020

BROWNSTOWN, Pa. – After last week’s Farmshine cover story, dairy producers across the country have been reaching out to DMI board members and staff seeking answers to questions posed about the Net Zero Initiative, direction of sustainability goals, and the newly hired Executive Director of Dairy Scale for Good, Caleb Harper. He was tapped in May to lead the effort to ‘scale up’ technologies for “U.S. Dairy” to meet its commitment,
despite his history of involvement in cellular agriculture and other concerns.

DMI has not yet responded to the questions posed by Farmshine. However, producers are asking questions and getting some responses. During Wednesday’s “open mic” call with DMI CEO Tom Gallagher, the topic was addressed at the top of the hour to say that a future “open mic” would be devoted to this topic of sustainability.

“We’ve been getting questions,” said DMI chairwoman Marilyn Hershey as she opened the call Wednesday. She referred the 350 people on the line — including 50 board members, 80 dairy farmers, along with media and staff — to her blog post at usdairy.com.

“The Net Zero Initiative has pathways for all size farms to be able to stand behind our sustainability goals,” she said.

“Our next ‘open mic’ will focus on sustainability because there is a lot going on in that arena. There is misinformation and good information, and we want to get the details and have National Milk and Newtrient — a company of dairy co-ops and people from the Innovation Center — on where we are going and why,” said Gallagher.

“The industry is focused on being net-zero, but profitable net-zero. That is something that will take time and hard work to get to. We are focused on all size farms — not just large, medium, or small — and on all regions,” he stated. “We know each region has different challenges.

“Most of the small farms are probably net-zero already,” he said.

Gallagher explained that DMI recently added several people in different parts of the organization. “One (new person) is Caleb Harper, and we are really glad to be able to attract him,” said Gallagher.

“We know Caleb is completely a dairy guy. Let’s face it,” said Gallagher. “Cell ag and other competitors are getting well-funded. Caleb is a smart guy, a guy who is pro dairy. He understands the playbook of the other team, so we are miles ahead.”

In the blog post Hershey pointed to for answers to questions, she writes: “Caleb Harper joined our team in May to lead Dairy Scale for Good. Caleb is a former principal research scientist at Massachusetts Institute of Technology (MIT) and director of the Open Agriculture Initiative at the MIT Media Lab. He has a tremendous background of leading engineers, scientists and educators in the exploration and development of future food systems and technology.”

Hershey goes on to describe his responsibilities as “directing best practice and technology adoption and implementation on a handful of pilot farms. Harper will also develop third-party strategies to generate investments, partners and technologies that will keep farmers from bearing the entire commitment of this endeavor.”

Harper has already been visiting dairy farms in the Southwest and Upper Midwest after his first-ever dairy farm visit to Fair Oaks Farm.

Both in the blog post, and in other responses made in writing to producers from DMI staff, Harper is described as “coming from a family that raises horses and goats on a small ranch in Texas and crops and cows on a fifth-generation homestead in Kansas.”

What isn’t mentioned is that, according to a Sept. 2019  Chronicles of Higher Education story, Harper’s father was a grocery executive. We’ve since learned that Steve Harper was Senior Vice-President of Marketing and Fresh Product Development, Procurement and Merchandising from 1993 to 2010 for the H-E-B supermarket chain in Texas and northern Mexico, among the largest supermarket chains in the U.S. in sales. He stayed on part-time through 2012 before retiring in 2015.

H-E-B was a first partner and longstanding partner of Mike and Sue McCloskey. The relationship began when Steve Harper was chief merchant for H-E-B in the 1990s and the McCloskeys were dairying in New Mexico, according to information shared by Sue in a presentation at the Pennsylvania Dairy Summit in Feburary. In fact, according to the Houston Chronicle, the McCloskeys worked with H-E-B, supplying their milk and in 1996 began to produce Mootopia ultrafiltered milk, an H-E-B brand.

Both Caleb Harper and Mike McCloskey are on WWF’s “Markets Institute” Thought Leadership Group

Hershey writes proudly of Caleb Harper’s involvement in several non-profit organizations, including the World Wildlife Fund, the World Economic Forum, as an explorer for National Geographic, and at New Harvest, a cellular agriculture research institute.

Meanwhile World Wildlife Fund (WWF) — the DMI sustainability partner — will stop at nothing in its quest for food transformation away from animal use. WWF is currently using the Coronavirus pandemic and “threat of zoonotic diseases jumping from animals to humans” as the angle for pushing food transformation, with a “stop the next pandemic” campaign at the WWF website stating: “The conversion of land for unsustainable agricultural and livestock use drives wildlife, domestic animals, and humans in closer contact.”

Both New Harvest and WWF support and advocate for rewilding of lands as farms and ranches fold under the pressure of low prices, rapid consolidation, misinformation used to position new plant-based and cellular ag products as future of food replacements for meat, eggs and dairy, using climate change, sustainability and now pandemic fears to prepare people to accept these bio-engineered versions grown in fermentation vats and bio-reactors instead of farms and ranches.

“While (New Harvest) goes against the essence of who we are as farmers, and Caleb no longer serves on its board, his knowledge and insights in this area will be an asset,” writes Hershey. “I am very excited about Caleb’s ability to open new doors for dairy. He brings an astounding depth of relationships with other scientists, organizations and companies.”

New Harvest is more than a “cellular agriculture research institute.” It’s mission is to replace cattle and other livestock by growing portions of animals, separating protein excrement from yeast, and other methods of displacing farmers and ranchers from the land. In 2017 and 2018, Harper was one of five board members. In fact, though canceled due to Covid, the New Harvest 2020 Conference was scheduled for the M.I.T. Lab in Cambridge, Mass., where Harper was a lead researcher until April 30, 2020.

In her blog post, Hershey writes that, “Earlier this year, the Innovation Center for U.S. Dairy set new environmental stewardship goals to further the progress and commitment that dairy farmers and the broader dairy community have to responsible production.

She describes it as a “collective effort” expected to benefit all farms with a pathway for farms to voluntarily contribute. She writes that it will not be mandatory. Instead, she notes that it will provide opportunities for farms of all sizes to adopt technologies and practices and create revenue streams.

Stay tuned.

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Fair Oaks, fairlife co-founder paints picture of dairy’s future as seen by partner DMI

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By Sherry Bunting, Farmshine, February 14, 2020

STATE COLLEGE, Pa. — The big question Sue McCloskey gets about fairlife is “How did you think of it?”

As co-founder with her husband Mike of Select Milk Producers, Fair Oaks Farms and the fairlife brand, McCloskey spoke about “the spark of innovation” to a crowd of over 500 at the 2020 Pennsylvania Dairy Summit in State College last Thursday, Feb. 6. She was among the featured speakers that were sponsored by ADA Northeast.

“We are all innovators in agriculture,” said McCloskey, telling how they learned of reverse osmosis when a well on their New Mexico dairy backed up 25 years ago, and RO membranes were used to separate solids to restore water quality. That experience introduced them to the concept of filtering solids by molecular size, but her larger message was about the concept of innovation in allowing companies to differentiate in a generic category like milk.

For example, she said, who would think, years ago, that water would become the multi-billion-dollar industry that it is today? And coffee? She cited Starbucks as a catalyst for the rise of coffee houses and coffee drinks and blends today.

As in these examples, someone was the first innovator to bring value to those generic categories. She said for milk, the parallel is fairlife.

“Innovation – thinking outside the box — that’s what grabs people,” she said.

McCloskey maintains that as consumers, “We are all waiting for the next new thing. We want more. We want new. That’s where we have seen success with fairlife.”

The journey

McCloskey talked about her husband’s journey from being a dairy veterinarian to a dairy producer and innovator. They started with 300 cows in California and a partner they still have today in Tim DenDulk. One by one they bought dairies, fixed them up and rolled them over.

Once they got to New Mexico with a 3000-cow dairy, that was the real beginning of it, she said. That’s where they founded Select Milk Producers 25 years ago, which is today the sixth largest cooperative on a milk volume basis with 99 members.

They formed to focus on high quality milk with low somatic cell counts and to sell that concept direct to retailers instead of being part of a co-op that commingled their milk to blend-down the somatic cell counts. That’s where they were introduced, she says, to the concept of what has become fairlife through the use of RO membranes to ultrafilter the milk. She explained that the milk going in must be very low in somatic cell counts because the process of ultrafiltration concentrates the solids – including somatic cells.

She pointed to the “incredible success” of building different plants and beginning to build the fairlife brand, which led them to their next opportunity in the Midwest – Fair Oaks Farms.

When the McCloskeys came to Indiana, DenDulk, their original partner in California, was already in Michigan.

McCloskey said the housing technology had developed by that time to where they felt they could do larger dairies in the Midwest climate. They built the first of the original four 2800-cow dairies in 1999. Today, there are 13 separate dairies totaling over 36,000 cows that are owned and managed by a few families on the roughly 30,000 acres, including the new 800-cow robotic dairy that opened at the end of 2019.

In fact, she spent part of her time talking about the innovations coming out of Fair Oaks to recycle and recover nutrients and to address greenhouse gas emissions to improve the “sustainability” and carbon footprint of dairy.

“There are cool things happening and things we are doing that we really need to embrace,” she said.

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(Sue’s husband Mike, who spoke in March at the PDPW virtual business conference on U.S. Dairy’s goals for GHG emissions, was the first chairman of the Sustainability Initiative when it was launched under DMI’s Innovation Center for U.S. Dairy in 2009-10, and the checkoff’s research and development and marketing assistance for fairlife and Fair Oaks came from DMI through the Innovation Center where such partnerships are born.)

The process

Establishing fluid milk supply relationships with large retailers like H-E-B and Kroger, McCloskey said they have worked over two decades to move closer to consumers as they began using RO and ultrafiltration as early as 1995 to reduce the water moving loads of milk to cheese plants, while at the same time beginning the high protein, low sugar milk proposition partnering with H-E-B in Mootopia in 1996, before what is fairlife today.

They saw other protein drinks in the market they could compete with – by concentrating the protein in milk.

So began the process of building the brand from coast to coast as new products have been added continually. While most people are familiar with fairlife ultrafiltered milk, the CorePower fitness recovery drink was among the first that was created as a competitor for Muscle Milk.

Today, there are flavored Yup drinks, snack drinks that pair ultrafiltered milk with oats and honey, new coffee creamers, and a full line of weight management and healthy lifestyle products that are just emerging under the fairlife brand.

While Select Milk Producers sold its remaining half-interest in fairlife to its early partner Coca-Cola a few weeks ago, McCloskey remains a spokesperson for the brand. Also, the research and development teams remain intact and are still located in Chicago.

The spotlight

What Coca-Cola did for fairlife, said McCloskey, is to provide a nationwide distribution network that the Select co-op could not have achieved on its own.

“The hardest thing in consumer goods is to get a product in front of the people who want to buy it,” said McCloskey. “Our challenge was distribution. So, we formed a partnership with Coca-Cola. With Coca-Cola as 100% owner of fairlife, what happens now is that they are just going to run with it.”

This means that, “Milk is in the spotlight. While we hear the bad news from Dean’s and Borden, the good news is that the Coca-Cola, a top-five company, is involved in milk,” said McCloskey.

With an ultrafiltration plant producing fairlife in Michigan, she explained that the east coast and midwestern markets could be served and that the new Select plant in Arizona will serve the west coast market. A plant is also being built in Canada.

Answering a question about whether fairlife, or this direction of milk innovation, would ever “play ball” with the smaller average size farms in Pennsylvania, she replied that any milk supply for fairlife must be very low in somatic cell counts and will have to meet with flying colors all of the new levels of audits and animal welfare requirements that Select Milk Producers and Coca-Cola have implemented since the undercover animal abuse video at McCloskey’s original farm at Fair Oaks this past summer.

