Global dairy thoughts Part II: Who’s being creative?

Part Two of Six-part “Global Dairy Thoughts” Series in Farmshine

wGDC18-Day1-56By Sherry Bunting, from Farmshine May 4, 2018

BROWNSTOWN, Pa. — Everywhere we turn, we receive the message that fresh fluid milk is a market of the past and exports of less perishable dairy products are the wave of the future. As discussed in Part One of this ‘global dairy thoughts’ series, that seems to be the trend if you look at the markets.

Yet, could a portion of the reason we are in this fluid milk decline, be the effect of USDA-regulated pricing, USDA-imposed restraints on the ability to promote competitively in the beverage space, and the resulting industry neglect of this regulated commodity category — fresh fluid milk?

The government — USDA — and the checkoff and cooperative leadership have no appetite for significant change to any of these factors. USDA gets to pay less than it otherwise might for milk in its nutrition assistance programs, while both the proprietary and cooperative processors get to pay less than they might otherwise for components in a range of products.

Meanwhile, dairy farms see the first product to come from their herds — milk — declining, and their futures along with it.

Yes. We all know it. Fresh fluid milk — the most nutritious and natural option — is in the fight of its life. In meeting after meeting, presentation after presentation, we hear the messages from the industry and university economists — both subtly and outright.

Like this: “The fluid milk market is the dead horse we need to stop beating.”

Or this: “Do we want to hitch our wagon to a falling rock?”

And so forth, and so on.

It is difficult to question the industry and its economists on anything to do with the Eastern U.S. or the fluid milk market. Some have gone so far as to say that if the East is relying on fluid milk, they are out of luck.

Meanwhile, dairy farmers in eastern regions suggest that if fluid milk does not stabilize its losses or restore its market share — at least partially — they see their value as producers vanishing.

And in fact, this has an impact on our global advantage — that being the U.S. having a large consumer base at home to anchor the base production while growth is said to be the reason why we need exports.

As mentioned briefly in Part One, the Federal Orders are designed to move the milk from surplus regions to deficit regions, and that is what the proposed USDA change in Orders 5 and 7 will do further, the experts say.

Meanwhile, who is being creative to figure out how the deficit regions of the East can use or regain their primary competitive advantage — having a base of consumers within a day’s drive. This line of thinking is analogous to how the U.S. fits as an exporting nation with quite a large consumer base at home.

What really requires our creativity is the U.S. product mix and how milk resources are priced and sourced.

Here are some numbers. U.S. dairy protein disappearance has had average annual growth of 6.3% over the past five years, though it has been a bumpy ride, with U.S. production of milk protein concentrate (less exports) at its lowest levels over that five-year period in 2014.

Meanwhile, demand for fat is increasing as consumers heed the dietary revelations and switch from lowfat and fat-free milk to whole milk and have their butter without guilt.

Mentioned last week in part one is that global milk production increases are beyond the stable rate of 1.5% per year. According to the U.S. Dairy Export Council (USDEC), the combined growth rate from the EU-28, U.S., New Zealand, Australia and Argentina was double that collective 1.5% threshold. Looking at 2018, however, reports are surfacing to show spring flush is delayed in Europe just as it appears to be in the U.S.

Or is global production reining in? The markets are trying to figure that out with quite a rally going in powder right now.

One thing rarely mentioned in these reports is that Canada’s production has also grown with increased quota to account for the greater demand they see in their domestic market for dairy fat.

In fact, despite its supply management system, government figures show Canada’s milk production had year-over-year growth between 3 and 6% for each of the past three years, and 2018 production is off to a 5% start.

In Canada, as in the U.S., fat fortunes have changed over the past four years, so the belt has been loosened to serve that market, leaving more skim swimming around.

Canada’s new export class (Class 7) mainly pertains to this excess skim, which has reduced the amount of ultrafiltered milk they now buy from U.S. processors.

In addition, as pointed out by Calvin Covington in his presentation at the Georgia Dairy Conference in January, milk can be purchased at lower prices for this Canadian export Class 7 because the excess skim is used in products that are then exported.

This means the resulting products in the Canadian export class can be sold at globally competitive prices. While not in huge volumes, some of this product is going to Mexico.

This brings us to Mexico — currently the largest buyer of U.S.-produced nonfat dry milk, making the outcome of NAFTA negotiations a sticky issue for industry leaders, especially as Mexico recently signed a trade deal with the EU to include dairy.

The two forks come together in regions like the Northeast, where Class IV utilization has become an increasing part of the blend price and a more important balancer of the shrinking Class I.

While March showed a surprising jump in Class III utilization to a 15-year high in the Northeast, the overall trend over the past four years has been a blend price with increasing Class IV utilization and decreases in Classes I, II and III.

Dairy economists indicate the U.S. is making more world-standard skim milk powder for export, but in reality, the U.S. still makes a high percentage of nonfat dry milk (NFDM), which is still the largest domestically-produced milk powder category and it is the only milk powder that is used in the Federal Order pricing formulas.

NFDM is primarily made in conjunction with butter. As butter demand has grown and prompted greater butter production in the U.S. over the past four years, more NFDM has been made and stored (or the skim is dumped) as a result.

The market issue in the U.S. has been compounded by the EU having a mountain of intervention powder stocks in storage, some of it aging.

After the European Commission sold over 24 metric tons two weeks ago, global and domestic powder markets moved higher. It was the largest chunk to come out of that mountain to-date and was offered at reduced prices to attract buyers. But by the time the bidding was done, it sold at or above the GDT price for SMP powder.

It’s really true. Inventory depresses prices. Having a big chunk of a huge inventory gone, is, well, big.

The flip side of the coin is that European processors have shifted from powder production with their excess to making more cheese and butter.

Next in Part Three, we will look specifically at some differences between the products made in the U.S. vs. what is traded globally, and at the differences between the U.S. and global trading platforms.

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PHOTO CAPTION

GDC18-Day1-56

While attending the 2018 Georgia Dairy Conference in January, a large global cargo ship on the Savannah River, passed by the glass windows at lunchtime on its way out to sea. Several dairy producers walked outside for a closer look, we all hoped there was plenty of powder on board. Photo by Sherry Bunting

Global dairy thoughts Part I: Whirlpool of change. Who’s minding the store?

Part One of Six-part “Global Dairy Thoughts” Series in Farmshine

By Sherry Bunting, from Farmshine, April 27, 2018

BROWNSTOWN, Pa. — Even though U.S. per-capita milk consumption is in decline, consumption of other dairy products is strong. As the industry devotes resources to new milk markets abroad and puts the fluid milk market here at home on commodity autopilot: Who’s minding the store?

While it is true that the U.S. dairy market is ‘mature’ — not offering the growth-curve found in emerging export markets — the U.S. consumer market is still considered the largest, most well-established and coveted destination for dairy products and ingredients in the world.

As U.S. milk production continues to increase despite entering a fourth straight year of low prices and market losses, industry leaders look to exports for new demand that can match the trajectory of new milk.

The U.S. has already joined the ranks of major dairy exporting nations, and the U.S. Dairy Export Council (USDEC) has set a goal to increase exports from the current 15% (milk equiv) to 20%. Keep in mind that as our percentage of exports increases while our milk production also increases, the volume of export markets required to meet this goal is compounded.

On one path at this fork in the road is the mature domestic market with its sagging fluid milk sector that is increasingly filled in deficit regions by transportation of milk from rapidly growing surplus regions.

This dilemma of getting milk that is increasingly produced away from consumers packaged and moved toward consumers was cited as a “tricky challenge” by Dr. Mark Stephenson, Director of Dairy Markets and Policy at the University of Wisconsin-Madison, in his presentation on Changing Dairy Landscapes: Regional Perspectives at the Heartland Dairy Expo in Springfield, Missouri earlier this year. In this presentation, Stephenson pegged the Northeast milk deficit at 8 bil lbs and the Southeast deficit at 41 bil lbs. (More on this in a future part of this series).

On the other path at this fork in the road is the industry’s desire to expand exports within a global market that needs a 1.5% year-over-year global production increase. But, as the USDEC reported in its February global dairy outlook, global milk output is growing by twice that rate, mainly from gains in Europe.

Meanwhile, U.S. regulatory pricing structures are based on milk utilization. As the total dairy processing pie grows larger, the neglected fluid milk sector becomes a shrinking piece of the expanding pie, and income is further diminished for dairy farms.

The emerging export markets are rooted in the demographic of rising middle-class populations improving diets with dairy. And yet, just because these new markets offer new growth curves for new milk production, the anchor for this ship is still the U.S. market, still No. 1 as the largest dairy consumer sector globally, and still moving milk via Federal Order pricing that hinges on that shrinking piece of the expanding pie: Class I.

What are the obstacles to improving this sagging fluid milk sector? How are regulated promotion and pricing constraining restoration of declining fluid milk sales?

