Policy

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Not following conventional thinking entails taking certain risk, not the least of which is the accusation of believing in conspiracy theories. However, most conventional thinking will not stand up to careful observation.

Economics professor Emmanuel Saez of UCLA, Berkeley has done some very interesting work on economic distribution as seen from the above graph. Professors Saez has examined income taxed data from 1917 through 2006.

Most interesting about the work of professor Saez is, that income distribution information shows the way the pie is sliced has much to do with government policy.

The amount of income going to the top 10% from post-World War II until about 1980 corresponds with what might be considered by many to be the golden age of farming.

For dairy, parity was created by government in the late 1940s and taken away in 1981. The excuse for taking away parity was to reduce farm milk production, and that of course did not happen. Farm milk simply became cheaper to buy. Farm income per cow was vastly reduced. Farm consolidation occurred as an attempt to keep the dairy farmer’s nose above water.

The moral of this tale is that a change in attitude is the mandatory first step in correcting the broken farm milk pricing system.

Words Fail

Words fail to convey the calculated loss occurring to American farmers. The theorizing class seem to maintain a fine lifestyle advising farmers on various methods to improve efficiencies.

Two months ago I heard a presentation by a Farm Credit representative regarding a multistate 2008 study of dairy farm profitability. As an aside, the audience was informed that dairy farmers who bought all feed actually outperformed those who raised some or all feeds.

This was not always so. USDA monthly publishes a report on Agricultural Prices. In the Agricultural Prices report are listed indexes of prices received versus prices paid. Needless to say, the present numbers for dairy farmers are horrible.

However, a look at the annual indexes back to 1979, which is published by USDA, Economic Research Services indicates that farmers in general have been losing money since about 1991. Dairy farmers would have a much more difficult time making ends meet if all other farmers were paid a fair and honest price for their produce.

Milk Feed Ratio

Today, May 29, 2009 USDA released the milk feed ration for May of 1.47.

A milk-feed ratio is reported monthly by USDA. The milk-feed ratio, according to USDA, is the number of pounds of 16-percent protein mixed dairy feed equal in value to 1 pound of whole milk.

Feed in the milk-feed calculation is computed by USDA as 100 pounds of 16 percent feed should contain 51 pounds of corn, 8 pounds of soybeans, and 41 pounds of alfalfa hay.

A significant problem with these calculations is geography. The prices used are weighted for volume. This gives a low costs ration. However, where the hay is produced, say Nebraska, for example, is not where the corn and soy is produced. Therefore the calculations are flawed by way of an artificially low price for feed.

Conclusions drawn from the milk-feed ratio are also flawed. There is no connection between milk-feed ratio and milk production.

Nevertheless, USDA has used the milk-feed ratio consistently for years. Since 1985, the milk-feed ratio has averaged 2.87. If you swallow the usual PhD drivel, there should not have been any increase in milk production since 1985.

Fakery

In the last post I indicated commercial disappearances were greater than farm milk production each year since 1996. The reason for the difference is imports.

Kraft’ Cheez Whiz was detained at port for technical reasons. The Cheez Whiz was made in the Philippines.

However, the real culprit is not even considered in the commercial disappearance numbers. When the GATT treaty took effect dry dairy proteins were deemed to be a chemical and not subject to tariffs. For years USDA considered products made from these proteins as imitation.

A look at the U.S. Patent Office records indicate there are 124 patents which include milk protein concentrate (MPC). An there are 78 patents for “cheese” incorporating MPCs.

Dry imported dairy proteins are used extensively in barrel Cheddar and mozzarella. Processed cheese uses something in the area of 60% of imported MPCs. All of these fake cheeses the public buys, thinking they are buying cheese.

Reason

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By all appearances, farm milk price will be historically low in real dollar terms until some kind of panic sets in.

Most of the media dutifully report the problem is soft demand. As logical as the “demand” explanation sounds there is no factual basis. USDA keeps track of demand in their “commercial disappearances” numbers, just as they keep track of farm milk production.

Commercial disappearances have exceeded farm milk production every year and I do mean every year since 1996. In 2000 the all milk price was $12.32 when farmers produced 1.57 billion pounds less milk than the commercial disappearances indicate. In 2003 the all milk price was $12.52 and the commercial disappearances exceeded production by 4.3 billion pounds.

So, if you are looking for a hard and fast rule regarding supply and demand, you may as well give up. Farm milk pricing seems to be as Plato said about justice – it is the will of those in power.

Complexity

“Complexity and Financial Panics” is the title of a working paper just released by the National Bureau of Economic Research (NBER).