When asked how producers are compensated for these additional measures, she did not disclose proprietary information about how producers are paid.

The proposition

She said the fairlife story shows “there is still room for investment and innovation in milk, innovation that makes milk relevant to consumers.”

McCloskey explained how the ultrafiltration process raises the protein and calcium levels, removes the lactose and reduces the natural sugars in milk without adding anything.

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“And it is still real milk… but better,” she says, explaining that fairlife is finding “amazing growth in differentiation,” that fairlife’s entire proposition to consumers is the concept of  “believe in better.”

“Our core tenets of the master brand are better taste, better nutrition, and better values,” she said.

“The brand is created around values, and these values are not new, but they are done in a way that is a little more creative to today’s consumers.”

She explained that Select Milk Producers sends milk that goes into a jug at Krogers and sends milk to fairlife, “but it’s the innovation and sharing the values that leads to growth.”

Sharing consumer surveys showing 90% of fairlife consumers are satisfied and 69% are repeat customers, McCloskey said this growth and innovation “mean bigger things for dairy than just fairlife.”

She said that 45% of the fairlife market share is coming from within the milk category and 55% of their consumers are coming over from outside of the milk category.

While fairlife’s ultrafiltration process is patented, McCloskey said a dozen new products have come on the market since fairlife that use similar technology or other means of delivering high protein, low sugar outcomes.

This allows these products to differentiate themselves next to the gallon of milk as a generic staple, she explained.

“If someone is on food stamps and can’t afford these new products, that’s okay,” McCloskey said. “They can buy milk. People will still buy milk.”

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The next phase

McCloskey stressed the “tremendous value checkoff organizations bring to dairy farmers to promote how to innovate dairy and make it better.”

She explained the next phase, how DMI is sitting down with young urban-suburban consumers to “learn how they make food choices, to learn what they look for. This is leading us into sustainability and carbon footprint,” said McCloskey.

“We also sit down with the different NGO’s (like World Wildlife Fund for example). We all sit at the table and talk about the challenges that face dairy farmers,” said McCloskey. “The Net Zero Initiative coming out of that is one of the coolest things, and we are a collaborator on what is needed for dairy to get to net zero. It’s a big stake in the ground, but it’s got to be the place where we need to go.”

She explained the Net Zero Initiative under DMI’s Innovation Center for U.S. Dairy has a catalog of technologies to help producers deal with environmental issues.

“What if 37,000 dairy farmers could have net zero greenhouse gas emissions? This is what we have to chase,” she said. “The innovation can’t stop. The whole genome of the dairy cow has been mapped. Manure can be fractionated. There is innovation that is so exciting for us to think about what dairy can look like in the future.”

The forward-looking picture McCloskey painted for Summit attendees includes even more fractionization and extraction of milk’s elements, more use of specialized GMO crops and more consolidation of farms and processors with fewer cows producing more milk to meet new sustainability benchmarks.

McCloskey said the innovation from fluid milk to cheese to fractionating protein into “all kinds of other products” — while reducing the overall dairy carbon footprint — is the road to 2050.

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The ‘perfect laboratory’

“We have only begun to know milk’s power and the different vitamins and elements we are just discovering how to use and extract,” she said.

“And it all happens in nature’s perfect laboratory – the dairy cow.”

On the flip side, McCloskey acknowledged that DMI has also learned consumer choices come back to this bottom line:

“It’s got to taste good and it’s got to do something for me,” she noted. “This is why dairy is not going away. Dairy is real and it tastes great and it makes you feel good.”

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Deep discounts on All-Milk prices bring new risk management challenges

NOTE: In the first part of this three-part series, we’ll look at some of the factors contributing to the huge divergence between Class III and IV at the root of current losses in milk income, especially for risk-managers who were caught off guard with no good tools to manage the misalignment and especially the de-pooling. In the next two parts, we’ll look at some of the advice for managing basis risk in CME-based tools and revenue insurance.

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This graph at dairymarkets.org shows the divergence between Class III and IV milk futures at the root of deep discounts in All-Milk prices as compared with Class III.

By Sherry Bunting, Farmshine, Friday, August 7, 2020

BROWNSTOWN, Pa. — Dairy producers find themselves in uncharted territory, where a mixed bag of market factors, pricing structures, class price misalignments, Federal Milk Marketing Order (FMMO) provisions, product-in / product-out flows via imports and exports vs. inventory, as well as the government’s thumbprint on the scales in a pandemic shutdown of the economy and the dairy product purchases that followed. All have affected Class III and Class IV milk prices quite differently, creating deep discounts in blended farm milk prices vs. Class III.

“We’re seeing milk class wars,” said economist Dan Basse of AgResource Company, a domestic and international agricultural research firm located in Chicago, during a PDPW Dairy Signal webinar recently. Basse opined that the current four-class FMMO system is old and outdated with pitfalls creating new volatility issues for producers in the form of the $7 to $10 spread between Class III and Class IV in June / July.

He noted, as have others in the past, that a simpler pricing system with one manufacturing milk price and one fluid milk price is something that “dairy farmers could live within.”

Under the current four-class system, and the new way of calculating the Class I Mover via averaging, dairy farmers now find themselves “living on the edge, not knowing what the PPD (Producer Price Differential) will be,” said Basse.

“A $7.00 per hundredweight discount is a lot of capital, a lot of income and a lot of margin to lose with no way to hedge for it, no way to protect it, when the losses are not being made up at home (as reflected in) the PPD,” Basse related.

Previous Farmshine articles over the past few weeks have explained some of the FMMO factors reflected in the negative PPDs everyone is focused on because they are so large. While June’s PPD was primarily affected by lag-time, the next several months of negative PPDs are likely to occur based on the legislated change to the Class I Mover calculation in the last Farm Bill.

The significance of the PPD is that it indicates to the producer the value of the milk in FMMO-available pool dollars as compared to the announced Class III price. The PPD is how the FMMO pool revenue is balanced.

Normally, component values are paid by class, and the extra is divided by hundredweights in the pool to calculate a PPD reflected as the difference (usually positive) between the FMMO uniform price and the Class III price, according to Dr. Mark Stephenson, University of Wisconsin dairy economist in a recent PDPW Dairy Signal.

When higher-value Class III milk is de-pooled in this scenario, the dollars don’t stretch, so the pool has to be balanced by dividing the loss (negative PPD). Even in the southern FMMOs based on fat/skim the same shortfall occurs and shows up as milk being worth less than Class III, instead of more.

The problem faced right now is the Class III price does not represent the broader industry, and there are no straightforward tools for managing this type of risk, especially when the higher-value Class III milk is de-pooled or replaced with a lower class.

“It’s a terrible situation on the hedging side, with three material sources of the problem,” notes Bill Curley of Blimling and Associates in a Farmshine interview this week.

While he describes ways to manage some of these sources in building a risk management price or margin, such as using a mix of Class III and IV and other strategies that reflect a producer’s milk market blend of classes, “there’s no hedge for de-pooling,” he relates.

In fact, Stephenson illustrates this for the Upper Midwest FMMO 30, showing a difference of $7 between the level of negative PPD for July without de-pooling and the level of negative PPD with de-pooling.

While July de-pooling figures won’t be known until mid-August, the June de-pooling in the Northeast wasn’t as bad as in California, as an example. In California, so much milk is already sold outside the pool, that it is easy to replace virtually all of the Class III milk with lower-value Class IV in this divergent classified price scenario.

In the Upper Midwest, only so much de-pooling can occur due to qualifying criteria, so utilization that may normally be 75% Class III, was 50% in June. They don’t have enough Class IV to simply replace Class III and stay qualified on the Order.

Curley and others explain that this situation could leave producers unprotected, especially since they can’t control any of the sources of misalignment between their All-Milk price and Class III. The only factor they can control is whether or not to drop the hedges, which then leaves them unprotected for market risk at a volatile time in the midst of a pandemic as virus rates are reportedly re-surging.

Meanwhile, this week began with risk working its way back into markets as three consecutive days of steep losses in CME cheese and butter prices pushed both Class III and IV milk futures lower, but still with a $4 to $7 gap between them in the next few months.

For its part in balancing broader industry demand, USDA announced a third round of food box purchases for September and October, which will again include cheese, but this time will include more from Class II (sour cream, yogurt, cream cheese) as well as some butter from Class IV. All told, the government will have spent about $1 billion in three phases of dairy purchases for the Farmers to Families Food Box program.

Stephenson reminds producers of the silver lining in this cloud.

“Remember what the pandemic economy looked like just a little over two months ago,” he said. “It was absolutely devastating. Cheese was at $1.00/lb, and milk dumping was unprecedented.

“Now, as we look at things, it’s going to be better than we expected then,” he said showing the All-Milk price for 2020 is now forecast to come in at just under $18 for the year, but that many farms will net $20 per hundredweight for the year via the combination of Dairy Margin Coverage (DMC) and Coronavirus Food Assistance Program (CFAP) payments.

He estimates 2020 DMC payments at the $9.50 coverage level should net 66 cents across annual production for the year while CFAP payments have produced, so far, an impact equal to $1.55 per hundredweight across annual production.

For many producers, however, it won’t feel like $20. It might not even feel like $18.

Agricultural Prices 07/31/2020

USDA NASS reported June All-Milk prices last Friday, July 31. The range from high to low is $8, nearly double the normal range. At $18.10, the U.S. average All-Milk price did push the Dairy Margin Coverage milk margin above the highest payout level at $9.99.

Take June milk checks for example. USDA announced Friday, July 31 that the June U.S. All-Milk price was $18.10. That’s almost $3 below the Class III price of $21.04 for June, something we just don’t see.

Worse, USDA’s own report showed an $8.00 per hundredweight spread between the lowest All-Milk price reported at $14.80 for Michigan and the highest reported at $22.70 for South Dakota. This unprecedented spread is almost double the normal range from top to bottom. (Table 1)

Also unprecedented is the Pennsylvania All-Milk price reported by USDA for June at $16.30. That’s a whopping $1.80 below the U.S. All-Milk price when normally the state’s All-Milk price is 30 to 60 cents above the U.S. average.

The same thing can be said for Southeast fluid markets and other regions where a mixed products, classes and de-pooling of higher-value milk left coffers lacking for producer payment in the pool, and results varied in how co-ops and handlers  compensated producers outside the pool.

Dairy producers participating in the June milk check survey announced in Farmshine a few weeks ago, have reported gross pay prices that averaged fully $2 below the respective USDA All-Milk prices calculated for their state or region. Net prices, after deductions, averaged $4 below, and the same wide $8 spread from top to bottom averages was seen in this data from over 150 producers across six of the 11 Federal Orders. (Table 2)

This all creates an additional wrinkle in terms of the impact on the DMC margin, which was announced this week at $9.99 for June – 49 cents over the highest coverage level of $9.50 in the DMC program. This margin does not reflect anything close to reality on most farms in June and potentially July.

Large, unexpected and unprotected revenue gap

Normally the All Milk price is higher than Class III, and the cost of managing risk when the market moves higher is then covered by the performance of the cash price, or milk check, instead of the hedge, forward contract or revenue insurance. The inverse relationship in June and July between blend prices and Class III price, left a large, unexpected and unprotected revenue gap.

For its part, USDA AMS Dairy Programs defines the All Milk price in an email response recently as “a measurement of what plants paid the non-members and cooperatives for milk delivered to the plant before deduction for hauling, and this includes quality, quantity and other premiums and is at test. The NASS price should include the amount paid for the ‘not pooled milk.’”