Over the past three years, two prominent and longstanding milk bottlers in the New York / New Jersey metropolis have either closed their plants (Elmhurst in New York City), or sold their dairy assets (Cumberland Dairy in New Jersey sold to DFA). Amazingly, the former owners of both plants are expanding into the alternative beverage space — adding new plant-based beverages to the proliferation of fraudulent ‘milks’ that already litter the supermarket dairy case.

GlobalThoughts(Chart1).jpg

While dairy milk sales decline, plant-based beverages are a growth market, though the pace of growth has slowed.

At the Georgia Dairy Conference in January, Rob Fox, Dairy Sector Manager of Wells Fargo’s Food and Agribusiness Industry Advisors, talked about big picturedairy trends, and he showed graphically the way these alternatives are eating into the U.S. dairy milk market. While dairy milk sales decline, the plant-based beverages are a growth market, though the pace of growth has slowed. (See Chart 1)

Fox also showed a pie chart of combined supermarket sales of dairy and plant beverages at $17 bil., with dairy accounting for $15.6 bil. and plant-based at $1.4 bil. (Chart 2).

GlobalThoughts(Chart2)

Rob Fox showed a pie chart of combined supermarket sales of dairy and plant beverages at $17 bil with dairy accounting for $15.6 bil. and plant-based at $1.4 bil.

Doing the math, Fox remarked that the plant-based alternatives now represent 8.9% of the combined dairy and plant-based ‘milk’ market. He said that in other countries with mature dairy markets, these alternative beverages tended to level off in growth when reaching 10% of total dairy market share. But at the same time, the combined dairy and plant beverage sector has also declined from 6.4 billion units in 2013 to 6.1 in 2017, according to Fox.

He noted the alternatives are also infiltrating other dairy product categories and that these ‘next generation’ products are offering much better nutrition than earlier versions. “But they will never compete with dairy milk, nutritionally,” Fox said.

What these alternative beverages have going for them, said Fox, is very high margins for processors and investors.

He explained that plant-based dairy products have low ingredient costs, are easier to manufacture, package, market and distribute and are seen as ‘greener’ and animal friendly. They are better positioned for e-commerce and kiosk-type retail outlets and are made by innovative marketing companies and startups with a market and margin profile that attracts investors.

Meanwhile, dairy milk is a highly regulated market with a prevailing commodity mindset worn down even more-so by supermarket price wars at the retail level, making it difficult for the dairy milk sector to adapt to U.S. consumer market trends.

U.S. consumer trends gravitate toward innovation and specialization so everyone can be a ‘snowflake,’” Fox explained, adding that areas of growth for the dairy milk sector will be full-fat in smaller containers, dairy protein in sports nutrition, and non-GMO branding. (No joke: Look for more later on genetically-modified, aka GMO, lab-manufactured products like Perfect Day that are actively defending what they see as their right to use the term ‘animal-free dairy’ because their product is said to be compositionally the same as milk, derived from genetically modified laboratory yeast exuding a white substance they say IS milk.)

That said, where is the true and simply original dairy in its re-branding process? What efforts are being made to compete to reverse this fluid milk market decline? Wouldn’t revitalization of the fluid milk sector also provide a demand pull for U.S. production growth?

Fresh fluid milk is not interchangeable on the global stage as are milk powders, fat powders, protein powders, cheeses, butter and aseptically packaged shelf-stable fluid products.

Meanwhile, the fastest growing surplus regions of the U.S. are busy aligning with retailer/processors and utilizing the Federal Order pricing schemes to pull their production growth into milk-deficit regions, leaving the milk-deficit region’s producers sending their milk to manufacturing homes in other Orders, or even looking for ways to export from eastern ports.

The U.S. has the water, the feed, the space, the transportation, logistics and support infrastructure, as well as a large existing domestic market to anchor the base production level of our nation’s farmers. The U.S. also has a legacy of dairy producers that are respected for their progress, animal care and food safety.

The ingredients for global success are here, but other factors need evaluation because the success is eluding dairy farm families as they face their fourth year of low prices and lost markets forcing increased numbers to exit the business.

In future installments of this multi-part series “Global Thoughts,” we’ll look more closely at the export side of this fork in the road, including the product trends, product and trading platform differences, imports, transportation and logistics, the role of regulatory pricing and cooperative base programs at a time when the dairy landscape is being forever changed.

As this series proceeds, thoughts and questions are welcome: agrite2011@gmail.com

 

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Flashback: two NY/NJ dairy plant owners shift assets from regulated ‘commodity’ dairy milk to freedom of branded non-dairy ‘milk’

nondairymilk.jpgAuthor’s note: Below are two articles from two interviews August 2016 and November 2017 with two separate owners of two separate plants in the New York / New Jersey metropolis that were closed or sold in the past two years. Today, the Schwartz family (Elmhurst Dairy, Queens, NY) and Catalana family (Cumberland Dairy, Bridgeton, NJ) are involved in developing and launching new non-dairy plant, nut and grain based beverages in the supermarket dairy case. This trend toward making plant-based versions of animal protein products is also becoming a problem for the meat industry.

For dairy milk, the root of the issue is the alliance between USDA and the anti-trust-protected national-footprint milk cooperatives. First, USDA designates dairy milk as a “commodity” with an FDA standard of identity that is only enforced on dairy milk, not on plant-based ‘milks.’ USDA also runs the federal order milk pricing system on fresh fluid milk. USDA also dictates what schoolchildren are permitted to drink, currently allowing only fat free or 1% milk, despite scientific proof to the contrary that whole milk (3.25% fat) is the most healthy value. USDA also dictates what the dairy promotion boards may and may not do to promote fresh fluid milk using money the USDA mandates every farmer must have deducted off their milk checks for said promotion. USDA and the promotion boards push the lowfat agenda despite it being proven to be less healthy than full-fat dairy.

In their separate situations, Henry Schwartz and the Catalana brothers got out of commodity dairy milk and are developing and launching plant-based beverages with free rein in the supermarket “dairy” case.

BELOW ARE THEIR STORIES…

Story #1 – By Sherry Bunting, reprinted from Farmshine August 2016

New York City’s last milk plant, Elmhurst Dairy, closes doors

JAMAICA QUEENS, N.Y. —  He says the commodity milk category is ‘unsustainable’ and that the future lies in new brands.

At 82, Henry Schwartz has witnessed the evolution of dairy. Food and farming look very different today compared to when he was six years old, spending his youth on the family’s former dairy farm and in their milk plant.

His family’s Elmhurst Dairy was the combination of two dairy farms and milk plants in Queens County, New York — one owned by his paternal grandparents, the other by his maternal grandmother.

The farms have been gone since 1948, and in October (2016), the Elmhurst Dairy plant in Jamaica, Queens, New York, will close its doors too.

With this closure of New York City’s last fluid milk plant, a long and storied series of chapters in the milk business will end.

But with every end, comes a beginning, and Henry Schwartz sees light at the end of his tunnel.

“I’m not depressed anymore,” he said in a telephone interview with Farmshine. “We have other businesses that are related to dairy, and they are successful. We will be bringing out new products under the Elmhurst name.”

Henry referenced the family’s Steuben Foods, Inc. plant near Buffalo, N.Y. where 600 people are employed. Its aseptic packaging spawned a new line of beverages in June of 2015, called Elmhurst Naturals — an offshoot of Henry’s son Cyrus’ business Dora’s Naturals. (Examples include Banana Water and Mango Water). Henry also referenced the family’s Mountainside plant near Roxbury, N.Y., where filtered milk with a longer shelf life has been bottled since 2006.

With both plants already expanded into aseptic packaging and Natural market lines, the next sequence, said Henry, will be further expansion at Steuben into grain, nut and seed beverage products already set to generate half a billion in sales.

Henry was quick to give heartfelt thanks “to a great many people who worked so hard for so long to see that we succeeded.”

He also cited the “enormous economic impact” the company has had in the area through the dairy business.

But, he said, in order to continue to have positive economic impact, things had to change. They had to break free of commodity milk.

“The future of the milk business is value-added,” said Henry. “The milk business as I knew it is unsustainable. Nobody talks about the price of milk anymore, they talk about all of these other things. They talk about quality and services. That is the evolution and an indication that we do not have a totally sound business model in (conventional) milk, so we are trying to diversify in the marketplace.”

When asked whether brand marketing within the conventional dairy milk category can help save this seemingly “unsustainable future,” Henry commented that there are “outstanding people in the marketplace coming out with cutting edge new products.”

He mentioned what fairlife has done to bring out what is basically milk and to market it as a brand.

He mentioned what Chobani did to “take limited assets and build a billion dollar company inside of seven years on branding an old-style yogurt right in front of our eyes.”

He talked about how Daisy revived the sour cream category by specializing in it and branding it.

And he mentioned other products, like the genesis of Lactaid milk right out of Atlantic City and later sold to Johnson and Johnson.

He also mentioned Organic milk as a branded category that “started from scratch into a billion-dollar category.”