The abstract begins, “During extreme financial crises, all of a sudden, the financial world that was once rife with profit opportunities for financial institutions (banks, for short), becomes exceedingly complex.” The summery concludes with, “At some point, the cost of information gathering becomes too unmanageable for banks, uncertainty spikes, and they have no option but to withdraw from loan commitments and illiquid positions. A flight-to-quality ensues, and the financial crisis spreads.”

Of course, the complexity of “innovative” financial activity was source of much profit. Likewise, the complexity of the current milk pricing system and the fact that dairy farmers cannot pay the costs associated with full transparency. No one can dairy and simultaneously be on the trading floor of the Chicago Mercantile Exchange (CME).

So today’s settlement price for class III milk futures for December 2009 of $14.78 is the result of a lack of transparency. For the rest of 2009, the $14.78 price is the highest. No milk can be produced for anything close to $14.78.

Will there be any bank with the “flight-to-quality” attitude willing to make farm loans based on $14.78 per hundredweight milk checks? Don’t bank on it.

Also, don’t bank on those who brought the smoke screen to farm milk pricing to solve the current crisis. At this point, complexity is still yielding a profit for some.

Dairy Imports

For imports of dairy in general, there was a reduction of 9.1% in the first quarter of 2009 but, the price was up 2.3%. For MPCs there was an increase of 24.6% and an increase in the price per unit of 23.2%. No one is importing MPCs to sit unused.

Data for the first three months of 2009 is available. The following list shows the change for the first quarter of 2009 compared with the first quarter of 2008.

New Zealand 41.20%
Canada -40.90%
Italy -40.80%
Argentina 128.40%
Mexico 12.70%
Vietnam 28.00%
France -25.30%
Brazil -14.00%
Netherlands -13.30%
India 34.30%
China -98.80%
Chile -2.60%
Denmark -29.60%
Finland -7.10%
Australia 18.20%
All Other: -32.80%

The New Zealand, near monopoly co-op Fonterra holds more low tariff import permits than any other entity.

Farmland Value & Credit

According to the Agricultural Newsletter from the Federal Reserve Bank of Chicago:

“There was a quarterly decrease of 6 percent in the value
of “good” agricultural land—the largest quarterly decline
since 1985—according to a survey of 227 bankers in the
Seventh Federal Reserve District on April 1, 2009.”

Needless to say this is not a good sign for farmers in the Heartland of America. In all likelihood, this will lead to less money to invest in crops and eventually a reduced yield.

The Federal Reserve also indicates the charge-off rates, in the first quarter of 2009, for all banks on ag loans is 0.42 (a ratio), whereas for the for the first quarter of 2008, the rate was 0.08.

Loan delinquency rates also increased to 1.71 in the first quarter of 2009 versus 1.06 in the first quarter in 2008.

http://www.mudcat.org/@displaysong.cfm?SongID=6261

“Oh the farmer comes to town
With his wagon broken down,
Oh the farmer is the man who feeds us all;”

The above link is to a song from the 1800s. It is worth clicking the link to read the entire lyrics.

Last One Out

Everyone knows the expression, “Last one out, turn out the lights.” Call it gallows humor when applied to dairy farmers. Certainly, there will be some time before the U.S. gets to that point – if ever.

However, in the graph, which shows the period from Ronald Reagan’s election until 2008, there are only 20% of the farmers as there were in 1980.

While land-grant colleges portray the loss of dairy farms as a natural progression, the fact is, with each dairy farmer leaving, there is a proportionate loss of political power.

DEIP

Today, May 22, 2009 at: http://www.usda.gov/wps/portal/!ut/p/_s.7_0_A/7_0_1OB?contentidonly=true&contentid=2009/05/0178.xml

“Agriculture Secretary Tom Vilsack today announced allocations under USDA's Dairy Export Incentive Program (DEIP) for the July 2008 through June 30, 2009 period, as allowed under the rules of the World Trade Organization. The program helps U.S. dairy exporters meet prevailing world prices and encourages the development of international export markets in areas where U.S. dairy products are not competitive due to subsidized dairy products from other countries.”

Under DEIP the U.S. Department of Agriculture pays cash to exporters as bonuses, allowing them to sell some U.S. dairy products at prices lower than the exporter's costs of acquiring them.

Nonfat dry milk (NFDM) will be the lead export under the DEIP program.

According to the latest data, NFDM is $0.8275 per pound in the West, skim milk powder (SMP) in Europe is $0.9922 per pound, and in Oceania the price for SMP is $0.9072. Go over the numbers very carefully and think about the so-called purpose of DEIP. There is something wrong with this picture.

Now, a side effect of DEIP is the lowering of world prices because the dumping by the U.S. on the world market naturally has to lower price. Since we live in a global economy,few people in dairy should applaud this move. Of course, National Milk Producers Federation is praising the move – no surprise there.

What Do You Know?