USDA’s response to our query further confirmed that, “The Class III money still exists in the marketplace. It is just that manufacturing handlers are not required to share that money through the regulated pool.”

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By the looks of the milk check data from many areas (Table 2), most of this value was not shared back to producers, with a few notable exceptions. However, economists project the situation for July milk will be worse in this regard.

The factors depressing June and July FMMO uniform prices, USDA All-Milk prices and producer mailbox milk check prices are three-fold: the 6 to 8-week lag-time in advance-pricing of the Class I Mover, the new method of averaging to calculate the Class I Mover, and de-pooling of the higher-value Class III milk. All three factors are rooted in the $7 to $10 divergence between Class III and IV in June and July.

The part of the equation attributed to the new Class I Mover calculation is perhaps most discouraging because this is not money producers will eventually see. On the other hand, the lost value from the advance-pricing lag-time is eventually “caught up” in future milk checks. Most of the discount to come in July farm-level prices and negative PPDs in future months vs. Class III will be from the divergent factors that are not reconciled later.

Demand drivers differ for Class III vs. IV

Driving Class III $7 to $10 above Class IV was the abrupt turnaround in the cheese market, fed by strong retail demand, the resupply of foodservice channels, a significant May rebound in exports of cheese and whey, significant declines in cheese imports in the March through June period, and new government purchases of cheese for immediate distribution under CFAP.

On the flipside, Class IV value weakened at the same time as butter and powder did not have as many competing demand drivers. Additionally, butter stocks were overhanging the market, despite butter being the dairy product that saw the very highest increase in retail demand during the March through June Coronavirus shutdown period with retail butter sales up 46% over year ago.

Butter and powder production in the U.S. are mainly through co-op owned and managed facilities, while cheese production is a mix of co-op, private and mixed plant ownership.

When co-ops petitioned USDA for a temporary Class I floor hearing, most of the pushback came from the Midwest, and there were calls instead for government direct payments and cheese purchases for distribution to bring down what had been a growing cheese inventory. A stabilizer, or “snubber” on the Class I Mover calculation would have helped avoid much of this unrecouped discount on All-Milk price compared with Class III that affected most of the country.

While cheese moved to retail, foodservice, government purchases and export, butter was mainly relying on the surge in retail sales. Butter and milk powder were not draws in government CFAP purchases.

Overall, however, CFAP has not been the biggest driver in the cheese rally, according to Stephenson, although it added another demand driver to the Class III mix.

He notes that while the government CFAP purchases included a lot of cheese, those purchases accounted for 10% of the cheese price rally in June and July. The rest was fueled by retail demand staying strong and restaurants reopening and refilling supply chains, along with strong demand for other dairy products at retail, such as fluid milk. Producers were also pulling back to avoid overbase penalties. These factors combined to reduce cheese production in May and June, while demand drivers reduced inventory vs. demand.

Other dairy products also saw higher retail demand and were included to some degree in the USDA’s CFAP purchases, but without the same level of visible pull for the trade.

Import/export and inventory equation differs for Class III vs. IV

In taking a closer look at imports and exports relative to inventory to gauge differences between the product mix for Class III vs. Class IV, there are some key differences on both sides of that equation.

Exports of cheese in May were up 8%, and whey exports up 16% over year ago, according to U.S. Dairy Export Council.

Meanwhile butter and butterfat exports were down 7% in May, and down 21% below year ago year-to-date.

Powder exports did break records up 24% for May on skim milk powder. Whole milk powder exports were up 83% in May and 44% year-to-date.

On the import side of the equation, cheese imports were down 13% in the March through June period vs. year ago, according to USDA’s Dairy Import License Circular.

Non-cheese imports, on the other hand, were up 37% above year ago at the same time.

One factor hanging over Class IV markets is the butter inventory — up 11% over year ago — despite significant draw-down month-to-month and retail sales volume being almost 50% higher than a year ago throughout the Covid period.

While U.S. dairy imports are dwarfed in volume by U.S. exports, overall, it is notable that the 37% increase in non-cheese imports included 17% more butter and butter substitute imported compared with a year ago during the March through June period and up 28% year-to-date. Furthermore, whole milk powder imports were up by 25% in the March through June period.

Looking ahead

In a dairy market outlook recently, both Stephenson and professor emeritus Bob Cropp said these wide swings that are creating deep discounts are expected to begin moving toward more normal pricing relationships after August, with Class III and IV prices both forecast to be in the $16s by the end of the year, and in the $16s and $17s for 2021.

Already this week, CME cheese has slipped below the $2 mark, pushing August Class III futures under the $20 mark and September into the mid-to-high $16s. Spot butter tumbled to $1.50/lb, pushing Class IV futures down into the low $13s — keeping the divergence between Class III and IV in place.

Experts encourage producers to be thinking more holistically about the milk markets in planning risk management and not to look at Class III as the leading indicator of which direction the market will take.

This makes any discussion of “margin” based on a Class III milk price irrelevant to the reality under the present conditions. In short, risk management tools did what they were designed to do, but new challenges on the cash price, or milk check side, will change how producers implement and use these tools, or blends of tools, in the future.

“Class III might be a wonderful market for cheese, but it’s not reflecting the entire dairy industry. Risk managers are losing margin on contracts that were meant to protect them from market risk,” says Basse.

“We normally trade at an All-Milk premium to the CME Class III. Today, that has changed dramatically,” he adds. “We are at a significant discount to the CME. We just don’t see these discounts relative to the CME. It is unprecedented.”

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New face, new position, ties ‘Undeniably Dairy’ to ‘milk without cows’

NEW HOLLAND 092206

By Sherry Bunting, Farmshine, July 31, 2020

CHICAGO, Ill. – A new face has “joined” Undeniably Dairy with direct ties to the effort to produce milk without cows.

Caleb Harper is the new hire for a new position via Dairy Checkoff. It was created within the DMI Innovation Center for U.S. Dairy’s Net-Zero project. His title as of May 1, 2020 is executive director of Dairy Scale for Good (DS4G).

On April 30, 2020, as reported last week in Farmshine, Harper left his position as the principle researcher at the M.I.T. Media Lab where he spearheaded the Open Agriculture Initiative, described as a “food computer” project. The lab came under scrutiny last fall for certain financial ties.

According to the May 13 New York Times, Harper’s OpenAg project “was quietly closed amid allegations that its results were exaggerated to sponsors and the public, the university confirmed. The Massachusetts Institute of Technology also announced that it would pay a $15,000 fine to the State Department of Environmental Protection because the project… improperly disposed chemicals into a well at a research center outside Boston where it conducted some experiments.”

For dairy farmers, that’s not even the worst of it. Harper has been a prolific writer and speaker touting cellular agriculture – milk, eggs and meat without animals.

Public Disclouser Copy for New Harvest.pdf

According to the most recent IRS 990s (2017 and 2018) for New Harvest Inc., Harper was a New Harvest board member during those two years.

This new DMI executive will head the work of scaling up the ‘climate-friendly’ practices dairy farms will implement in the future, when his past is rooted in cell ag to replace them. His direct association with New Harvest as part of their 5-member board is troubling.

New-Harvest-screenshot

New Harvest describes its purpose as “support for education and scientific research that advance technologies that make animal products (meat, eggs, milk, etc.) without the animals in order to reduce animal suffering, improve human health, and protect the environment.”

We reached out to DMI through Scott Wallin, vice president of industry media relations and issues management. We also sent questions to the DMI chair.

— We asked whether this newly created position filled by Harper had been advertised and if other candidates had been interviewed.

— We asked what are the responsibilities and qualifications for this “executive director of Dairy Scale for Good (DS4G)”? (For his part, Mr. Harper has the following description listed on his resume at Linked-In, that he is “part of an initiative working to help U.S. Dairies pilot and integrate new technology and management practices to reach net zero emissions or better while increasing farmer livelihood.”)

— We asked whether Harper had prior connections to DMI or any member of staff or leadership before getting this position.

— We asked for confirmation of how Mr. Harper’s salary is paid, through what sub-agency of DMI or partnership?

— We asked to know his starting salary, given his listing with a speakers agency showing he charges between $30,000 to $50,000 as a speaker – a speaker who frequents events side-by-side with the executive director of New Harvest, such conferences sponsored by the United Nations, World Government Summit, EAT Forum and other entities on planetary diets, “future of food” and cellular agriculture – milk without cows, eggs without hens, beef without cows.

— We also messaged Mr. Harper to ask him how a board member of New Harvest that funds research and supports technology specifically for milk without cows gets a job paid by mandatory checkoff funds from American dairy farmers who feed, care for and milk cows?

— We asked him what are his interests and qualifications in dairy?

— We asked if he was tapped for this position by someone within the DMI organization or one of DMI’s “partners” or did he simply respond to a job posting and interview for the position?

— We asked DMI how it came to be that a person who is an obvious supporter of technology to create milk without cows became the person hired by dairy checkoff — with dairy farmer money — to help develop, scale and implement environmental practices for real dairy farmers?

So far, the only response we have received was a brief general email from DMI’s Wallin, as follows: “Caleb Harper joined on May 1 to support U.S. dairy’s growing commitment to environmental stewardship and the development of new, scalable technologies and practices to support U.S. farmers.”

Harper, who goes by the handle @CalebGrowsFood on Twitter, has deep connections to cellular agriculture, a new sector populated with Silicon Valley “tech food” startups that the largest global dairy and meat integrators and food giants are now investing in to ramp up to scale. They use false science on human health and environment, especially climate change, as the angle to push these new product investments so they take root in retail and foodservice sectors across the nation, the world.

In fact, the continuation of status-quo low-fat and fat-free diets via the Dietary Guidelines Advisory Committee’s unscientific “Scientific Report,” July 15 is a key in the cell ag arsenal. A primary vegan on the saturated fats subcommittee alluded to “making way for new foods coming” that will deliver the nutrients the government-sanctioned meal patterns leave lacking.

New Harvest has funded and supported research with donations to companies making bovine DNA-altered yeast that excrete “dairy replacement” proteins that companies claim are “interchangeable” with real dairy protein in any food processing application. Companies like Perfect Day tout their B2B model of working with large dairy companies to scale, to provide replacement dairy protein that reduce the need for real dairy protein and thus reduce the need for cows and the “pressure” on the environment.

These “cell ag” companies and non-profits work together to seek from FDA the ability to label their creations as the dairy and meat they replace because they declare them to be biological replicas — achieved through gene-editing and modifying.

They seek the new “healthy” icon FDA is creating with its ongoing development of a Nutrition Innovation Strategy to meet dietary goals, such as low-fat. They say their replacements are superior because they reduce the impact of livestock on the planet and can be genetically customized to meet goals for the low-fat DGA recommendations.

Even the USDA bio-engineered (BE) labeling implemented in January is all set and ready for this, and guess what? Dairy producers helped lobby for it, thinking it applied to the crops they grow. Our industry leaders used producer reactions to non-GMO labeling to get grassroots support for label language that now does not require bio-engineered replacements to be labeled as such unless the engineered DNA is detectable within the final edible food.

A visit to the New Harvest web page at new-harvest.org will make your hair stand on end. Seeing the motto so boldly proclaiming: “Milk without cows. Eggs without Hens. Beef without Cows,” offers the realization that their goal – in concert with World Wildlife Fund (WWF), DMI’s “sustainability partner” — is the end of animal agriculture through cell agriculture.

Don’t get angry and don’t be depressed. Have hope. Be bold.

If every Farmshine reader does some of the suggestions below, maybe the Titanic can be steered away from the iceberg:

1)      Send this article to your Congressional representatives with a short note stating that this is just one example of how your rights as an American dairy farmer are being violated by the 15-cent mandatory dairy checkoff. Ask for his or her help in getting you an exemption from paying the checkoff, or in allowing you to assign your checkoff “tax” to another promotion, research and education entity.