“We can create with milk and dairy products tremendous success stories and brands if we are willing to work at it,” Henry elaborated. “In many ways, our Steuben Foods — operating as an offshoot of Elmhurst but now much bigger — is doing that.”

Yes, the Schwartz family of businesses, including Dora’s Naturals started from scratch by Cyrus, is transforming itself according to the wishes of the urban New York City consumers.

Henry’s word of wisdom to the dairy farmers who ship milk to the New York City plant that is closing? “Diversify.”

It was obvious after a 45-minute conversation that he has a soft-spot for dairy farming. But his family’s younger generation is following the trends. They value the economic contribution to the community and dairy legacy of the generations before them, but they see even more economic opportunity and job creation in diversifying their efforts into a variety of beverages and breaking free of the commodity-milk market.

Henry could barely bring himself to call them all ‘milk,’ but he had enthusiasm as he talked of the future. He said that “exciting new products” — derived from grains, nuts and seeds — will be the wave of the future as the family diversifies into branded plant-based beverage businesses, which their website refers to as ‘grainmilk’ and ‘nutmilk’.

Already one of the largest Organic dairy milk processors in the nation under contract for Horizon and other brands, the Schwartz family’s Steuben Foods and Roxbury plants will continue in dairy milk, but Steuben will also branch out into the newer non-dairy beverage categories as well.

Henry said the Roxbury plant is expected to expand opportunities in both the dairy and non-dairy fields also. He said the family has many interesting and proprietary product concepts in store.

“We will continue to be a large milk handler,” he said. “We will also be doing a lot in grains and nuts and seeds. Part of our future will be cow’s milk. That will certainly continue. I have had my whole life in it. There is a bright future ahead and the continuation of something our family started over 130 years ago when my great-grandfather opened the first family farm plant in Middle Village in the 1880s. We are pleased to continue in this milk business, but that continuation will look different in the future than it did in the past.”

The Jamaica, Queens property — where the ubiquitous red barn and silo label of Elmhurst Dairy now fades — will become the site of any one of a number of projects Henry said his family is currently working on.

“I spent a good deal of my youth at my grandmother’s farm plant, Juniper Valley Dairy, where she milked 200 cows, bottled the milk and delivered it until 1948. She was the last farm in Queens County,” he said. Meanwhile, his paternal grandfather’s dairy farm spawned the original Elmhurst Dairy plant, which was started by Henry’s father and uncle at their father’s dairy farm in nearby Middle Village.

“They got all of that together here in Jamaica, Queens in 1948, where we are the last milk plant in the area. Now that it is closing, we expect to make use of the land in a way that is more beneficial to ourselves and to the community,” said Henry.

“It is an evolution of what was once dairy farms that became a dairy company and now is going into other fields that will be beneficial,” he added.

“Yes, it is sad. I spent 76 years, my whole life in it. When I saw the end coming, I was initially upset. But now I realize it is for the best. Even though it is a big change, we are going to use the property in a way that will be good for the community, and we will continue in the milk business near Buffalo, New York, through other forms — both cow’s milk and with grains, nuts and seeds,” he said.

Bottom line according to Henry Schwartz: The future is very much agriculture-based but not 100 percent dairy-milk based. That can be said of the future for the Schwartz family in the post-dairy era as it can be said of the urban food and beverage marketplace of New York City for which they are building new brands and expanding in plant-based beverages.

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Story #2 – By Sherry Bunting, reprinted from Farmshine, November 2017

DFA buys Cumberland Dairy, New Jersey’s last independent fluid milk processor

BRIDGETON, N.J. — Cumberland Dairy, the last independent fluid milk processor in New Jersey, was acquired by Dairy Farmers of America, Inc.  The plant has been co-op supplied through Land O’Lakes and its predecessors Atlantic and Interstate as well as Maryland-Virginia milk cooperatives, since its founding, according to president Carmine Catalana IV.

In a phone interview with Farmshine Tuesday (Nov. 7), Carmine said they are moving forward with their current milk supply, which includes a few DFA members commingled on local milk routes.

He acknowledged that the Bridgeton, New Jersey company had interest from other buyers, but that a big consideration in accepting DFA’s acquisition offer — at an undisclosed price – was that Carmine and his brothers would continue in the leadership of the company with the backing of the nation’s largest milk cooperative.

Cumberland Dairy, founded in 1933 by Charles Catalana, is run today by third generation brothers Carmine IV, Frank and David.

The business will continue to operate as Cumberland Dairy, and the (180) employees will retain their current positions, according to DFA’s public announcement of the acquisition. The announcement stated further that, “The Catalana family and existing management team will continue to manage all day-to-day operations, including customer relationships, milk procurement and production.”

“We have the opportunity to move the company forward with the blue-chip customers we serve, and other benefits are sure to come with the backing of a national milk cooperative with 13,000 dairy farms behind them,” said Carmine.

In its press release last Thursday (Nov. 2, 2017), DFA described Cumberland Dairy as a company “proudly serving some of the nation’s top quick-service restaurants, convenience and grocery chains, wholesale food distributors, fine-casual restaurants and dessert concepts to a variety of customers,” stating that the acquisition aligns with DFA’s strategy… to expand into extended shelf life processing.

“DFA approached us because we are one of several extended shelf life (ESL) plants, and they were looking to enter this marketplace and acquire our technology and customer base,” Carmine told Farmshine.

Since the mid-1980s, the plant has been doing ultra high heat pasteurization ESL products in ultra clean packaging to deliver shelf life over 75 days for refrigerated liquid dairy products.

Their ESL process is different from the UHT aseptic packaging that DFA currently uses on the West Coast to package California Gold — a primarily 3.5% fat shelf-stable drinking milk with a non-refrigerated shelf life of one year — which is shipped to Walmart and other chains in China. Those fluid milk sales to China have grown every year since 2014.

“We have not taken the big financial and technology step into the aseptic shelf-stable non-refrigerated dairy market,” said Carmine. But, over the last 30-plus years, the Catalanas have been innovators in the ESL space, before the concept of extended shelf life had a name or an acronym.

DFA noted in an email response that upgrades for aseptic shelf-stable technology may be considered for export from this East Coast plant.

Carmine notes that once his family had implemented an ESL process with a flavor close to fresh milk, “we stopped doing the regular pasteurized milk as a relatively small player, and sold our roots off to a customer, and did nothing but ESL,” Carmine said as he explained the company’s evolution of moving away from conventional milk bottling toward producing their own ESL liquid dairy products under the Freshlife brand and especially into co-packing for private labels.

For example, they do milk and dairy products for Rosenberger’s and other dairies, like Rutters, Schneiders, Wawa, Gallikers, Turkey Hill, and Turner Dairies. While they do everything liquid and refrigerated — from skim milk to heavy cream to dessert mixes — the emphasis is on the ESL products like egg nog, half-and-half and other cream products.

Cumberland Dairy also makes McDonald’s milkshake mix, Rita’s frozen custard, Shake Shack sakes and Kohr Bros. frozen custard, to name a few. In fact, the company’s website shows photos marking when the company began making milkshake mix for “that new drive-in restaurant in the area called McDonald’s” in 1971.

“Most of what we produce has someone else’s label on it,” said Carmine. “We do these products for other dairies, these family businesses that we hold dear as our customers.”

He sees a bright future for the products they currently manufacture. “We have had some conversations with DFA about where this portion of the business is going and how it has continued to grow,” Carmine related. “We felt like this was not something we had the ability to do on our own, and that in DFA, with that many dairy farmers behind them, we had the best partner for the future.”

In an official statement, Carmine said that, “A future with DFA means that we can continue to focus on our values as a company while accelerating our opportunities for growth. This is a very exciting time for the entire Cumberland Dairy family, and we look forward to this next chapter with DFA.”

For DFA’s part, the acquisition “represents a commitment by our farmer-owners to expand our investments in processing and to continue to grow the U.S. dairy industry,” said DFA president and CEO Rick Smith in a DFA press release.

“There are not many independents dairy plants left in this business,” Carmine reflects. “We were the last independent fluid milk processor in New Jersey.”

The Catalana family’s sister business — Innovation Foods LLC, founded by the Catalanas in 2008 — is not included in this transaction with DFA. It will remain independent and wholly-owned by the family, according to the announcement.

At the Cumberland Dairy website, the Catalana family’s retained Innovation Foods LLC is described as “producing high-acid beverage products for our partner NextFoods under their GoodBelly brand.” According to their website, NextFoods, Inc. was founded by Steve Demos, the founder and former president of WhiteWave (makers of Silk soymilk, almondmilk, etc) along with Todd Beckman, a former vice president of business operations at WhiteWave. Their website explains that Demos and Beckman built their NextFoods team to include many who worked at WhiteWave where they helped launch Silk Soymilk “into the stratosphere.”