"The only thing new in the world is the history you don't know."
Harry Truman


A very interesting site is:

http://www.albany.edu/jmmh/vol1no1/dairy1.html

At this site you will find a wealth of information of a successful New York 1939 milk strike. The strike was settled by the famous New York City Mayor Fiorello LaGuardia.

As you look through the site, take note of the dairy farmer’s age. Today, we have more dairy farmers over 70 than under 50 years old.



An earlier strike organized in September 1916 was also successful. See:

http://query.nytimes.com/mem/archive-free/pdf?res=9801E2DD143BE633A25753C3A96F9C946796D6CF

Milk strikes may or may not be a solution, however,they do not form in a vacuum.

Indicators

Two important factors suggest dairy farm costs will increase significantly. The first is grain.

Planting in the Eastern Corn Belt has been delayed by weather. Additionally, the government may increase the fuel ethanol requirements. Many people are thinking $5 per bushel corn will seem like a good deal in the fall.

Then U.S. light crude for July delivery settled at $62.04 a barrel, up $1.94, the highest since Nov. 10, 2008.

The jump in crude is being attributed to a supply report by the U.S. Energy Information Agency (EIA) regarding stocks. However, EIA’s own data shows 25.6 days of crude oil stocks as of May 15, 2009. July 4, 2008 there were just 19.1 days.

Crude tends to be heavily influenced by changes in the stock market and the value of the U.S. Dollar compared with other currencies. The market has risen and the dollar has fallen.

The White House “comment line”, where you can speak to a live person is 202-456-1111. Time to call.

Comments

I would encourage readers to add comments. Click on the end of posts on the word “comments.”

Logical

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The time when critical thinking is most important is when something sounds logical. The dairy “checkoff”, or as the proponents like to call it dairy promotion, a deduction from farm milk checks to encourage increased consumption of milk through advertising and promotion is an example of something which sounds good.

Has it worked? By all appearances, no.

Promoters base the case for the checkoff program upon presuppositions which are not provable but are assumed as true.

However, the money rolls in. And now, USDA has proposed rules for assessing imports dairy products. See today’s Federal Register http://frwebgate4.access.gpo.gov/cgi-bin/PDFgate.cgi?WAISdocID=777113406262+9+2+0&WAISaction=retrieve

Imported products will be assessed at a rate of $0.075 per hundredweight equivalent. According to the listing dairy powders, such as MPCs and caseins will be included.

Talk about an enforcement nightmare!

Two NASS Reports

Today, May 18, 2009 USDA National Agricultural Statistical Service (NASS),released two reports http://www.nass.usda.gov/. The one most people in dairy are concerned with is milk production for the month of April.

The data showed milk production for April, 2009 was -0.1% when compared to April 2008. What is important and remember here is there is an annual population growth of just about 1%. For the previous five years, the average increase for the month of April, year on year, was virtually 2%.

So today's milk production data report really is further confirmation of production slowing down.

However, it is important to remember this is not a precise measurement. For instance, the report shows milk cow numbers down by 3,000 cows. In order for the milk production to remain the same dairy farmers would have to have gone a little heavy on the grain scoop. With farmers struggling to pay grain bills, the idea of feeding more grain is more than a little hard to believe.

The second report issued today is "Crop Progress." Here the problem with report is simple average. For the 18 lead corn states, the simple average reports that 62% of the corn has been planted. However Illinois is the second corn state and only 20% of the Illinois crop has been planted and just 7% has emerged.

One hardly needs a crystal ball to predict grain prices will be rising for dairy farmers.

New BSE case in Canada

On Friday, May 15, 2009, the Canadian Food Inspection Agency (CFIA) announced a new case of bovine spongiform encephalopathy (BSE) – commonly known as mad-cow disease. Since 2003, there have been 17 cases of BSE detected in cattle born in Canada. An additional cow imported from the United Kingdom to Canada also developed BSE.

“The BSE Inquiry Report, published in October 2000, concluded that the development of the BSE epidemic resulted from the use of infectious meat and bone meal (MBM) in cattle feed.” according to United Kingdom’s Department for Environment Food and Rural Affairs (DEFRA). See: http://www.defra.gov.uk/animalh/bse/controls-eradication/causes.html which also has a link to the official UK investigation.

There are many who, probably legitimately, are concerned about safety. However, there is a deeper concern. For over 8,000 years the cow has been a friend and ally of humans. By this point in time there should be some respect for the cow. No cow should be fed something she would not under normal circumstance eat.

Why is this done? Making the cow an involuntary cannibal is done because farmers have been driven to economic desperation, even when milk prices seem normal.

Trades on the CME

This past week, May 11 – 15, 2009 the number of loads of both block and barrel Cheddar traded on the Chicago Mercantile Exchange was impressive. A total of 58 loads of blocks and 41 loads of barrels were traded.