2)      Call, email, or write to the cooperative director who represents you and ask what your cooperative is doing to protect its members from even more FARM requirements, considering an obvious supporter of “milk without cows” will be implementing the “Undeniably Dairy” environmental piece as executive director of DS4G.

3)      Call your state or regional dairy promotion representative or CEO and ask them to keep all of your dime in regional promotion instead of sending those 2.5 to 3 extra cents to DMI’s Unified Marketing Plan. They have the nickel. That’s enough.

4)      Watch for opportunities to support a dairy checkoff referendum. The law states that when 10% or more of the dairy producers and importers subject to the checkoff request a referendum, the Secretary of Agriculture must oblige.

At best, DMI did not do its homework on this, and other decisions that have influence over the future of rank-and-file dairy producers footing the bill.

At worst, DMI’s “pre-competitive” alliances with global food giants and WWF are steering efforts toward dilution in order to meet some ethereal environmental goal.

Meanwhile hard working, conscientious dairy farmers have done and are already doing more good for health, climate, water and soil than the combined efforts of billionaire Silicon Valley ‘tech-food’ startup investors, multinational food corporations, gene-altering animal replacers, plant-based imitators, high-paid future food fast-talkers, sly and cunning dietary do-gooders, cows-and-climate catastrophe exaggerators, and so-called ‘sustainability’ WWFers.

In times like these, dairy checkoff unity could mean circling the wagons to protect dairy farmers with a locked-and-loaded promotion, education and research front that keeps the cunning wolves from getting in, but instead it gives them an opening and some leverage to devour.

Business is business. But dairy farmers should not be forced to fund their own dilution and demise.

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DOJ files ‘Statement of Interest’ in DFA lawsuit, case goes to jury trial Sept. 30

By Sherry Bunting, Farmshine, July 31, 2020

BURLINGTON, Vt. – The U.S. Attorney General’s office and attorneys for the Department of Justice (DOJ) filed “Statement of Interest by the United States of America” Monday (July 27) in the civil lawsuit brought in October 2016 by Farmers United (Sitts, et. al.) alleging monopsony antitrust activity by Dairy Farmers of America (DFA) and Dairy Marketing Services (DMS).

The case is scheduled for a trial by jury beginning September 30, 2020 in the U.S. District Court of Vermont with Judge Christina Reiss presiding.

The plaintiffs are 116 dairy farmers who opted out of the earlier settlement by DFA of the Northeast class-action lawsuit approved by the U.S. District Court of Vermont.

In this Statement of Interest, the DOJ makes three main arguments: 1) The allegations against DFA in the case are not shielded by the Capper-Volstead Act from antitrust laws. 2) The Capper-Volstead Act does not insulate exclusionary acts from the antitrust laws prohibiting monopsonization. 3) The defendants (DFA) bear the burden of proof that they are protected by the Capper-Volstead Act.

According to the 15-page DOJ brief, the allegations in this case do not appear to have involved efforts to increase farmers’ bargaining power but rather efforts at monopsonization. Basically, the brief explains the “heartland protections” provided by the Capper-Volstead Act, and states the plaintiffs’ claims, if shown in Court, fall outside of those protections.

In fact, the DOJ brief notes that the claims at issue do not involve claims that farmer cooperatives acted anti-competitively against processors and other middlemen, but rather these are claims that farmer cooperatives – through agreements with processors, middlemen and other cooperatives – acted anti-competitively against farmers.

According to the Statement of Interest, “The United States is principally responsible for enforcing the federal antitrust laws… and has a strong interest in their correct application. In particular, the United States seeks to ensure that antitrust exemptions, including the Capper-Volstead Act, are not interpreted more broadly than necessary because antitrust law “is a central safeguard for the Nation’s free market structures.”

The full statement offers an analysis of the Capper-Volstead Act and the Sherman Antitrust Act as pertains to the claims made by the plaintiff dairy farmers should they be shown in Court. The Statement of Interest was filed as an aid to the Court in applying (Capper-Volstead) to this case.

“Congress enacted the Capper-Volstead Act to give farmers who produce food greater bargaining power with processors and other corporate handlers of food products. It would be inconsistent with the Act’s text and purpose to allow a defendant to use the Act as a shield when it acts as a food processor or exercises monopsony power to harm individual farmers,” the DOJ statement explains.

The brief goes on to state that Capper-Volstead “does not protect a cooperative’s agreements with non-cooperatives, and it should not protect agreements between cooperatives that have nothing to do with ‘processing, preparing for market, handling, and marketing’ the cooperatives’ products.”

On the monopsony claims, the DOJ brief indicates that the range of “predatory” conduct falling outside the scope of Capper-Volstead exemption “should be construed broadly… and the totality of the defendant’s predatory acts should be considered.”

The DOJ brief indicates that the Capper-Volstead Act “protects effort to increase farmers’ bargaining power against corporate food handlers and does not insulate monopsonies from the antitrust laws.”

Recounting the Court’s recognition in summary judgment that dairy cows produce milk seven days a week, and as a result, dairy farmers must find a processor that will take their milk regardless of demand, the DOJ brief states that this reality puts dairy farmers “at the mercy” of large milk processors seeking to buy raw milk at the cheapest price. In fact, the DOJ statement observes that farmers are potentially the main entities behind the passage of the Sherman Antitrust Act in the first place.

“The legislative history of the Sherman Act shows that its passage was motivated in large part by the harmful effect that agricultural trusts were thought to have had in reducing the prices paid to farmers,” the brief relates, describing a situation in the beef industry at that time, when members of Congress during passage of the Sherman Act condemned the beef trust for suppressing prices paid to cattle farmers.

When the Sherman and Clayton Acts did not sufficiently aid farmers, Congress sought a stronger statute in the 1920s, later passing the Capper-Volstead Act “to support the cooperative form of organization that would help equalize farmers’ bargaining power…”

The DOJ brief notes that Capper-Volstead allows cooperatives to have marketing agencies in common as long as “such associations are operated for the mutual benefit of the members thereof, as such producers, and conform to certain membership and organization requirements.”

In the statement, DOJ attorneys note that the Supreme Court recognized that the Capper-Volstead Act does not protect agreements that would be unlawful under Section 1 of the Sherman Act when they are between cooperatives and non-cooperatives, except perhaps when they are necessary to carry out the purpose of a cooperative as set forth in the Act.

For example, an exempt cooperative can lose its exemption if it conspires with nonexempt parties.

In other words, the case law cited in the DOJ brief indicate there is precedent set that cooperatives may not lawfully combine or conspire with non-cooperatives in the restraint of trade, nor may they use predatory or coercive practices to stifle competition.

“Such behavior remains subject to normal antitrust remedies,” the DOJ brief states.

In short, the Statement of Interest by the United States upholds that to the extent the plaintiff dairy farmers can show at trial that DFA violated the Sherman Act in reaping profits as a handler or processor from lower milk prices rather than for the mutual benefit of its members, “it would turn the (Capper-Volstead) Act on its head to allow DFA to use the Act as a legal shield,” according to the DOJ brief.

If at trial, the plaintiffs can show DFA had monopsony power and used it to injure other cooperatives or independent dairy farmers who actively – or potentially – compete with DFA, the DOJ statement is basically indicating that Capper-Volstead is not a shield for that.

“It would be inconsistent with the (Capper-Volstead) Act to allow a monopsony to use it as a shield when Congress had no intention to ‘vest cooperatives with unrestricted power to restrain trade or to achieve monopoly by preying on independent producers,’” the DOJ statement indicated.

Judge Reiss in her Opinion for the case to go to jury trial previously stated that, “a rational jury could conclude that DFA management favored growth of its commercial operations and empire building over the interests of its farmer-members.”

The jury trial is set to begin September 30. Stay tuned for more from the docket next week on a flurry of pre-trial activity occurring over the past week.

Note: The defendant in this civil suit, DFA, is the nation’s largest milk cooperative with 14,000 members (nearly half of all U.S. dairy farms), 42 dairy processing plants, plus joint ventures, and on May 1, consummated purchase of substantially all assets of the nation’s largest milk bottler Dean Foods — 44 of its 57 plants — in Chapter 11 bankruptcy sale. Previously in the U.S. District Court of Vermont, the Northeast Class Action Antitrust lawsuit alleged market control conspiracy by DFA and Dean Foods. Both settled for $50 and $30 million, respectively. The 116 dairy farmer plaintiffs in this current proceeding had previously opted out of the “class” when the class action settlement was approved by the Court.

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What’s this? DMI hires ‘director of DS4G’, Resume looks impressive if the goal is to keep on diluting dairy

By Sherry Bunting, Farmshine, July 24, 2020

CHICAGO, Ill. – Dairy Management Inc (DMI) has a new hire at the Innovation Center for U.S. Dairy, under the leadership of Tom Vilsack and Mike McCloskey,  as part of the big push to make “sustainability” center of the plate. The definition could surprise us.

We know the goal on climate is to get “U.S. Dairy” to “net-zero” emissions across the supply chain by 2050 or sooner, but for me, this looks like a smoke screen to ramp up the rate at which the dairy food industry giants seek to scale dairy production and fill in the gaps with a little Perfect Day.

No announcement, but an occupation change and new Undeniably Dairy logo’d cover photo on his twitter feed signals that Caleb Harper — the former principle researcher and founder of the now closed Open Agriculture Initiative at M.I.T.’s embattled Media Lab — is the new DMI “Executive Director Dairy Scale for Good,” whatever that means.

Our initial inquiry for DMI’s vice president of media relations and issues management about the position and whether other candidates were interviewed — and other questions — was emailed earlier this week and not immediately answered.

Harper has a long history of advocacy for urban food production in the sense of digitized, software-programmable, particulized and reconstituted food.  He wrote opinion pieces and did TED Talks about how the cutting edge of this movement is agri-‘culturing’ companies making lab-created dairy protein from DNA-engineered yeast and meat replacements from gene-edited muscle cells, stating that these are the food innovations needed to be sure the world does not go hungry.

In a National Geographic opinion piece in 2017, Harper even mentions and advocates for companies like Perfect Day and Modern Meadow, makers of replacement dairy protein from bovine-DNA-altered-yeast, as the future of food production because, according to Harper, people will move to cities and the rural lands will lose population.

Yes, he’s a guy who believes in true factory farms, the kind of factory farms where fermentation vats feed yeast and collect their excrement to separate out interchangeable dairy components, like protein and where gene-edited muscle blobs grow in bioreactors instead of as animals on farms.

All part of the WWF (World Wildlife Fund) plan, I might add. They want to move everyone to the cities, re-wild the farms and rural lands, and they’ve already begun.

Harper, who goes by the handle “CalebGrowsFood” on Twitter, is part of the WWF “Thought Leadership Group.” In fact, Mike McCloskey of Fair Oaks, fairlife, and Select Milk Producers as well as a key leader in DMI’s Innovation Center for U.S. Dairy is also on the WWF Thought Leadership Group. Harper’s association with WWF goes back a long way.

For his part, Harper’s OpenAg Project at MIT set out to prove people in cities could grow their own food in LED boxes controlled by computers. Trouble is, it appears that despite the glowing reviews in 2016-18 when models were featured, the boxes never really worked. Some of the photos and demonstrations were allegedly fudged with plants purchased from local stores, according to Oct. 2019 and May 2020 articles in the New York Times, Propublica, WBUR public radio and several reports in science and technology publications.

On April 30, 2020, Caleb Harper left his position as the lead researcher for the OpenAg Project at MIT.