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Electronic trading brings anonymity. Understand how CME dairy spot markets function

By Sherry Bunting, Reprinted from Farmshine, February 9, 2018

CHICAGO, Ill. — The CME dairy spot markets have been evolving since arriving in Chicago after a tumultuous past on the Green Bay Cheese Exchange, writes Ronald K. O’Brien, II, a dairy market risk specialist and geostrategist. He is director of global derivatives for Interfood, multidimensional global dairy risk managers using physical and financial global dairy markets to offset internal sales and inventory risk.

CME(RonOBrien).jpgRecently, Farmshine interviewed O’Brien to better understand from a trader’s perspective how the dairy spot markets function since the transition from live floor trading to electronic trading in the second half of 2017. We also gained insights on some differences between the global and domestic trading platforms.

This conversation matters because the daily price at which those 15 minutes of CME trading close — whether bid, offer or trade — helps set pricing for the weekly USDA National Dairy Product Sales Report for cheese, whey, butter and nonfat dry milk (NFDM), which in turn sets the monthly commodity prices that are plugged into the Federal Order formulas that form the basis for how dairy farmers get paid for their milk.

O’Brien points out that markets are based on the “who” and the “what.” That’s as much true about CME dairy spot markets as it is about cattle auctions. People want to know, in the moment, where the auction is going in price, but also who is buying and who is selling, to infer a sense of market demand and resistance at those positions.

“Fundamentally, we have the same participants on the dairy spot markets, and it is still like coming to an auction,” says O’Brien of how bids, offers and trades occur on the electronic platform today, just like when it was live on the floor of the Chicago Mercantile Exchange (CME). “The difference, now, is the anonymity. This requires you to participate if you want to know what is going on. This brings a little more interest to those 15 minutes of spot trading.”

The anonymity also creates a situation where the largest market leaders know more because they know the buyer or seller once a trade is completed; whereas before, others outside of that transaction could observe and speculate based on which brokers were trading.

O’Brien observes that when the CME dairy spot markets traded live on the floor, analysts would not precisely know who was buying and selling; however, they knew the brokers and who they typically bid or cleared for.

CME(lastOpenOutcryDAIRY)For example, in past years, the largest physical producers and end users in the United States would regularly use the same clearing broker for their spot transactions, resulting in the majority of market participants acting on this inferred knowledge in real time. A single bid or offer from certain brokers would set distinct levels of support and resistance, and this was coveted as the most prolific dairy information of the day.

The electronic platform “made this all disappear,” says O’Brien. “Spot traders know who is trading when a transaction is complete, at the end of the auction, if they are involved in that transaction, but they have no clue about who else was involved during the session.”

Thus, he says, “it is now more difficult to sense how strong the support is or how heavy the resistance because (with electronic trading) you don’t know if the buyer in a session was the largest end user, or your grandmother taking a position.”

In fact, anyone with eligible product in a warehouse, a CME auction account and a funded futures account can sell on the CME dairy spot market.

This is different from the Global Dairy Trade (GDT), which is run by Fonterra of New Zealand. In the GDT biweekly internet auction, not just anyone can bring product to that exchange. “They have to be vetted and approved to offer product on the GDT, and selling is limited to processors,” O’Brien notes.

For this reason, the CME is more of a “natural and price transparent marketplace,” he explains.

He calculated the trade volume for the 12 months leading up to the change from floor trading to electronic trading, noting that 38,000 tons of 40-lb blocks and barrels were traded on the CME during the second half of 2016 and first half of 2017.

Trade volume on 40-lb Cheddar blocks has increased 16% and on barrels 38%. O’Brien points out that the amount is still relatively small considering that the U.S. produces 5.5 million tons of cheese annually, which is essentially priced off the CME session trades, bids or offers.

“We were trading 7/10ths of one percent of total cheese production on the CME spot market,” says O’Brien. Since the change to electronic trading, this has increased slightly to just shy of 1%.

The volume of CME spot butter trades, on the other hand, has increased 138%, while NFDM has been flat.

With more trades, one can argue that the CME spot markets have become a better price discovery mechanism via electronic trading, particularly for butter. For the 12 months prior to going electronic, the CME traded 1.44% of the total U.S. butter production, compared with trading 3.7% of total production in the past six months since going electronic.

“That is a dramatic jump in the price discovery for butter,” says O’Brien.

The CME spot market for cheese has some product specification differences from butter and powder. “It is a fresh cheese market,” O’Brien points out. “Sellers cannot bring product older than 30 days to the CME, so we can have 400 million pounds of cheddar in inventory, but if there are no sellers of fresh cheese, and if buyers have a need for fresh cheese, we get these massive short-squeezes.”

He notes that the CME could price fresh cheese at $1.60/lb on the spot market, but cheese that is 31 days old or older could be trading through normal distribution channels at discounts as great as 20 cents per pound.

In that sense, the CME gives dairy farmers hope — when they see Cheddar up 10 to 20 cents on the CME spot market — but then the rally erodes in real time as the “short-squeeze” on fresh product passes, and the CME spot market falls.

This volatility is often seen from week to week, and cheesemakers can get caught when their input cost for milk does not align with their output sales of cheese that is older than 30 days.

On NFDM, the product age window is 6 months, and for butter it is one year, making those spot markets more reflective of supply and demand in terms of stored product realities.

“We could have a better marketplace (for cheese), but at the moment, these are the boundaries that participants are forced to operate within, regardless of the increased volatility that results from them…volatility greases the track and gets things moving,” observes O’Brien.

His experience with dairy market risk over the past two decades gives him insights into many sectors of the dairy industry. He suggests that dairy farmers need to be aware of their options and be realistic about their cost of production.

“Everyone is in same boat (in terms of market risk), but for dairymen, it is different because they are mostly price takers, while physical trading houses and other market participants that have risk management departments can be price makers,” he says. “Physical traders incur risk when they can manage it, and if they cannot, they immediately offset it or avoid it altogether, whereas dairy producers make milk and work hard and do some things about risk on their inputs but neglect fixing the price of milk outputs.”

O’Brien notes that with the farm milk price based almost completely off the CME spot markets, this is also affected by delays. The CME spot market can be going up while the USDA weekly National Dairy Product Sales Report can be going down in the same window of time. Meanwhile, the CME spot dairy markets, especially on cheese, remain a “market of last resort” with limited participants on the processing side.

While there is increased activity of end-users coming to the spot market directly to buy — especially for butter — the spot market is mainly selling more product with the same participants. There are still a limited number of butter sellers — traders fulfilling contracts and a handful of processors that make butter.

The large processors and cooperatives focus on allocating the bulk of their sales for the year and make inventory based on those allocations. Global dairy traders, on the other hand, have ever-changing risk profiles, which forces them to buy, sell and arbitrage to survive.

“We don’t operate under the luxury of make allowances,” says O’Brien of the role of market participants such as themselves.

Meanwhile, market dynamics are changing in the cheese industry where cheese plants are being built as much for the cheese as for the whey stream valorization. This creates a supply of Cheddar barrels that can build up and are seldom exported.

U.S. processors continue to produce yellow Cheddar blocks and barrels, but few globally have the equipment to break down the barrels, so they are not exported. The industry makes what it wants — what milk is priced from — but is that reflective of the market?

There are certainly inefficiencies in the current commodity market pricing systems that underpin the Federal Order milk pricing. Can a case be built to improve this?

Could inclusion of more indexes built off more pricing points (products) bring better market transparency?

Meanwhile, the four basic commodities from CME to Federal Order set the allocation pricing barometer for dairy processing as well as both the spot milk and milk futures markets.

Looking overseas, O’Brien suggests that the countries of the EU “would love what we have in the ability to lock in a milk price for up to two years (via a mechanism like the CME futures markets). For the most part, farmers in Europe are paid on what milk-derived sales their co-op or processor can attain. Their pay price does not float with the market. But farmers in Europe have the intervention program — similar to the former dairy product price support program the U.S. eliminated in the 2014 farm bill,” O’Brien relates.

Volatility in the marketplace provides opportunities to manage risk, but it is easier said than done. For example, there must be access to funds to hold positions (through the margin calls when the market goes against their positions).

On the processing side, says O’Brien, “Deferred positions of just 5 months can move against you as much as 70% for products such as NFDM or Cheese and as much as 100% for butter.”

As for dairy farmers, he observes that there were opportunities during late 2008 to lock in $20 Class 3 milk prices during 2009.

“But most dairy farmers didn’t do this. A super majority operate without safeguards, eternally optimistic. Dairy production is not a pastime, and survivability is not certain,” he suggests. “The future is managing risk. The multinational companies do it, and traders do it. Successful farmers will have to do it also.”

Ron O’Brien can be followed @rko2milk on twitter and at milkfutures.com

Check out the final open outcry live CME dairy spot market auction from June 2017 here

 

 

check it out at https://www.youtube.com/watch?v=si2vVdOQemo&t=35s

 

Dumped. Desperate. Delivered. But is it over?

