One Class for Manufacturing Milk?

Someone asked about one class for all manufacturing milk. Superficially, this may seem to be just fine, at least to those supporting S1645.

However, the problem we face with generating a new pricing system is the need for input from many more a sectors.

The problem with the one class approach can easily be understood by thinking of one price for all female bovines. If the price is adequate for a newly fresh cow, who would pay the same for a heifer calf?

Obviously, the whole pricing structure would break down with a one price system for either cows or milk.

Fonterra, at the end of the milk season, prorates the value of each product it has sold and then divvies up the proceeds. Fonterra is going to sell everything for waht ever it will bring.

Class III Milk

The major factor in farm milk price Cheddar cheese traded at the CME. The trading of Cheddar sets Class III farm milk.

Cheddar, officially, has a yield, officially of 10 pounds, with a maximum moisture content of 39% of 10 pounds per hundredweight. Never mind that the yields obtained through fortification are 13.7 pounds per hundredweight.

Mozzarella, on the other hand has a maximum moisture content of 60%. Therefore, if made in the traditional manner, the yield is much, much higher than Cheddar. Yet, the mozzarella maker pays the same price for the milk as the Cheddar maker.

At the time manufacturing milk was first thought up, mozzarella was virtually unknown.

So, should there be several Class III prices?

Classification of milk

There is quite a bit of discussion about how many classes of milk should be out there. This raises at least two questions. First, should farm milk price be based on the value of the product or as some say they don't care what happens to the milk after it leaves their farm as long as they get a "fair" price.

However, the farmer has a real interest in all the milk being used at the highest value.

Secondly, in the early days of milk pricing fluid milk was the product with the most value. So, one could say there has always been a relationship between the farm price and the consumer price. Well, at least until recent years.

In the most recent Dairy Market News, condensed skim solid for the Northeast are listed as, $1.20-1.30 per pound of solids. there are 8.6 pounds of skim solids per hundredweight. The April Class II skim price was $8.52.

If the condensed skim is converted to yogurt the retail value is just under $50 per hundredweight. On top of that there is still about $9 of cream wholesale.

If you put the same milk in a gallon jug, you have $36 retail value - $23 less than the same milk going to yogurt.

In the old days, the value of farm milk was based on the highest retail product and the declining shelf life of the the rest.

Perhaps, we need more not fewer classes of farm milk.

Money Rising

Yesterday the Bureau of Economic Analysis (BEA) released its "corporate profits" report. Bloomberg summarized it:

Corporate profits in the first quarter advanced to an annualized $1.393 trillion from $1.270 trillion the prior quarter. Profits in the fourth quarter were up an annualized 44.8 percent, following a 37.0 percent jump the prior quarter. Profits are after tax but without inventory valuation and capital consumption adjustments. Corporate profits are up 42.7 percent on a year-on-year basis, compared to up 51.8 percent in the fourth quarter.

At the same time unemployment is the highest it has been since the Great depression. Half of those unemployed will, according to some experts, never have another job. According to the Bureau of Labor Statistics:

Among the marginally attached, there were 1.2 million discouraged workers in
April, up by 457,000 from a year earlier. (The data are not seasonally adjusted.)
Discouraged workers are persons not currently looking for work because they be-
lieve no jobs are available for them. The remaining 1.2 million persons marginal-
ly attached to the labor force had not searched for work in the 4 weeks preceding
the survey for reasons such as school attendance or family responsibilities.

Obviously people at the top do not care.

The lesson here, and I think it is a big lesson, those who remain actually doing something are having a greater share of their efforts captured by those at the top. there is plenty of money in the market chain for a decent farm milk price.