His departure coincides with the Institute’s investigation into the entire Media Lab at MIT amid the brewing scandal that first came to light last fall when the MIT Media Lab’s main director Joichi Ito was found to have financial ties to Jeffrey Epstein. Epstein is the international financier and socialite, who was a previously-convicted sex-offender and committed suicide last year in prison awaiting trial on new charges of human trafficking.

According to the New York Times, and other sources, the OpenAg project, led by Harper, was being used through various meetings between Ito and Epstein to get Epstein to invest more than the half million the MIT Media Lab was already receiving from him in “discretionary” funds — funds MIT was not aware of. As this became known, the work of the lab itself came under scrutiny, and that scrutiny is still in progress even though the lab shut down at the end of April with Harper’s departure.

Here’s the clincher. MIT began a thorough investigation of its Media Lab after firing the director over the Epstein financial ties, and along with that, is investigating Harper’s OpenAg project. Portions of the investigation were reported on in May of 2020 by various science journals and even the New York Times, indicating Harper’s OpenAg project released water from its “computerized plant boxes” with too much nitrogen, well beyond the levels they were permitted to release, and it went to an underground well. When a researcher on-site blew the whistle with local authorities, resulting in a $25,000 fine, he was reprimanded in an email from Harper for jeopardizing the future of the project, the report indicated.

In addition, Harper’s computerized artificial intelligence plant boxes, that were showcased on 60 Minutes and National Geographic as well as other high profile outlets, never really worked, according to researchers in the lab, who were interviewed by ProPublica, a non-profit journalism entity judged high in their accuracy based on evidentiary reporting.

What we are learning is concerning. Harper, in this Undeniably Dairy Scale for Good position, may be the very person to work with Vilsack and McCloskey on what practices dairy farmers (most likely via the FARM program) must implement in order to remain part of “U.S. Dairy” by meeting their environmental benchmarks on soil, air, and water. That’s being funded with your checkoff funds, and there is a big question mark behind the name of the new hire on implementation. Does he really know anything about those three resources – and how to really produce real food while stewarding them?

To be continued in the July 31, 2020 edition of Farmshine

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Farmers send June milk check data and preliminary review is revealing

MilkCheckSurvey072920

UPDATED! By Sherry Bunting, Updated from the article in July 24 Farmshine print edition

BROWNSTOWN, Pa. — June milk check reports are pouring in after Farmshine’s previous article about negative Producer Price Differentials (PPD) included a request for milk check data from readers. Along with the data, we are receiving many comments.

One producer notes the PPD had typically averaged a positive $1.50 in his area of the Northeast, but for June, it was a negative $5.38, a loss he pegged at $15,000 for the month for his farm.

Another producer in the Mideast area noted a loss of over $60,000 in component value, which would not be covered in the way expected by the Dairy Revenue Protection (DRP) policy he had purchased. The negative PPD loss represents “basis risk”, whereas tools like DRP, forward contracting, even DMC, mitigate “market and margin risk.”

The “markets” did their thing. Demand went up, cheese prices went up, Class III milk contracts gained, but the de-pooling in most Federal Milk Marketing Orders (FMMOs) ate up most of the doubled protein value and other component value gains for farms across most of the country, as reflected in a steeply negative “basis”. There’s really no risk management tool for that, and we’ve received correspondence indicating that producers who opted to manage risk, had losses where they thought they would have coverage.

It’s difficult to make sense of it all, especially when FMMO Market Administrators explain all the workings of PPDs in terms of advance pricing, sudden commodity increases that are complicated by advance pricing of Class I, pooling and de-pooling of milk when Class I milk value is lower than the blend price. But these explanations leave out the fact that Congress changed the way the Class I Mover is calculated at the request of NMPF and IDFA in the 2018 Farm Bill, without holding a milk pricing hearing that so many have requested.

This is a big concern going forward. The spreads between the higher Class III price over the Class I Mover are $9.62 for June and $7.75 (estimated) for July.

From July, forward, the lagtime is less of a factor. However, the new way vs. the old way of calculating Class I is a much bigger factor in predicted negative PPDs because as Class III has been rising, Class IV has been falling, widening the divergence.

The final math equation for the Class I Mover is the same as it was: Class I Mover = (Base Skim Milk Price x 0.965) + Butterfat Price x 3.5). What changed in May 2019 is the way the Base Skim Milk Price is determined before it is placed in that calculation. It used to be simply the higher of the two Advance Pricing Factors — Class III or Class IV — that was plugged into that equation as the “Base Skim Milk Price. Now the two Advance Pricing Factors are added together, divided by 2, and 74 cents is added to that to produce the Base Skim Milk Price for the final equation above.

Under the previous way, using the “higher of,” the August Class I Mover would have been $24.36 — $4.58 higher than the $19.78 Class I Mover announced on July 22 for August. Also, under the previous method, July’s Class I Mover would have been $19.13 — $2.57 higher than the announced July Class I Mover at $16.56.

These new concerns in FMMO pricing bring new variables into how producers manage risk, so the market value that did not make it into milk checks or risk management tools cannot be blamed completely on Covid-19 pandemic disruptions. A convergence of factors have created a situation where the mechanics of risk management like Dairy Margin Coverage (DMC) and Dairy Revenue Protection (DRP) — as well as forward contracting — may not work as intended for all producers in all regions in a time of disrupted markets and extreme risk, with fairly recent changes to certain milk pricing formulas.

This market disruption, and the fallout in negative PPDs, should signal to USDA and the Congress that a National Hearing on Milk Pricing is overdue. Piecemeal changes have consequences. The de-pooling exacerbates the situation. In June, de-pooling contributed to removing hundreds of millions of dollars of value from milk checks across all Federal Orders. As one producer asked, who gets that money? The answer: It depends.

First, if the end-product “market” value found was paid to the plant or cooperative or handler, and if the handler consequently de-pooled the milk and didn’t pass that value back to the farms voluntarily or contractually, then we know who has the money. If the “market” did not pay what we see in the USDA end-product pricing or on the CME spot market and futures markets, then it’s not real money.

Given the wide range in milk check data with most of the nation coming in around $5 to $7 lower than the Upper Midwest — and a $4 range in FMMO uniform prices to begin with — it’s obvious the “market” is paying. But the calculations are not passing through to milk checks, except in the Upper Midwest Order 30 where 50% of pooled milk receipts were utilized as Class III milk, even though Class III volume reductions suggest significant de-pooling occurred.

Let’s look at preliminary data from Farmshine readers around the country (Table 2 above).

So far, over 150 Farmshine readers from six of the 11 FMMOs have provided milk check data. Since only a couple responses were received from California, we did not do any math for FMMO 51 yet, until we receive more data. At this writing, we have not received any milk check data from Orders 6 (Florida), 126 (Texas and New Mexico), 124 (Arizona) and 131 (Oregon and Washington).

What is evident in the preliminary review is the significant gap between the highest and lowest gross and net prices paid.

For each of the six FMMOs — where we had enough data to do some math — we see the difference of $7 between the FMMO with the highest average gross price paid (before deductions) of $20.81 in the Upper Midwest (FMMO 30) and the lowest average gross price paid of $13.77 in the Central Order (FMMO 32). When looking at the range of price data, the spread is $8 between some check data as low as $13.02 gross pay price in Pennsylvania to $21.05 in Minnesota.

The other FMMO average data fall into place $4 to $6 below the Upper Midwest with gross pay price averaging between $14.97 and $16.15 before deductions.

On the net mailbox price (after deductions), the difference is almost $7 between the highest mailbox average of $19.74 for FMMO 30 and the lowest average of $12.97 for FMMO 32. Average net mailbox price for FMMOs 1, 33, 5, and 7 trail FMMO 30 by a difference of $5 to $6. (See Table 2.)

Respondents for each of the FMMOs so far are a mix of mostly co-op members, but also some independent shippers, and a range of cooperatives — national and regional — are represented in the data.

In the Upper Midwest FMMO 30 for June, where PPD was least negative and Class III milk utilization was the highest (50%), the Uniform price already reflected the smallest negative PPD in the $3s compared to negative $5s and $7s everywhere else. At the same time, reports indicate the cheese plants and co-ops in that region even shared some of that smaller loss, knocking it back into the negative $2’s.

While large penalties for overbase milk still remain part of the pricing equation, it was not a major factor for most producers in June, perhaps because producers are reducing production as well as dumping, donating or utilizing overbase milk differently to avoid these penalties. This process is continuing into July. In the Northeast and Midatlantic region, reports of milk dumping were confirmed in July. Mostly this was due to producers wanting to avoid overbase penalties, but at least one report involved temporary “plant equipment issues”.

Of the milk check data shared with Farmshine, most showed producers were shipping 93 to 99% of their base for June. But some data includes producers seeing significant assessments on small amounts of overbase milk by both smaller regional cooperatives and larger national footprint cooperatives — except in the Upper Midwest. Also, in pockets of the Southeast, check data show some penalties were waived as a base / overbase blend was shown on checks, but then in another spot, the stub reported “revenues available to pay” a better price. In those instances, it appears the overbase penalty was eliminated and market adjustments reduced, which added 30 to 50 cents to what the location blend would have been.

Elsewhere, producers overbase deductions ranged $1.50 to $6.40.

Another variable was “market adjustments”. No “covid” deductions were seen in June check data, however, many had “market adjustments” deducted to the tune of 13 to 24 cents. In a few cases, the “market adjustment” was described in an earlier letter stating that the “covid” deduction for co-op costs incurred in April and May was being spread out evenly over several months forward.

The averages for the Northeast and Mideast FMMOs belie the wide range in prices. For Pennsylvania, alone, the range in gross pay prices before deductions was more than $4.00/cwt.  Even after adjusting for butterfat, the range was $3.50. The lowest net mailbox prices submitted by anyone in any FMMO came from Pennsylvania producers, with instances as low as $11.20/cwt mailbox for June. Overbase penalties and market adjustment deductions contributed to these lower nets.

In Pennsylvania, the Pa. Milk Marketing Board (PMMB) over-order premium (OOP) was set large for June, but was a small factor on most milk checks. It does appear that the western half of the state in Order 33 received at least some OOP benefit to make up for taking a more significant beating from negative PPDs.

Very few producer milk checks showed numbers other than zero in the PMMB OOP line item. However for Pennsylvania producers shipping directly to some Pennsylvania bottlers in the Mideast order, the benefit was $1.25 to $2.00/cwt listed as a line item and serving to simply pull them up closer to where the Northeast blend price sat. Remember, negative PPDs in the Mideast Order, which includes western Pa., were in the $7s. Negative PPDs in the Northeast Order, which includes eastern Pa., were in the $5s.

Meanwhile, out-of-state bottlers buying Pennsylvania milk and selling into the Pennsylvania minimum retail price market passed on about 10% of this floor-setting OOP in June at about 30 to 50 cents.

June’s PMMB OOP was over $4 per cwt because $3.68 was added to the normal $1 to make the difference between the USDA Class I Mover and a temporary $15 Class I floor. The PMMB used the OOP to temporarily accomplish this, but then became an island as USDA did not follow suit. The USDA had canceled a hearing requested by cooperatives petitioning it do the same nationally.

Looking at the milk check data we have received, it is obvious that USDA would have done well to have followed PMMB’s lead — as they were petitioned to do in April — to set a temporary Class I Mover floor at $15 through August.

At the time that the PMMB took its action, USDA AMS Dairy Programs had indicated in correspondence shared with Farmshine that a date was set to meet with petitioners to hear evidence for a national temporary Class I floor.