‘It will happen again if we don’t find a way to deal with this.’

By Sherry Bunting, Farmshine, April 17, 2015 Cover-041715

FULTONVILLE, N.Y. — Ray Dykeman does not want to see anyone go through what he and his cooperative of 8 producers did this week. He cites the feeling of not knowing where to turn as the worst part of the “bizarre situation.” But as the group began their phone-tree of calls last week, and the Albany television news cameras rolled at the 950-cow Dykeman Dairy Farm to produce what became the number one ‘shared’ story of the week… things started happening that led to a reprieve.

The co-op of 8 had lost their milk market. They were given notice 4 weeks ago that April 15 was the last day they would haul their milk to New York City’s only bottler — as they had for 13 years. Less milk was needed by Elmhurst Dairy, and another entity had stepped in to supply — and balance — that need.

“When we first lost our market, we spent 14 days thinking we were getting something lined up with another buyer,” said Dykeman. “When that fell through, we were faced with literally 7 to 10 days of hecticness. There’s not a tremendous amount of options. That is the other hard part.”

Dykeman served as the co-op’s point man communicating with other co-ops, processors, government officials and the media.

The 8 farms, totaling near 3000 cows, were down to 7 days to find a new home for their 110 million pounds of annual milk. Staring them in the face was the real possibility of selling their cows and shutting their doors.

“What do you do in 30 days, in that amount of time?” said Dykeman, who has ownership in 3 of the 8 affected farms, including the 500-cow Envision Dairy, Amsterdam, owned by a consortium of 23 people with expertise in different aspects of dairying and forage, along with young dairy startups from Cornell. Envision Dairy was accepted by another co-op 10 days before cutoff. That lightened the load a bit, but the rest of the milk was still a long way from home.

“Even today, our 42 employees are looking at me saying what are we doing Thursday?” said Dykeman in a Farmshine phone interview late Tuesday afternoon. “We are 24 hours away from having no home for our milk, and I still am not sure how to answer them.”

Hope and support…

But he had hope. Fellow dairy producers and community members were calling and emailing. People were reaching out. He had had countless meetings and secured two buyers to each take a little of the milk. On Tuesday afternoon, he was waiting for an answer from a third processor considering taking half.

By late that evening, that contract was signed for a 3-month reprieve in time to make the nightly television news.

“Trucking our milk to 3 different places will be new for us, but we are able to use the same hauler and we are accustomed to high trucking costs — having hauled milk into New York City for 13 years — so we are very happy,” said Dykeman with an audible sigh of relief.

“I hope, going forward, we don’t let this experience go by the wayside because I honestly believe if we do not come up with a plan for this area, it will happen again and be potentially devastating,” he quickly added. “Just look at the investment farmers have. All that we have put at risk.

“I would much rather have someone say to me: ‘We really need you to go out of business. You are not needed in New York anymore, and you have a year to get out,’ than to be told all of a sudden there’s no place to send my milk,” he said.

Dykeman stressed that they have “no animosity toward any of the companies.” This is business to business, they realize. But what amazed them was the amount of public support.

“Everyone worked so hard to find a home for this milk: Our representatives and senators, the Governor’s office, the New York Ag Commissioner, other co-ops and processors. Local people wanted to take the local milk. It was a very difficult situation in which to find a solution, but the people we have dealt with in this were very helpful.”

Dykeman could not say enough about Sen. Chuck Schumer. “He was kind enough without a scheduled meeting to meet with a couple farmers while in Johnstown for another reason,” he explained. “He and the Commissioner both called this morning to express their relief in how things turned out.”

No easy solutions…

The 3-month reprieve gives the co-op of now 7 farms the breathing time to secure an annual contract. And Dykeman feels certain there will be more discussion in the industry on how to handle these things better in the future.

“Farmers generally want to go back to being farmers,” Dykeman shared. “This is not what we do. This is one of the reasons we farm. We grew up on farms and this is what we want to do — not doing the kinds of things I’ve been doing for the past few weeks.”

Dykeman said the silver lining is “seeing your community respond and be very helpful. I can’t even calculate the number of emails and phone calls I’ve had. In fact, I’ve had 5 calls try to buzz through while on the phone with you today,” he said Tuesday. “People want to help. But there are no easy solutions and it will happen again if we don’t find a way to deal with this.”

One of the ideas being tossed around is to pair extra milk with efforts to supply food banks, or to ask the government how to use the “demand buying” in the Farm Bill to alleviate the supply pressure coming to roost on a region despite the fact that the “national average milk margin” is not even close yet to triggering the national government purchases for feeding programs.

Players and perspective…

In contacting the New York Department of Ag and Markets on their role and perspective, emailed questions were requested, and Dave Bullard, assistant public information officer provided this statement in response: “Ag and Markets is working with local elected officials, including Congressman Tonko and Assemblyman Santabarbara, to assist the farmers in finding alternative processors and manufacturers for the cooperative.  There is currently a surplus of milk due to strong production combined with lower sales as a result of reduced exports and a few other factors.  This supply/demand imbalance has created a very challenging situation for all producers and processors.”

Similarly, a request for an interview with DFA was met with a request for emailed questions. In asking what DFA would like to report in terms of taking on one of the farms in the Pennsylvania situation a few weeks ago and the New York situation currently while also gaining additional outlet for member milk in the process, the emailed response from DFA’s spokesperson was, that “Every milk marketing organization handles regional market dynamics differently.  One of the advantages of our cooperative system is that we work diligently to provide a secure market for our members’ milk.  Our goal is to market our members’ milk in the most efficient and cost-effective way as possible.  As we look to the future, the Northeast dairy industry is in an excellent position because of our proximity to major population hubs and our access to natural resources.”

Asked to define some of the biggest reasons for the oversupply of milk in the Northeast given that the Northeast has not grown by as wide a margin as the national average, DFA’s emailed response was: “For most of 2014 and into 2015, the Northeast marketplace has been in a challenging milk supply situation. Overall a generally weak demand and increased milk supply resulted in the need for additional milk movements around and beyond the Northeast. With plant closures (Farmland Dairies) and an overall weakening in demand from Class I and Class II customers, more milk than normal was placed in balancing facilities throughout our system and outside our geography. In the Northeast the loss of capacity in conjunction with the increase in supply resulted in the extra milk movements.”

Welcome to the squeeze chute…

When reviewing the larger decline in Northeast Class I utilizations versus the decline nationally — and seeing the effect as Eastern mailbox milk prices fall further behind their respective all-milk price while national average mailbox milk prices have atypically become higher than the all-milk price — it is obvious that the Northeast market is the new squeeze-chute when milk supplies nationally burgeon.

The yogurt-magnet that strengthened the confidence of Northeast dairy farmers over the past few years has led to small but steady increases in production, and then in 2014, New York increased by more than 2% to re-take from Idaho its former position as the #3 milk-producing state. Meanwhile the Northeast milkshed, as a whole, was up just under 2% in 2014 compared with the national increase of 2.7%, and has backed off in early 2015.

No reason to sour on yogurt…

Yogurt production is one of the primary fall-guys for the current supply/demand situation reversal of fortunes in the Northeast. But further analysis is less clear on that pointed finger. Yogurt production was 741 million pounds in New York State in 2013 and 692 million pounds in 2012. The 2014 figures for the state will not be available until late May. The 2012 and 2013 totals, however, show New York yogurt production used around 12% of New York’s growing milk supply in both years as both the yogurt and the milk production grew simultaneously.

On a national basis, however, the total U.S. yogurt production figures are available at this time, and yogurt production grew from 4.42 billion pounds nationally in 2012 to 4.65 bil. lbs in 2013 to 4.74 bil. lbs. in 2014.

Furthermore, the April 2 Dairy Products report indicated that nationwide plain and flavored fresh (not frozen) yogurt production was up in February by 7.2% over year ago and nearly 12% higher than for January.

Context and common denominators…

The yogurt industry is known to be highly secretive and competitive.

Interestingly, 2009 is the last year in which the USDA reported monthly yogurt production on a state-by-state basis. Since 2010, those monthly yogurt production figures are only available on a national basis. This reporting change coincides with the timing of when yogurt production began to rise in New York State; so now, when it counts, there are no free and public records of production by state until 6 months after a year ends. It’s not that way for other substantial dairy products, and prior to 2010, those figures were available monthly without having to pay hundreds of dollars for an insider yogurt market publication to read insider industry estimates and trends.

In April’s central New York situation, like western Pennsylvania in February, rumors fly about reasons for farms to be cut from the shipping rolls of processors and small co-ops. Some folks wonder about the milk quality of those producers, or they may believe producers were expecting to be paid more money. But that’s the thing with rumors, there is but a shred of quasi-truth.

While some producers may find themselves in this situation through nitpicking on an inspection report or somatic cell counts that are a little too far north of 200,000, others may find themselves in this situation for merely asking a higher pay price when milk is short, but then staying with their processor on a handshake without the requested pay increase during the short-milk times only to find themselves on the other side of that equation — losing their processor when milk becomes long.