On the old National Cheese Exchange, there were usually about 25 loads traded a week. An exception to that was the fourth week of October 1996 when a huge and successful effort was made to drive down the price of cheese – and, of course, farm milk.

To add a little perspective, in 2006,for the entire year,there were only 92 loads of block Cheddar traded.

Usually, when a large number of loads are traded, the intent is to drive down, or hold down the price.

A key feature of the recent world economic downturn was the lack of transparency. Naturally, the key players know who is trading. There is no reason other than to provide a smokescreen for the players that everyone is not made aware of who is driving the price down.

Mailbox Price

February “mailbox prices” for farm milk are out. Mailbox prices are the amount per hundredweight after adding bonuses and subtracting deductions in the farm milk check. Within the federal milk market order system, the fall from February 2008 ranged from $14.97 in Florida to $10.03 in New Mexico. The average mailbox price for all federal orders was $11.61 in February 2009 compared with $19.03 in February 2008.

For California the mailbox price was $9.80 versus $17.05 in February 2008.

Congress, in the 2008 Farm Bill was proud as could be for providing a “safety net” of $9.90 per hundredweight. Since, the Farm Bill changed the name to “dairy product” price support; Congress had no intent of actually putting a safety net under farm milk prices.

Notice though, with the MILC program none of the “big guys” in dairy processing have had to go to Washington DC for handouts.

PPI

The Bureau of Labor Statistics (BLS) publishes several price reports monthly. Today, May 14, 2009 the Producer Price Index (PPI) was released. There is data for farm level and data for the processor level.

Today’s news release by BLS is interesting. BLS states, “Among finished goods, prices for consumer foods rose 1.5 percent in April following a 0.7-percent decrease in the previous month.”

Although natural cheese fell .1 on the index which is based the period 1982 – 84 = 100, dairy products rose from 153.1 to 153.8.

Naturally, processors do have a voice in what is charged to their customers. Farmers, on the on the other hand are at the mercy of a handful of powerful players since parity was eliminated in the early days of the Reagan administration.

Cause for Alarm

On May 12, 2009 the USDA released their latest World Agricultural Supply and Demand Estimate (WASDE). http://www.usda.gov/oce/commodity/wasde/latest.pdf

Farm milk price “is forecast to average $11.85 to $12.35 per cwt.” for 2009. Then, “The 2010 all milk price is forecast at $14.70 to $15.70 per cwt.”

USDA ERS publishes monthly “Costs and Returns” for milk. http://www.ers.usda.gov/Data/CostsAndReturns/testpick.htm#milkproduction

The latest “operating costs” average for the 23 lead dairy states is $15.41 per hundredweight. I think labor really should be a part of “operating costs” and if labor is added, the total out of pocket is $17.23 per hundredweight.

If USDA knows national milk production costs, for “cash costs” are higher than the milk price they are projecting for a two year period what do they think the likely outcome will be?

Getting Data Straight

USDA is their calculations of the amount of milk used in America do not count imported dry dairy proteins, such as milk protein concentrate (MPC) of caseins. Caseins are the main protein found in milk. Should they be counted? Well, it takes milk to produce those products.

I have not done the calculations for March because the import data just came out today. However, for January and February 2009, the amount of milk required to produce the imported caseins and MPCs, would amount to over 7% of U.S. production.

The January through March trade data presents an interesting picture. There is a negative trade balance of -$167.1 million dollars.

In each month of this year, we imported casein from India. It seems as if it is not enough to tech jobs and telemarketing taken over by India, but why dairy?

Before blaming India, remember, it is American executives and not Indian national making these decisions.

Broken System

Trading at the Chicago Mercantile Exchange (CME) of block Cheddar accounts for all the price volatility of both farm milk and wholesale cheese. In order for anyone to think this is the market at work, one would have to believe that when a farmer buys seed and fertilizer, the processor also buys something of equal costs.

Capitalism is based upon costs plus a profit equals selling price. There is no way to have two segments in the supply chain taking price signals from one source – the CME.

The pricing system is broken.

I've started this blog for several reasons. Most pressing is the fact that never in anyone's lifetime has dairy farming seen such financial hardship.

Most of the leading experts will attribute the low farm milk prices of 2009 to a simple matter of economics supply and demand.

In the 1940 USDA Yearbook of Agriculture in an essay entitled “Beyond Economics” by M. L. Wilson, we read, "our economic problems are really moral problems." In fact, while dairy experts would have people believe dairy economics are the work of some vast, infallible supercomputer, dairy economics are the results of choices made by very few people.

The real question and the most important one, is to what end are these choices made. Mere common sense will tell you America was a better country when there were more dairy farmers. The loss of dairy farms and dairy farmers is an unnecessary contemporary tragedy.

Progress is not a simple change. Progress is movement in a desired direction.