But, when word got out, certain dairy economists, such as at the University of Minnesota, along with Minnesota Milk Producers and other entities, including Walmart, protested that this idea of a temporary Class I Mover floor would “decouple” Class I milk and be unfair to the Upper Midwest where Class I utilization is low. Mainly, they complained that a move to stabilize Class I would “disrupt” milk markets and affect the Dairy Margin Coverage.

Well, folks, that disruption happened anyway — in reverse.

What we have seen, in the absence of a Class I floor, is total disruption and instability due to the inherent lagtime in Class I pricing reflecting market trends, and additional severity because of how the Class I Mover calculation was changed by Congress, with no hearing at all, just placed in the 2018 Farm Bill at the direction of National Milk Producers Federation (NMPF) and International Dairy Foods Association (IDFA).

The so-called “markets” have not worked for any of the FMMO’s dairy producers except for the Upper Midwest where the complaints over flooring the Class I Mover arose.

The change in the calculation of the Class I Mover in the 2018 Farm Bill was implemented one year ago in May 2019. By using an average instead of the “higher of” to determine a base value for components or fat/skim, the Class I Mover no longer moves in concert with the highest value of components or fat/skim.

This is a problem because there is no way to assess market value on Class I in an of itself. Class I beverage milk is a designated loss-leader by the 800-lb retailer-processor gorillas like Walmart and Kroger. Also, in a couple states, the retail milk price is regulated to some degree.

Class I’s new “averaging” method is contributing to the removal of hundreds of millions of dollars from Federal Order pools through de-pooling.

It’s hard to predict what “reality” or “alternate reality” the USDA NASS All Milk price and Dairy Margin Coverage milk margin will reflect when they are announced on July 31.

This is a serious problem, given the widening divergence between Classes III and IV on the futures markets. This divergence is a warning that the current four-class system should be re-evaluated. When two manufacturing classes for stored products can be averaged to produce the basis of value for fresh products and beverages, it’s easy to see how large entities in the marketplace can make decisions that affect imports, storage, supply and demand to move one side of an “averaging” equation and create lopsided returns outside of FMMO pools. If milk moved to its highest value use and components were valued on multiple cross-class markets, a stable Class I base could be established as one piece of an overall value mix with less incentive to de-pool lopsided value.

For example, the July Class III contract stood at $24.41 on the futures markets as of July 27 — now $10.76 higher than the Class IV contract at $13.65. August Class III stands at $22.11, $8.39 higher than the Class IV contract at $13.72. September Class III, at $20.49, is $6.34 higher than the $14.15 Class IV contract. October Class III, at $18.90, is $4.51 higher than Class IV at $14.39. November Class III, at $17.53, is $2.95 higher than Class IV at $14.58. The gap narrows for December, but as of July 27, the difference between the two classes is still more than the $1.48 ‘magic number’ with December Class III at $16.60, $1.81 higher than Class IV at $14.79.

Creating even more value loss in every FMMO in June — whether priced by multiple components or fat/skim — is the amount of Class III milk that was de-pooled. Total volume pooled across all Federal Orders was 9.5 billion pounds in June, down 36% from a year ago and down 28% from May (May 2020 was down 13% from year ago).

While June milk production was reported on July 21 at 0.5% above year ago, milk dumpage in June was down considerably in terms of what showed up on FMMO pools. We know farms are dumping and diverting to avoid overbase penalties, but the pooled “other use” milk, including dumpage and animal feed, was down by 44% compared with a year ago in June. The only Federal Order to have more “other use” milk in June than in May was the Appalachian Order 5, and Central Order 32.

Table1_YTD_MilkDumped(Bunting)rTable 1 (above) shows the “other use / milk dumpage” pooling data. What is mind-boggling is that year-to-date milk dumped totals at 566.7 million pounds for just the first 6 months of 2020, is 125 to 150 million pounds greater than the 12-month annual totals for each of the past five years.

Dairy producers wishing to submit June milk check data as well as next month’s milk check data for July to broaden this survey geographically, please send: Gross price, net mailbox price, PPD, butterfat and protein, other deductions (especially ‘market adjustment’ deductions), overbase penalties if applicable, along with your location or the FMMO in which your milk is marketed and information stating whether you market with a cooperative or as an independent. There is no need to provide your name or your specific co-op or plant affiliation unless you choose to include that.

Please consider emailing me at agrite2011@gmail.com or text/call 717.587.3706. All information is aggregated anonymously by state, region and FMMO.

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Farmers wonder what happened? June PPDs ugly, pool volume down 36%

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By Sherry Bunting, Farmshine, July 17, 2020

BROWNSTOWN, Pa. — The negative PPDs are turning out to be whoppers as expected for June, and experts say the situation will repeat in July. In fact, by the looks of the milk futures markets, the wide spread between Class III and IV is projected to remain above the magic number of $1.48/cwt. through at least September and quite possibly through the end of the year.

That’s the big news. This divergence is messing with PPDs more than normal and changing the ‘basis’ for producers in a way that defies most risk management tools. While the Upper Midwest milk checks reflected some of the marketplace rally, other regions fell quite flat. The range in uniform prices among FMMO’s is $4 from the $13s in in California, the Southwest and Mideast (Ohio, western PA, Indiana, Michigan) to $15s in Northeast, Southeast, Appalachia to $16s in Florida and the highest uniform price in the $17s for the Upper Midwest.

In fact, depending what Federal Milk Marketing Order (FMMO) you are in, and depending upon how much of that higher Class III “marketplace” value makes it into payments by plants to co-ops and producers, this could alter how “real” the Dairy Margin Coverage margin is, as well as the workings of Dairy Revenue Protection (DRP) program insurance and other risk management options that play off Class III but settle out on an “All Milk” price USDA will calculate for June at the end of July.

Producers who purchased DRP policies and based them on components to stabilize their risk in markets that utilize a blend of classes, are realizing an indemnity they expected to receive as protein doubled from May to June is now deflated to a smaller number due to negative ‘basis’.

Experts admit —  There’s no good way to manage PPD risk (or as it’s referred to in the skim/fat Orders of the South “revenues available to pay”). Interestingly, Dairy Farmers of America (DFA), at its member risk management website, is touting it has “strategies” for members to “mitigate future negative PPD risk”.

(Read to the end to learn how to participate in the Farmshine Milk Market Moos milk check survey on this issue.)

So, what changed? Other than a pandemic disrupting things.

A big change is the new way USDA calculates the Class I Mover. This was implemented in May 2019 and is currently adding on to the largeness of the inverse relationship between Class III and the uniform price in multiple component pricing orders.

In fat/skim orders of the South, producers are seeing one price on their check but then “revenues available” to pay a different price. In some cases, the “revenues available” is reference to dispensing with “overbase penalties” in June because revenues were available to pay a better price on that milk.

There are no PPDs in the four FMMOs still pricing on a fat/skim basis. But those Orders are seeing a flat-out reduction in their uniform price as announced for Florida and the Southeast FMMOs being lower than May! Meanwhile the Appalachian Order gained just 13 cents over May. (See Table I above.)

During the formation of the 2018 Farm Bill, National Milk Producers Federation (NMPF) and International Dairy Foods Association (IDFA) agreed on this new way to price Class I so that Class I processors could find “stability” in their costs by forward pricing without having to “guess” which manufacturing class price contract would be the “higher of.”

Farm Bureau remained neutral at the time that this was going through, and their analysis showed, historically, this new way leveled out over time for dairy producers. In fact, supporters stated that the stability of averaging Class III and IV to make the Class I Mover offered stability in input costs to milk bottlers so they could forward price, which in turn would offer stability to farmers by keeping bottlers in a position of strength to invest for the future. These are the reasons we heard, and it wasn’t much debated at the time.

No hearings were held by USDA on this major change in Federal Order pricing for the one and only class that is actually regulated. It was done in the Farm Bill, legislatively, because cooperatives and processors agreed it was what they both wanted. (More information next week on what factors Covid and non-Covid-related that are contributing to these diverse trends between Class III and IV.)

Under the current method, instead of using advance pricing factors from the “higher of” Class III or IV to calculate the Class I Mover, the two classes are averaged together and 74 cents is arbitrarily added.

The reason this is such a big issue right now, and likely for months to come, is the size of the spread. Rapidly rising block Cheddar — which hit another record of $3.00 per pound on the CME spot market early this week – keep pushing the AMS end-product pricing higher, more than doubling the value of protein between May and June and pushing Class III milk futures further into the $20s.

In fact, Class III milk futures settled Tues., July 14 at $24.34 for July, $23.09 August, $20.23 September, $18.40 October, $17.44 November and $16.35 December. Meanwhile those months for Class IV milk futures settled Tuesday at $14.03 for July, $14.51 August, $14.85 September, $15.07 October, $15.31 November and $15.53 December. Not until December is the spread within the $1.48/cwt range where the new way of averaging the two classes returns from being so out of kilter to Class III.

Remember, these negative PPDs are the result of Class III being larger than the uniform blend price, and the large amount of depooling that resulted keeps that higher value from being shared in the pool. Class III handlers are accustomed to taking a draw, not writing a check, and there’s no requirement to be pooled unless a plant is a pool supplier or wants to stay qualified for the next month in most FMMOs.

A Farmshine article two weeks ago explained these price relationships in more detail.

Now the numbers are coming in. The recently announced uniform prices and PPDs range from nearly $4 to near $8 — just as leading dairy economists had estimated.

The least negative was the Upper Midwest FMMO 30, at minus-$3.81, where 50% of the milk utilization was Class III, and the uniform price gained a whopping $4.92 at $17.23 for June. In fact, producers in Wisconsin and Minnesota report $20 milk checks for June.

The most negative PPD was minus-$7.91 in California, where less than half of one percent of the milk utilization was Class III, and the uniform price gained just $1.18 at $13.13 for June.

The Southwest FMMO 126 wasn’t far from that at minus-$7.62 with a uniform price announced at $13.42 — up 41 cents from May.

In the Northeast FMMO One had a minus-$5.38 average marketwide PPD, but the uniform price gained $2.19 over May at $15.66 with 18.5% Class III milk utilization.

The Mideast Order PPD is minus-$7.05, and the uniform price gained $1.26 at $13.99 with just over 9% Class III utilization.

In the southern FMMOs, pricing is still on a fat/skim basis, not multiple components, but the inverse relationship of the Class I Mover to Class III pricing is keeping June uniform prices flat or lower compared with May. The Southeast FMMO 7 saw a penny decline in the uniform price to $15.38 in June, and Florida Order 6 uniform price fell 46 cents from $17.29 in May to $16.83 for June. The Appalachian FMMO 5 gained just 13 cents at $15.27 for June.

Nationwide, just over 9.5 billion pounds of milk was pooled across all Federal Orders in June, down 36% from 14.4 billion pounds a year ago and down 28% from the 13.2 billion pounds last month.

May milk production was down 1.5% compared with a year ago, but the pooling volume nationwide was already 13% lower than a year ago in May.

USDA confirms that handlers making just Class II, III or IV products are not required to pool the milk, and therefore, due to “expected price relationships,” some handlers decided to not pool some of their milk receipts in May, and most definitely elected not to pool in June.

“Only Class I handlers are required to pool all of their milk receipts no matter how it was used,” USDA Dairy Programs explained in an email response to Farmshine this week.

In Table I are the marketwide FMMO data for June from Market Administrator announcements on different dates over the past several days. Comparing Class III volumes reported to month ago and year ago, an estimated 45 to 94% of Class III milk was depooled in various FMMOs, with the exceptions of Arizona and the Pacific Northwest where depooling was less of a factor.

Looking at the Northeast FMMO, alone, the estimated 45% less Class III volume in the pool in June vs. May, kept just over $110 million in collective component value out of the Northeast pool.