The bottom line in talking to various folks who’ve been through this in Pennsylvania and New York, the common denominators are: 1) the lack of warning, 2) the inability to prepare or negotiate or help problem-solve in advance of being flatly cut off, and 3) the loss being driven, at least in part, by the independents and small co-ops’ lack of reliable access to balancing assets — either owned or simply a standby buyer that will take a little milk for cheese or butter or yogurt or powder as producers balance the diminished and diluted Class I demand.

Looking ahead…

“Everyone in the industry was helpful to us, and we want to continue to work with them on solutions for the future,” said Dykeman reflectively.

Running in the background is some loss of confidence as producers deal with permanent and temporary loss of markets. One of the producers who survived the western Pennsylvania cutoff in March said in a phone interview this week, “crazy things are happening and people are being let go. Everyone is afraid to invest. Some of us already invested in our operations and are on our toes about losing our markets, and then we go to a local meeting where the speaker from Elanco tells us we need to increase production with rbST even though we are clearly in a region where more processors are requiring affidavits not to use it and people are losing their markets because of too much milk.”

At the end of the day, from the outside looking in, it seems the good beef price and current status of processors wanting to label products rbST-free are two strong signals folks could pay attention to in stabilizing demand. It’s also important to gauge the market direction in planning phases of growth. That growth is necessary here to sustain the dairy infrastructure and make farms that are not quite as surrounded by other farms attractive as a pickup. However, the two market loss situations in Pennsylvania and New York illustrate vividly that size does not matter.

As long as the Federal Orders put all the marbles of high value, pooling and provisions into Class I while that is the milk class that is dwindling in sales, size won’t matter. When milk is long, the milk guns will continue to point East and all size farms are vulnerable in the business of dealing with the push of supply through the squeeze chute.

Look for more on the Northeast market situation in next week’s Farmshine.

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PENNSYLVANIA – Feb. 2015

Got Milk! But nowhere to go…Cover-022715

By Sherry Bunting, Farmshine, Feb. 27, 2015

WEST NEWTON, Pa. — What happens when no one will come for your milk? That’s a situation increasingly facing dairy producers in southwest Pennsylvania, given what has and is occurring in the proverbial tip of the iceberg: Westmoreland County.

It happened to Mike and Vicky Baker and six of their neighbors last May, and it is happening this week to 6 to 8 more producers in Westmoreland County, with the potential for additional shippers in surrounding counties to be affected as the calendar approaches the spring flush and schools letting out for summer.

For Doug and Janice Greenawalt, West Newton, Pa., the news could not be worse. On Saturday, February 28, the milk from their 40 cows will simply not be picked up.

Two other producers being terminated this week said they are selling or have already sold their cows. Two others said they have until March 31 to find new buyers for their milk. All received termination letters from Lanco-Pennland Quality Milk Producers Cooperative between January 30 and February 5.

“I’ve been on the phone all day, for days. I must have called dozens of dairies in the area since getting the notice on Jan. 30 that we were being terminated due to ‘hauling and marketing conditions.’ Our farm supports 3 families and we have 4 days to find a way to keep going,” said Janice Greenawalt in a phone interview with Farmshine Monday. As of Wednesday, they were still without a buyer for their milk come Saturday, and were looking at options for culling some cows and putting assets and energies to work raising cattle in a way that can yield some income for the farm and its families.

“All we know is that United Dairy has not renewed the contract with Lanco for our milk to be commingled, so Lanco could not sign for our milk after Feb. 28,” she explained. “Everyone we contacted to buy our milk says there’s too much milk around to take us. But some said they would have taken us … if we were larger.”

For Todd Ramaley, the story is similar. His farm is almost into Indiana County and about a 35 minutes’ drive (in a car not a milk truck) from the nearest Lanco shipper still shipping to Lanco. As of Tuesday, he said DFA was still looking at the possibility of taking the milk from his 40 cows “because it is really clean milk with SCC of 150,000.”

If his milk went to DFA, it would actually still go, physically, to the United Dairy, Inc. plant in Uniontown, several sources indicated, because United has a “swapping deal” with DFA, under which some of United’s milk goes to DFA’s plant in New Wilmington and some of DFA’s milk goes to United’s Uniontown plant.

When asked about the letters sent to six of its producers in Pennsylvania’s southwest corner, Lanco’s director of dairy operations Robert Morris explained how originally all the milk hauled by that hauler served Saputo Cheese in Hancock, Maryland.

“That plant closed in July,” he said. “But before that, those shippers ended up in our world when Saputo bought Jefferson Cheese. At that time, we were able to work an arrangement with United in Uniontown and hauler Wayne Harmon to commingle that milk on United’s independent routes. They were in charge of the Uniontown, Pa., Martins Ferry, Ohio and Charleston, West Virginia plants and would commingle some of our milk on the nearest truck.”

Morris noted the total milk of their six terminated farms is “roughly 250 to 275,000 pounds a month.”

According to Morris, United had apprised Lanco about losing a sizeable bottling contract through its system in January, and before cutting its own producers, would first stop receiving milk from outside sources. United set Feb. 28 as the last day they could commingle that milk. Lanco also received word through the St. Louis, Missouri milk broker that ran the commingling that United’s sizeable loss of sales would prohibit further commingling of Lanco milk in that region on their trucks.

Morris noted that Lanco is “still taking on new producers in areas where we have haulers close to our customer base,” and he noted the six producers they’ve let go are “small farms and out of our orbit, especially since Saputo closed the Hancock plant in July.

“Those farms were never charged the real cost of hauling their milk because United had picked up the trucking subsidy,” Morris stated. “With us losing the ability to commingle that milk, there is no way for us to haul it, or any market for us to send it to, where the hauling doesn’t eat up all the income.”

Requests from the affected producers to find a way to haul their milk for Lanco were denied.

Morris further explained that their milk from south of Williamsport, including Cambria County, Indiana County and Somerset County as well as Garrett County, Maryland — that had all flowed to Saputo in Hancock — is now going East to the Land O’Lakes plant in Carlisle. Some of it goes to Dairy Maid in Frederick, Md., and to HP Hood in Winchester, Va.

In areas where Lanco has hauling, they do commingle with the Maryland/Virginia co-op, but these fringe areas — like Westmoreland County — are an issue now without the Saputo cheese plant and considering the cut in volume needed by United at its Uniontown plant. Both Lanco and Maryland/Virginia have milk into Somerset County, plus Maryland/Virginia has milk in the Sugarcreek, Ohio region. The producers affected by the latest termination fall into a void — a pocket of milk between two higher-density dairy areas.

“We simply had too much milk at the Uniontown plant,” said Tom McCombs, milk procurement manager for United. “We had to cut back on the co-op milk, so we gave Lanco the notice.”

When probed further about the loss of Class I milk contracts, McCombs said that what United actually lost was its volume of sales that Save-A-Lot trucks would pick up at its Uniontown plant for their Pennsylvania warehouse “just down the road.”

“They did some redistricting with their stores, and that milk volume is now going to other warehouses,” he noted. This would include the warehouses served by United’s bottling plants in Ohio and West Virginia.

McCombs said the loss of volume going to the Save-A-Lot warehouse served by United’s Uniontown, Pa. plant leaves the company with the difficult task of deciding when and how to cut some of its own independent shippers that serve that plant as well.

“We have to make that decision in the next few days,” he said Monday. “It will be a tough situation to pick a load in an area that is not as flexible to get to our plants or other cheese plants.”

When asked about the milk swapping arrangement still ongoing with DFA, McCombs noted that, “We would not be accepting DFA milk, either, if we did not have the swapping agreement with DFA.”

He added that he expected the lost volume from the Save-A-Lot warehouse served by the Pennsylvania plant to come back in the fall “if things change.”

According to McCombs, United’s current 340 farms produce 36 million pounds of milk per month, and this total had increased by 850,000 pounds from December to January. “Our farms have not added cows, but they are producing a lot more milk per cow. It must be the good feed,” he said.

“Not only do we have more milk, but the Class I consumption is down. We have got to get milk back to consumers. The schools used to serve lowfat. Now they serve no-fat. They take the fat out of the milk, which takes the taste out of the milk, and people don’t want to drink it,” McCombs stressed, adding that the snow and low temperatures this winter are causing school closures. “We had five loads of school milk canceled and the balancing plants were all full. That snowballs on you.”

The Pennsylvania Department of Agriculture has received the quality records of the terminated farms, but not one of the producers has heard anything in terms of options from the state.

For shippers in Federal Orders 1 or 33, there are provisions for the market administrator to direct a cooperative to pick up the milk but be allowed to pass the full cost of marketing on to the producers. However, the shippers regulated under the Pa. Milk Marketing Board do not have those protections if their Class I market collapses.

That is what happened to Mike and Vicky Baker’s dairy and six others in the Westmoreland County region last May.

“We have a lot of independent processors in this western region,” she said in a phone interview Tuesday. She recounted her experience of losing their milk market last spring. In fact, her dairy and the others let go at that time were in the top seven for milk quality at the plant, and they lost their market anyway.

“We were able to get a good load of milk together at that time, so five of us are now with Land O’Lakes. It’s not cheap. We are paying $1.43/cwt in trucking costs,” she said.

The overarching problem, says Morris at Lanco, is that the Northeast and Mid-Atlantic market is “losing raw silo space” for weekends, holidays, and times of the year when Class I utilization is lowest. Add to this the 4% national decline in Class I sales to begin with, along with the reluctance of cheese plants to run at full capacity to build inventory, and the situation becomes one that producers throughout the region should be watching.

While some truckers report wait times at plants of 2 and 4 hours over the holidays, coop dispatchers note that was accomplished by dumping milk or just separating the cream and dumping the skim so that the trucks would not be waiting and so their turnaround times could be maximized on multiple routes.

Estimates of milk dumpage since last summer runs in the hundreds, but is anyone’s guess. DFA’s response to the question is to say it balances its member milk as it sees fit. Only certain types of milk dumping are reported to the Market Administrator, and that’s a story for another day.

For Todd Frescura, another of the six Lanco-terminated producers, the path forward will be different. He has talked with Horizon because there is demand for Organic milk that is reportedly in short supply. He is confident his fields will certify for three years of organic treatment due to the way his farm is operated for rotational grazing. But he will still have to wait one year for the herd to be certified.

“I guess I’ll cull the herd real hard, dry the cows I can, and maybe just milk 10 cows to feed calves for the neighbors and raise my heifers to be ready to produce organic milk in the future,” said Frescura.

But “going organic” is not an easy answer for most of the dairies affected now and in the future.

With the milk dumping last spring and summer and over the holidays, the concern is the independent bottlers will have a balancing problem once the spring flush hits and the schools let out in June.

Part of the problem is the reportedly large shipments of milk into Pennsylvania balancing plants from Michigan. DFA member-milk from Michigan takes precedence over non-coop milk, here, and DFA’s plants are full to the point where the cooperative is charging a 50-cent/cwt marketing fee. Land O’Lake’s fee also increased recently from 15 to 40 cents/cwt.

“My fear is that the producers losing a market this month are just the tip of the iceburg for what could happen in June,” Baker explains. “DFA has their own milk to fill their own plants.”

What will happen to the shippers for plants that are relying on 60 to 80% of their market in Class I? The verbal agreements bottlers have with DFA may not be good enough to carry their shippers through the loss of fluid sales at a time when balancing plants are full, production per cow is high and the schools are closed.

Baker notes that the annual Southwest Regional Dairy Days in Blairsville, Pa. next Thursday, March 5 will include a producer panel on this topic.

“We had already planned this on the agenda to talk about positioning our milk for the future,” said Baker. “But now we’re going to really talk about having good quality milk and how it may or may not matter in long run. Producers in that 40 to 50-cow and 100 to 130-cow range need to be aware of what they might have to do to make themselves more attractive.”

She said it matters beyond the farmgate because of the domino effect. “I am fearful for what this means for our infrastructure. As dairies leave, the service providers will have trouble staying for those that remain,” Baker noted. “Other pockets of milk in this state have more options than we have here because, here, we have an independent market, and DFA is the only balancer for that market, and DFA has more than enough of its own milk (from here and from beyond) to fill their plants.”

-30=

Something different: My public comment on milk marketing rules

My great grandmother grew up milking cows in East Berlin, Adams County, Pennsylvania, not far from the battle of Gettysburg. She loved to cook. She always smiled. She was seldom cross, but you knew she meant business when she said: “Now, mind!” She was practical and daring. She wore pants before it was fashionable for ladies to do so and pierced her ears when the younger generations were still wearing clip-ons.

Growing up, I heard Sadie Phillips say more than once: “Trust your gut and Be bold!” Today, I have decided to do just that. I am using my blog to carry the public comments I will submit to USDA on the due date Monday, April 13 regarding the FEDERAL MILK MARKETING ORDERS and how they are (or are not) fulfilling their purpose and the effect on small businesses (A Section 610 Review). I’ll get knocked around for this in some circles, I am quite sure. And this is certainly very long for anyone to read. But here it is. Have at it. Or, if you are so inclined after reading it, shoot me a message, note, or thumbs up if you want your name added before I submit officially to USDA on Monday. 

April 11, 2015    

RE: Comments on the Federal Milk Marketing Order Program

Dear Mr. Rex A. Barnes, Associate Administrator of Agricultural Marketing Service: 

As a freelance ag journalist and market reporter for the past 30-plus years — as well as having as clients multiple small businesses and dairy farmer organizations for whom I do writing and photography — I get around the country and see firsthand what is happening to milk movement and dairy markets and the effects on dairy farm small businesses — as well as the small businesses that serve the dairy farms and the combination of jobs and revenue they provide to sustain rural economies.

Small businesses in the dairy industry — from the farm, to the service and supplies, to the processing, to the retailing — are in trouble. National Big-Business retailers and processors as well as national Big-Business cooperatives employ stables of milk accountants, attorneys and others in a centralized management model to re-shape the grid of milk movement within and between Federal Milk Marketing Orders (FMMO). Why would any small-business want to innovate in the fluid milk category when the two national Big-Business cooperatives (who work together through regional “marketing arms”) can come in and swoop the earnings away using FMMO rules to do so?

Yes, it has become increasingly difficult for the Northeast and Southeast milksheds to hold on to their Class I utilization in their respective blend prices. It is becoming more difficult to supply local milk beverage needs with a local supply of farm milk as the FMMO program of marketwide pooling actually facilitates the move to centralized models that displace milk from the local small businesses, local farms, local communities.

In effect, national Big-Business cooperatives are locking up regional balancing assets. By owning or controlling with full supply contracts most, if not all, of the dairy manufacturing in a region, independent bottlers and small co-ops find fewer options for selling extra loads to self-balance their local-to-local fluid market.

As a result, we are seeing individuals and small co-ops lose longstanding contracts with local bottlers in pockets all over the Northeast — especially in western Pennsylvania and central New York. In some cases, farms have been forced to sell their cows because they are now without a market at all.

These devastating effects have played out in other regions where small co-ops lost their markets to the Big-Business bottler and national Big-Business cooperative, and now this same effect is playing out in the Northeast — this time facilitated in part by complex FMMO rules.

The current FMMOs provide a needed structure and accountability in the buying and selling of milk. They also have the purpose of stabilizing prices through marketwide pooling. But opinions and analyses differ on whether the classification system — as it exists today — is stabilizing or instead contributes to price volatility. It also seems to detract from a competitive value being paid for manufacturing milk.

None of the above points are the actual defined purpose of the FMMOs. According to USDA, here are the 3 purposes of the FMMOs:

  • To provide for orderly marketing
  • To assure reasonable prices to both dairy farmers and to consumers
  • To assure an adequate supply of wholesome beverage milk to consumers

These 3 purposes (above) are not being realized in the current FMMO system.

  • A signal of DIS-orderly marketing is the fact that dairy farms within the Eastern markets are losing their access to milk marketing.

Milk produced in Georgia — that used to go to Florida — is moving North, while milk from Texas moves into Florida. Milk in Pennsylvania and New York is being displaced from its own milkshed by milk from Michigan. Milk from Illinois moves into Order 5 while milk from Kentucky has recently been trucked all the way to Texas, and vice versa. Truckers talk (more than tongue-in-cheek) about loads passing each other on the highways.

Both the Northeast and the Southeast are being chastised for having dared to increase their production. Farmers in Pennsylvania and New York are blamed for creating their own bottlenecks of surplus milk forcing tankerloads of milk to be dumped. Those ‘bad boy’ Eastern producers should not be growing their dairies. After all, that growth is throwing a monkey wrench into the planning of other regions to grow rapidly with eyes on filling the Eastern milk market deficit, using Class 1 sales in the East to sweeten the blend price paid to dairies that locate or relocate near huge dairy manufacturing plants in the West so those plants can enjoy the cheaper price paid for the milk they use to make dairy products.

  • The fight is on for the shrinking Class I piece of the milk market pie, when in reality other manufacturing uses have more value! In the process, consumers pay MORE for their beverage milk and farmers receive LESS. Farmers receive a shrinking percentage of the consumer retail dollar and a shrinking percentage of Class 1 sales. And yet…. the milk is all the same standard whether it goes in a bottle, in a cheese vat, a butter churn or a yogurt process. It’s all the same quality grade of milk!

As for current milk production growth. The truth is that the Northeast milkshed and the Southeast milkshed are not out-growing the needs of their areas. They are located in close proximity to consumer population growth, and their own milk production growth reflects an attempt to merely gain back some of their own formerly lost production that has weakened their infrastructure over the past 14 years for the farms that remain.