The question is, since USDA confirms that money is “in the marketplace”, will that “marketplace money” make it to farm-level milk checks, 13th checks, reduced retains? And will the “Covid assessments” and “marketing or balancing fees” and “overbase penalties” be adjusted or eliminated in June?

Others wonder how this will affect the All Milk price for June as calculated by USDA NASS at the end of July. Will the erraticness of how this “value in the marketplace” could be handled make winners and losers in terms of the Dairy Margin Coverage? How will this situation translate to those margins as a national average?

USDA AMS Dairy Programs defined the NASS All Milk price in an email as follows: “The NASS U.S. All Milk Price is a measurement of what plants paid the non-members and cooperatives for milk delivered to the plant before deduction for hauling, and this includes quality, quantity and other premiums and is at test. The NASS price should include the amount paid for the “not pooled milk.”

USDA explained that, “The blend price (Statistical Uniform Price, or SUP) is a weighted average of the uses of milk that was pooled for the marketing period (month).  If some ‘higher value’ use milk is not in the ‘pool’, then the weighted average price will be lower.”

However, the USDA response also points out that, “It is important to note that the Class III money still exists in the marketplace.  It is just that manufacturing handlers are not required to share that money through the regulated pool.”

So, will it be shared at the producer level outside of the pool? From the looks of a few June milk check settlements that have been reported to Farmshine on the morning of July 15, it’s not looking like the higher Class III value is helping checks shared from the Southeast FMMO at this writing. How will that stack up to a margin that gets figured also looking at the Upper Midwest where the uniform price saw almost a $5 gain?

We’ll look at that more closely next week.

Dairy producers who want to participate in my Milk Market Moos survey of June milk checks, please email, call or text your June milk price, fat test and PPD, and the list of deduct line items, especially any “Covid-deducts,” and include any overbase penalties. Also, provide your location or in what FMMO your milk is marketed. All the information will be anonymously aggregated. Email agrite2011@gmail.com or call or text 717.587.3706.

The Jersey Cattle Association is doing a similar June milk check survey sampling across the country.

This is a big topic when risk management is based largely on components and Class III, even though Class III use is not regulated unless processors want it to be, and certainly not in a pricing scheme that no longer prices the higher of two divergent manufacturing price trends into the only truly regulated class — Class I fluid milk. 

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Round bale art gets noticed at Thiele Dairy Farm: ‘I enjoy putting a smile on someone’s face.’

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Lorraine Thiele went with the Statue of Liberty theme this week for the farm’s patriotic round bale art display ahead of July 4th. It’s attracting a lot of attention on state route 356 at the end of the farm lane just outside of Cabot, Pa. Photo by Lorraine Thiele

Round bale art gets noticed at Thiele Dairy Farm

By Sherry Bunting, Farmshine, July 3, 2020

CABOT, Pa. — The flag-draped Statue of Liberty round bale artwork at the end of the long lane leading to Thiele Dairy Farm in Butler County, Pennsylvania is attracting attention. The Thiele family placed it on their farm alongside state route 356 just outside of Cabot this week ahead of Independence Day.

“Everybody just loves it, especially in a time like this with what our country is going through, with the turmoil we are in,” says Lorraine Thiele when asked in a Farmshine interview about the community’s response. A photo of it has also created a lot of activity on the farm’s facebook page.

“We get a kick out of seeing people drive by, stop, back-up, and take their pictures with it,” she adds. “I enjoy putting a smile on someone’s face, to have something that can make people smile on their way to work or wherever they are going.”

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James, William, Lorraine and Edward Thiele at their sixth-generation dairy farm in Butler County, Pa. Photo courtesy Marburger’s Dairy

Edward and Lorraine Thiele and their twin sons William and James farm 300 acres of corn, soybeans, hay and oats and milk 40 cows at the sixth-generation Dairy of Distinction, established in 1868. Lorraine does the bookkeeping and all the feeding. She hops on the tractor and helps with other things when needed, although she doesn’t milk much anymore.

Lorraine is also the artist behind the series of round bale portraits that have been created over the past several years. She credits her husband and sons for helping with some of the technical strategy and by providing custom-sized round bales when she asks for them.

“When Ed sees me with the skid loader stacking and piling round bales, he’ll get involved and we’ll draw it out. He likes to help with the more technical side,” she adds.

Her Statue of Liberty this year was painted on three large round bales. Last year she did just the American Flag on six. She’s been doing the round bale art projects for several years now – ranging from turkeys and pilgrims at Thanksgiving, to cows and milk jugs for June Dairy Month, and from tractors with wagons full of pumpkins in the fall, to Santa Claus, reindeer, Christmas trees (with lights) and a Nativity last Christmas.

“I try to do something different every year,” she says, explaining how she “googled” for some patriotic ideas to see what struck her fancy for the 2020 July 4th rendition. She came up with the Statue of Liberty.

“I can’t do faces, so I found a silhouette for the design. I also found a ceramic statue with the flag draped over and figured I would try that.

“I’m not an artist,” Lorraine states humbly. To guide what she calls her ‘graffiti style’ spray painting, she used big baler twine pinned to the stacked bales. If her design gets too big, she tailors it down with a background color.

She admits she has been surprised by how relatively easy it is to paint round bales. Their straw bales are not plastic wrapped, so they take a lot more paint than one would imagine.

“Always buy more spray paint than you think you need,” she suggests, adding that painting it on the net-wrapped side holds the paint better than painting the face of the bale of hay or straw, which “really sucks up the paint.”

She also likes to get creative, using items that are laying around. One year, Lorraine painted wood planks in different colors for the feathers on the Thanksgiving turkey.

One year, for June Dairy Month, she used black drain tile pipe and painted the tip white for the cow tail after Ed drilled-in a rod to hold it.

Once she gets an idea in her head, and thinks about it for a while, it comes together.

“It’s fun, and something different to do. It looks harder than it really is.

“Don’t be afraid to try something,” Lorraine encourages. “The nice thing is, if it doesn’t work out, throw it in for bedding and no one will ever know!”

While the Independence Day Statue of Liberty is creating the buzz right now. It was the reaction to the June Dairy Month art that really surprised Lorraine.

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For June Dairy Month, the painted milk pints had many people turning into the farm lane to buy milk, but the Thiele family explained that all of their raw milk goes to the Marburger Farm Dairy plant in Evans City — a great local brand.  Photo by Lorraine Thiele

“I painted milk chugs — chocolate and strawberry milk pints — to put beside the bale-painted cow,” she explains. “You would not believe how many people turned in the lane and came up to the farm wanting to buy milk. I never would have thought just a straw bale done up as a milk pint would do that!”

In fact, the response was so great, Lorraine had to put a post on the Thiele Dairy Farm facebook page (and a sign by the artwork), explaining that the family does not sell milk right off the farm and that their raw milk all goes to Marburger Farm Dairy in Evans City — a great local brand.

The Statue of Liberty took about a week to finish, but she only works on round bale art when she has the time. After a painting is complete, they haul it down the lane to position it by the main road.

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Faith, family and farming are alive and well on the Thiele family’s dairy farm.

The Thiele Dairy Farm facebook page is also something Lorraine enjoys. She started it almost 10 years ago through her love of photography and her desire to promote agriculture in a positive light.

“There’s a lot of negative out there,” she says. “Our son (William) has a drone, and he videos the baling, mowing, and planting. The average person doesn’t have a clue what we are talking about or how it is done or what is involved, so our sons love to show it, to do things like that to educate people about what we do.”

Each family member is a steadfast advocate for agriculture, and they are active in Butler County Farm Bureau and Dairy Promotion Committee. They participated in the Butler County milk donation drive-through back in April before the CFAP program. It was coordinated by Community Action Partnership with Farm Bureau, the Butler County Dairy Promotion Committee, Marburger Farm Dairy, AgCoice Farm Credit, and others, where 1200 gallons of milk were distributed along with a bag of groceries and a box of frozen products.

Lorraine is a positive person, and that was demonstrated in this interview and throughout her connections to the community in person and through social media. People appreciate it, even putting gifts or thank you notes to the family by the round bale Christmas tree at holiday time.

As difficult as things can be in the dairy business at times, Lorraine loves the farm and the cows and is thankful her family is farming together — where everyone in the family does everything on the farm.

As for the round bale art? If she can make someone else smile for even just a second. It is worth it.

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Summer sunset this week at Thiele Dairy Farm in Butler County, Pennsylvania. 
Lorraine loves taking photos on the dairy farm and the Thiele Dairy Farm facebook page is full of her photos as well as drone videos by her son William.  Photo by Lorraine Thiele

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Understanding these negative PPDs, massive depooling; ‘New’ Class I calculation doubles the rub

 

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Large negative PPDs, Class III depooling and buyers reblending the milk price paid to farmers in June and July could be with us through August and even September because of how wide the divergence is between the Class III and Class IV prices, based on what the CME futures markets are showing. This divergence lowers all other classes in the pool (I, II and IV), especially now with the new “averaging” method of calculating each month’s Class I Mover in effect since May of 2019.

By Sherry Bunting, Farmshine, July 3, 2020

BROWNSTOWN, Pa. – Dairy producers seek to understand record-large negative PPDs (Producer Price Differentials) for June milk, meaning the the significant gains made in cheese markets and and Class III milk price are not making it to milk checks, especially for Federal Milk Marketing Orders (FMMOs) that are not predominantly cheese markets. (See FMMO data here

The extent of these negative PPDs – ranging from -$3.00 to -$8.00 per hundredweight (cwt) – has several factors, including the new way the Class I Mover is calculated since the 2018 Farm Bill changed it from the “higher of” Class III or IV pricing factors to an average of the two with an arbitrary 74-cent add-on. (See related July 28 story on revealing milk check data here)

“Expect historically large negative PPDs in Multiple Component markets for June and July,” writes Calvin Covington, retired breed association executive secretary and milk cooperative CEO, in an email interview with Farmshine this week.

He also estimates the volume of milk depooled in June will set a record (it did), further limiting how much of the past six weeks of higher dairy product prices will even make it into their milk checks.

Covington confirms Class III milk was already being depooled in May. As reported in last week’s Farmshine, we calculated the volume of milk pooled across all Federal Orders in May was already 13% below year ago levels.  For June, the depooling volume will be much more significant, in fact it is likely to be enormous.

“There is little economical reason to pool any Class III milk in June,” Covington asserts. “The only Class III milk that will be pooled in June is Class III milk going to a pool plant, and to meet any requirements to keep milk pooled in July.”

In fact, if buyers pooled Class III milk on Federal Orders in June, they would have to write a check to the settlement fund (instead of taking a draw from the fund as they do in normal conditions when the Class I bottlers are writing that check).

This is because the Class III price for June was announced this week at $21.04 – nearly $10 per cwt higher than the Class I Mover for June, which was set at $11.42 back in the beginning of May. The June Class I Mover is the lowest since the Great Recession while the June Class III price is the highest since 2014 — both now occurring in the same pooling month!

The reasons for the steep negative PPDs producers in Multiple Component Pricing (MCP) FMMOs will see for June milk, says Covington, are the high Class III price ($21.04) vs. Class IV ($12.90) and Class II ($12.99), the Class I Mover advanced pricing lag at $11.42, and the new method of calculating the Class I Mover, especially for July.

“In skim-butterfat priced markets – the Southeast Orders – blend prices will be lower than the Class III price,” Covington adds.

He explains that the PPD is paid on a hundredweight (cwt) basis, and it impacts all milk the same regardless of milk components.

“High component herds, especially in Multiple Component markets, see larger variation in milk prices,” Covington explains. “It is all due to arithmetic. Milk is paid on fat and protein. The more fat and protein in the milk, the greater the price change when fat and protein prices change.”