  • The Northeast milkshed and the Southeast milkshed are both deficit if just the milk within their borders is considered. My home state of Pennsylvania, for example, has lost 55,000 cows since 2002 and 100 million pounds of production.

Furthermore, leaders of states in the Northeast and Southeast milksheds — Pennsylvania, New York, Georgia, Kentucky for example — have implemented programs and incentives aimed at GROWING their respective states’ dairy small businesses.

The Governors and State Assemblies in these states have — in effect — said: “Our ag infrastructure of small businesses can’t stay in business here providing local jobs and revenue if you the local small business dairy farms don’t grow back to where you were!”

Now, the very dairy farms these incentives were implemented to uphold are cast aside as the milk is displaced from elsewhere.

The implementation of the Federal Orders has become short-sighted in the quest to simply “Assure an adequate supply of milk to consumers.” But what about the future when the small-business farms and infrastructure here in the East are so diminished they implode?

And look at the cost! Fluid milk consumption is down and we keep jacking up the price with all of these maneuverings. Maybe if a more localized model was respected and cMilkTruck#1onsidered, farmers and consumers would both benefit.

The purpose of the Federal Orders needs to be more considerate of the long term. It should not be declaring the winners and losers, but instead provide a level playing field where the real costs of transportation are factored into the value of local milk to local markets.

The large and powerful market movers take over the grid and push regional suppliers — mainly small businesses that are central to their own communities — to the side. These entities bring milk into the community and then drain local dollars out of the community.

As a result, small dairy businesses are going out of business at an alarming rate. Independent dairy farmers, small and mid-sized, as well as small cooperatives, are getting notices that they are being dropped by local bottlers in my home state of Pennsylvania and north into New York and in Ohio. Young Plain-Sect farmers are finding out in the Southeast they can’t just start milking cows like their fathers did before them. There is no market, they are told, even though the Southeast is a milk deficit area. The Northeast is as well.

The small regional bottlers are being squeezed by the large national co-ops who own or control the balancing assets (through both ownership and contracts) within the Northeast, and Southeast.

So, when milk from members of the national Big-Business co-op is produced in the rapid (double-digit) growth areas of Michigan and Texas, for example, that milk takes precedence at the national co-op-owned and controlled balancing assets in the Northeast and Southeast — effectively pushing the local small business independent shippers and small regional co-ops out of the bottling plants and into situations where they don’t have a market for their milk.

The Walmartization of food retailing has infiltrated its way to the farm-level because local small businesses have limited access to the dairy product processing plants where they once sold extra loads at a discount in order to balance the fluctuations of the fluid milk market. The set make allowance that is built into the manufacturing class milk prices also encourages large single-product plants versus a market-savvy and nimble processing class that makes for the market.

In Pennsylvania, some bottlers are working together with local food banks to balance the ups and downs of the fluid market so they can keep their longtime shippers instead of giving them up to the national Big-Business co-ops who in turn broker the milk back to the plants it went to in the first place.

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What do the Federal Orders bring to this mix or — should I say — mess?

First, It is currently too easy to move milk and get paid more for moving it the farthest!

As a result, dairy manufacturing plants are being built where there are not many cows. “If you build it, they will come.” But then they will also send their milk back East to get that juicy Class I utilization to boost their blend price and keep the cost of milk down for the large new manufacturing plants.

The small businesses of the eastern region need a method by which to have the local-ness of their milk count for something in this equation!! If the government is going to be so involved, then it needs to look at the big picture.

Currently, not enough incentive is built into the FMMO structure to give local-supply-arrangements and advantage in the fresh fluid milk beverage market based on the fact that milk flows in smaller circles and does not have to move so far.

While I am not an expert on how all of the pieces of the FMMO came to be, I do know that some of the fixes have created new and worsening problems.

My ask of the USDA AMS — as a small business and as a consumer — is 3-fold:

1) Please extend the comment period to allow for more time to comment. Dairy producers are waking up to some disturbing activity in the Eastern markets. More is becoming known about the current failures of the Federal Orders to uphold their intended purpose! Dairy farms — in increments of half-dozen to a dozen at a time — are getting notices RIGHT NOW that they must find another market or sell out their cows, their investment, their vocation, their family-living, their heritage.

More and more of these producers losing their markets are the highest quality milk producers! Their only fault is they are small businesses (40 to 1000 cows) or part of a small co-op (8 to 12 producers). A large iron fist is coming down in the eastern markets and blaming the bloodbath of farms forced to shut down, dump milk, and go out of business on “too much milk” in the East.

All the while, milk from Michigan in the north and Texas in the south is displacing local eastern milk in the balancing assets of the two large national-and-centralized co-ops that work together. Members first, locals last.

2) Before considering the addition of California to the current FMMO system, please hold national hearings to first evaluate and devise a new pricing formula. Consider basing it on 2-classes of milk: fluid and manufacturing as well as component values based on an array of products — and evaluate removal of the “set” make allowance. This could facilitate competition among various entities buying milk for a variety of manufacturing uses — instead of declaring the winners and losers via set make allowances that encourage large single-product plants that are not nimble nor responsive to changing market conditions.

This could also cut down on some of the gaming we see among balancing assets and lead to more actual marketing of dairy milk products rather than large output of products the market may or may not want because the set make-allowance assures a margin where pure scale is the key to profit and efficiency.

An example of this is the difference between skim milk powder – a uniform product with a standardized protein content – vs. nonfat dry milk (on which the make allowance for powder is based) which is a lower quality product and not uniform in that the protein percentage falls into a 4-point range. If the market wants SMP for its repeatability in a recipe but the make allowance is based on NFDM, the response in a downtrending market is to make more of the latter because the margin is guaranteed by a set make allowance, which further depresses the market.

3) Re-evaluate the purpose, relationship and actual function of transportation credits, touch-base provisions, diversions and other aspects of how milk is supplied so that a premium resides wherever local milk supplies local markets and wherever the regional infrastructure of dairy farms and businesses is upheld in the movement of milk within a Federal Order. Perhaps instead of using such credits and rules to facilitate the bringing of milk from far away, the fund would be better used to get local milk to local markets.

Local small businesses are being forced out of business rapidly. The Department needs to move quickly to establish a fund where processors pay in what would have been spent to bring the distant milk so those dollars are used in the local community or within the Order to offset the balancing cost of keeping local dairy farms on the rolls.

In short, perhaps it is time to use the Federal Orders for their intended purpose and break up the centralized stranglehold of the two national Big-Business cooperatives working together (even sharing attorney and milk accountant assets) by forcing them to stop painting their milk movements with a centralized broad brush – forcing them to more aptly consider local to local, regional to regional.

It is also worth mentioning here that some shifts in the gap between the USDA “all-milk” price and the “mailbox” price released months later are becoming apparent as the national mailbox price has been higher than the all-milk price while the Southeast, Appalachia, Pennsylvania, and New York mailbox prices are falling further and further behind the all-milk price than ever before. This may have something to do with the 6% reduction in Class I utilization in the Southeast in 2014 and the 4% reduction in Class I utilization in the Northeast in 2014. The national reduction in Class I utilization is 3% by comparison.

This reflects not only the raw milk movement but also the infiltration of packaged milk coming from outside of the Northeast and Southeast milksheds directly onto the shelves of large buyers like Costco and Walmart.

On a personal note — as a former milking employee, 34-year veteran ag journalist in dairy and beef, and an eater of dairy products and drinker of dairy milk in the Northeast — I have this to say about “free markets”…

Some are calling for the abolition of the “archaic Federal Orders.” I would be on that bandwagon in a heartbeat — favoring open markets over the continued use and misuse of rules and structure to supress a region’s own supply of dairy farms, small businesses and infrastructure — if I didn’t think the Federal Orders still have a purpose of accountability and to be a running record for what is happening.

However, if the current problems are not fixed to give local milk, supplied by small businesses a fighting chance, then perhaps the FMMO system should go. We have seen the loss of too many small business in the dairy industry where nationalized Big Business processors and co-ops used FMMO rules to their advantage to take over markets. Without a change in FMMO rules, this will continue and accelerate, and we will see more losses of small dairy businesses that sustain rural communities.

If the current problems are not fixed, small businesses may find they are better off in a totally free market, unencumbered by the structure and rules that are increasingly designed by the national Big Business operators to effectively put them out of business as they increase their own centralized national footprint.

Please do not add California until after the current issues with the FMMOs are fixed to a point where local is rewarded in the formula and small business is respected. Once California is added, it will be much harder to make new changes that benefit local small businesses fighting for survival in the East. Thus, the current areas controlled by FMMOs should have a chance to improve the rules before adding the state that has wanted to be state-regulated for decades and represents almost one-fourth of the total milk production in the U.S.

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Thank you for your consideration,

 

Sincerely,

Sherry A. Bunting

 

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