Covington spoke at World Dairy Expo last fall about the makeup of the milk check, and all of the factors that go into it. He reminds producers that only regulated plants are required to pay minimum class prices. Unregulated non-Class I plants choose to be associated with the pool so they can draw from it to pay a blend price to their farmers.

Now that the price for milk used to make cheese is so much higher than the price for milk used as a beverage or to make yogurt, ice cream, dips, butter, powder and all other products —  cheese plants are free to disassociate themselves from the FMMO pool, and there is no regulation stating they must pay their producers even the minimum announced Class III price for components.

Under the current system, when the Class III price rises quickly to overshadow the previously-set Class I Mover, there’s no reason for those Class III plants to pool the milk, unless they want to remain “qualified” to participate in the pool (draw) in the following month.

Covington observes that the upside-down pricing and negative PPDs will be with us at least through July. Dairy economists Mark Stephenson, University of Wisconsin and Andrew Novakovic, Cornell, noted in a recent Dairy Markets and Policy brief that this situation of negative PPDs, Class III depooling and buyers reblending the price paid to farmers could be with us through August and even September because of how wide the divergence is between the Class III and Class IV price via the CME futures markets.

This divergence lowers all other classes in the pool (I, II and IV), especially now with the new “averaging” method of calculating each month’s Class I Mover in effect since May of 2019.

Covington notes that it all boils down to math. The PPD is simply the difference between a Federal Order’s revenue available for producer payment (Class I, II, III and IV combined), minus the payment to producers at the Class III price based on components.

When Class III components are higher than the available revenue in the pool, the PPD is negative. When the Class III milk is depooled in that scenario, the funds aren’t there to pay the value.

“Factors impacting the size of the PPD, positive or negative,” he says, “are Class III price relative to the other class prices, volume of Class III milk pooled and an Order’s Class I price and usage.”

The primary factor in June’s negative PPDs is the extreme rapid increase in the Class III milk price. The rising cheese markets and Class III milk futures were mostly translated into the June Class III price because it was based on four weeks of June cheese sales.

The Class I Mover, on the other hand, was calculated six weeks earlier based on what the trade was doing at the end of April and beginning of May.

In the Covid-19 market-disrupted environment this is like two different world’s colliding based on timing and calculations.

Add to this the fact that Class IV and Class II prices saw muted increases during June compared to Class III’s large and abrupt increase, and what we are left with is the scenario where Class III beats all other classes by $7 to $10 in the same pooling month.

FMMOs with larger utilization of Classes I, II and IV will not see much boost from the uptrending cheese markets in their June blend price.

FMMO’s with large Class III utilization would see that boost. But depooling, reblending and assessments will all play further roles in how even those mailbox milk checks look once June milk is paid for.

Negative PPDs are not new. Dairy producers have experienced negative PPDs on milk checks in the past. Seeing a negative number in an uptrending milk market always brings questions and frustration. In fact, the November 2019 through January 2020 period in several of the past five years produced negative PPDs.

Last November, for example, the seven Multiple Component Pricing FMMOs saw a negative PPD averaging -$2 and ranging from just under -$1 to over -$3.

That pales in comparison to the negative PPDs producers will see for June, July and potentially August or September of 2020. Expect to see PPDs that are double, even triple, what was seen last November.

By now, most dairy farmers understand that a rapidly rising cheese market and corresponding Class III milk price presents the key factor putting PPDs into negative territory. When this happens, producers are reminded that a rising Class III milk price is still a positive development because it indicates milk markets are improving.

But in what some are calling a “whipsaw market” where prices turn abruptly in unexpected directions due to an unforeseen disruption like Covid-19, it’s useful to look at the other factors, for the long term.

First, when Class III milk’s component value is higher than the value of all the classes combined, the result is a negative PPD because after the Class III component values are paid, there is nothing left in the pool for the PPD draw. When the Class III milk is depooled, then that value is not available either.

When the blend price is higher than the Class III price, which is the norm, those Class III plants take a draw. When the reverse is true, they would technically owe the pool.

What sets this up against a huge market-disrupting event like Covid-19 is the lag-time between the calculation of the Class I Mover based on two weeks of trade and calculated six weeks in advance compared with the calculation of the manufacturing class prices based on the current month’s market conditions weighted over four weeks.

Even in those prices, there is a one to two week lag between what happens on the CME daily spot market and its translation to the weekly USDA National Dairy Product Sales Report, on which the class and component prices are based. There is no daily reporting of actual trade, actual sales of the four main dairy commodities, just weekly surveys that are published the following week.

On the flip-side, for April, the Class I Mover was set at $16.64 based on market conditions (advance pricing factors) during the first two weeks of March, before the Covid-shutdown. The Class III price came to $13.07 for April based on the economic shutdown affecting foodservice demand while retailers had a tough time keeping dairy products in stock.

With Class I sales rising dramatically in April, and the Class I Mover sitting $3.57 higher than Class III and $5.24 higher than Class IV – there was incentive to pool everything, even the displaced milk as the industry adjusted to an unforeseeable event and the Class I Mover stood well above all other classes, especially the dumped milk that was pooled at Class IV value.

Thus, April set a record the amount of ‘other use / dumpage’ milk as 350 million pounds of displaced milk was pooled at the lowest class price across all FMMOs, nearly 10-times the amount that is normally pooled as ‘other use / dumpage’.

Now, that lag-time produces an opposite situation for June and July, and there is another wrinkle in the FMMO fabric – the new method for calculating the Class I Mover doubles the rub.

As a result of changes made in the 2018 Farm Bill, the Class I mover is now established by averaging Class III and Class IV and then adding 74 cents to that average. It used to be calculated using the higher of Class III or Class IV. In this case, that would have made a difference as Class III and IV have significantly diverged.

The calculation change for the Class I Mover was made to help processors hedge their future milk costs on the futures markets without having to guess which futures contract to use – Class III or IV. This was said to be something that would provide stability for Class I producers by stabilizing pricing for Class I processors. However, in these very unstable ‘whipsaw market’ times, the rub on producer milk checks will sting.

When it was proposed in 2017, American Farm Bureau Federation studied this method and documented little change to the net result for dairy producers when multiple years of pricing were averaged together and evaluated. In fact, when the new method went into place, there were several months where the average-plus-74-cents made the Class I Mover higher than it would have been under the old “higher of” method.

Not so in a volatile market with a time-lag involved.

These issues of negative PPD affect disproportionately the Federal Milk Marketing Orders (FMMOs) that have more Class I and IV utilization. FMMOs with small Class I utilization and large Class III utilization are relatively untouched as those blend prices would reflect mainly the much higher Class III cheese milk component value. But with depooling and reblending, those checks may also be impacted.

Looking ahead to July, the Class I Mover was already announced at $16.56, based on the advance pricing factors from the first two weeks of June. While July’s cheese trade is yet to be seen, the July Class III contract on the CME futures market stood at $22.85 at this writing on July 1st, which is $6.29 per cwt higher than the already set Class I Mover for July.

Even though the July Class I Mover stands $5.14 per cwt above the June Class I Mover, not even July’s Class I had the benefit of the full advance in June cheese trade because it was based on just the first two weeks of the June rally.

According to John Newton American Farm Bureau chief economist , there is currently, no mechanism to prevent negative PPDs. Newton writes in a recent ‘market intel’ piece:

“Historically, negative PPDs occur less than 15% of the time. Methods to prevent or mitigate negative PPDs  — such as eliminating the advanced pricing component, reconsidering the higher-of pricing formula (but with forward contracting of Class I milk), requiring mandatory pooling of milk in all Classes or consideration of decoupling the Class I milk from the price of manufactured milk products  – could be explored.”

UPDATE: Negative PPDs will be here for a while. Looking at these price spreads does not bode well for the continued inverted relationship between Class III and the Class I Mover — or what milk market analysts call “unorthodox pricing arrangements” — that will lead to continued negative PPDs and de-pooling of the higher Class III value milk from Federal Milk Marketing Order pools. In fact, the discussion of this issue has many twists and turns, a few questions have been forwarded to USDA Dairy Programs for some explanations, and June pooling data and blend price / PPD information is anticipated after the 14th.

Here’s the problem. Even when the ‘advanced pricing’ method gets caught up, the real problem is the way the Mover is now calculated. The 2018 Farm Bill made a huge change without a USDA administrative hearing and without a producer (bloc) vote.

Fluid milk processors wanted stability. They wanted to be able to forward-contract their milk costs and not have to deliberate over which futures contract to use — Class III or IV — since the Class I Mover used to be based on the “higher of” the two classes. Now, the futures markets are showing us that the spread between Class III and IV is going to be well above $1.48/cwt through November. That’s the significant number because the new Class I Mover method is calculated by averaging Class III and IV and adding 74 cents to that average. Once the III / IV spread hits $1.48/cwt, the 74 cents no
longer covers the difference.

Once we get to 2021, the spread narrows through those months, according to what the futures show now, but the Class III / IV spread looked reasonable and well within that $1.48/cwt for this current period back when viewed on the futures markets six months ago. If Congress can make a big change like this to Federal Order pricing formulas based on NMPF and IDFA agreeing on such while the Farm Bureau took a neutral position
— other than to review it and show it to be a wash when averaged over time — why can’t the Congress require a USDA National Hearing on milk pricing with Report to Congress?

Previous Farm Bills had such language, but the National Hearing “cost” was never funded. Now, the idea of a National Hearing on milk pricing, and a producer vote on Federal Orders, is seldom discussed. What we see from this Class I Mover example that a big changes can be made and implemented quite readily at the legislative level — no hearing or vote required — as long as the cooperative processors and proprietary processors agree on the change in advance. If milk is substantially depooled to keep higher end product values in hand, hopefully through the reblending process, plants and cooperatives will pay the marketplace value to dairy farmers, given the sacrifices producers have made to bring production into line with demand.

FYI: The Pennsylvania Milk Marketing Board (PMMB) successfully “decoupled” and stabilized the Class I milk price for two months by setting a Class I floor of $15 through the state’s over-order premium authority. The Federal Milk Marketing Orders were going to have a national hearing on this in April, but chose not to after economists and organizations in the Upper Midwest cheese region complained. The PMMB action was limited only to Pennsylvania, so for two months (the limit of the Order), when the Class I beverage milk price for milk produced, processed and sold in Pennsylvania fell below $15, the current over-order premium of around $1.00 per cwt was expanded automatically to bring the price back up to $15 for May-July 2020 for this very reason.

Trouble is, with the FMMOs not considering a similar move, this PA ‘premium’ only pertains to bottling plants paying milk suppliers for milk produced on PA farms (and they are free to take milk from other farms outside of PA). This price was built into the PA minimum retail milk price for May and June, but retailers, processors and cooperatives are not required to pass these state-mandated premium funds paid by PA consumers back to PA farms — unless the milk meets all three of these criteria: produced, processed and sold in Pennsylvania.

Author’s Opinion: There is one other thing worthy of consideration. A national hearing on milk pricing, period, to look at options, updates, simplification, transparency, daily reporting, producer voting, consolidation, transportation and deductions. Some grassroots groups have been asking for a national hearing with report to Congress for nearly 10 years as there is no other way for farmers to access the FMMO system run by market administrators, and they don’t even get a vote because cooperatives bloc-vote changes on behalf of their members. Previous Farm Bills included language for such a national hearing, but they were never conducted. At some point, the complexities at play here need to be evaluated from both regional and national perspectives in terms of “orderly marketing” and how farm viability and farm and food security in regions are affected and in terms of fulfilling the desire of many consumers wanting fresh, local milk.

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