Credit Rating

http://quicktake.morningstar.com/Stocknet/san.aspx?id=338969

Morningstar is initiating credit coverage of Dean Foods DF with a BB rating, reflecting the company's narrow economic moat and leading position as the largest processor and distributor of milk and related dairy products in the U.S. Offsetting these strengths, Dean Foods' Cash Flow Cushion is rated poor on the basis of the significant amount of term loan amortizations and repayments due over the course of next five years. In addition, we forecast that Dean Foods will need to tap the capital markets to refinance debt as it matures. Our Solvency Score is also poor because of the company's high balance sheet leverage and low interest coverage ratio.
As the largest dairy company in the U.S., Dean Foods' portfolio includes more than 50 local and regional brands, as well as private-label offerings, which are sold through retailers, food-service outlets, and educational facilities. With sales about 5 times greater than its closest competitor, Dean Foods dominates the highly fragmented dairy category. Acquisitions have contributed significantly to growth, as the firm has completed more than 40 acquisitions since 1994 and has increased revenue 37% compounded annually, from $150 million in 1994 to $11 billion in 2009. Most recently, Dean acquired Alpro, a leading European player in the branded soy-based beverage and food product market, in order to expand its scale and to extend its product portfolio.

The firm is working to improve its cost structure by eliminating redundancies, closing facilities, and streamlining distribution and production. Initial results from its efforts to improve routing technologies and sales standards are positive, as Dean has already eliminated more than 250 delivery routes and reduced the gallons of fuel used by more than 5% despite increasing the total gallons of product delivered. The firm should benefit from these efforts to streamline its cost structure, but we aren't convinced these actions will be enough to offset intense competitive pressures and continued volatility in input costs.

While Dean Foods has raised equity twice ($400 million in February 2008 and $410 million in May 2009) to repay debt, management's ill-timed decision to saddle the firm with debt to pay a $1.9 billion special dividend to shareholders in 2007 has only increased the volatility inherent in Dean's results. Beyond the risks associated with its significant leverage, consumer spending remains tight, and we are concerned that consumers who traded down to private-label dairy offerings may not trade back up to branded products when the economy improves. In addition, Dean is under significant pressure from major retailers (which are pushing their private-label offerings) and competitors (which are taking aggressive pricing actions).

Dean Foods reported total sales of $11.2 billion and EBITDA of $907 million for fiscal 2009, resulting in interest coverage of 3.6 times, a debt/cap ratio of 0.76, and leverage of 4.8 times. We forecast fiscal 2010 sales will increase 3.7% to $11.6 billion and EBITDA will increase 6.5% to $966 million. As a result, we project interest coverage of 3.2 times, a debt/cap ratio decrease to 0.72, and leverage declining to 4.3 times. On the basis of Dean's current cash balance of $48 million and our five-year cash flow generation forecast of $2.4 billion, the company will not cover total cash commitments of $4.8 billion and will need to refinance indebtedness as it matures.

Who are the traders?

Ron O'Brien has provided an opportunity to follow the trading on the CME:

Free Daily CME Spot Dairy Market Conference Call
Would you like to listen to the CME Spot Dairy Market's live without opening your checkbook?
Conference call will be live from 10:40am CST until Cash Butter wraps up. CME spot markets (Blocks - Barrels - Powder - Butter) trade between 10:45am and 11:15am CST.To listen live, Dial 1-213-289-0500. When prompted, enter the participant access code of 33139 #. During the conference call your voice will automatically be muted. Standard long distance rates apply.

Free Daily "Dairy Market Updates" via prerecorded voice messages
Would you like to know what happened in the cash Dairy markets but don't have the time to listen to the conference call? Rko2.com prerecords and delivers two separate voice messages (all under 2 minutes) directly to your phone.The first update wraps up the CME spot dairy auction as well as informs the listener as to what the commodity futures markets are doing as of 11:15 cst.The second prerecorded phone call briefly summarizes all daily trading in the Dairy, Grain, Cattle, Energy and any other related commodity futures markets. That update should reach you within minutes following the 1:15pm cst Grain market close. I must have your permission in writing, via email to ron@rko2.com along with your name and phone number to receive this service.

Free Weekly Newsletter
Titled "DairyPost". Newsletter can be found @ 7am est. every Monday on www.DairyPost.com or a copy can be sent via email or fax. To receive a copy via email, please sign up for the newsletter at the top of the www.rko2.com homepage.

This service will only provide "floor trader's" symbols. The traders trade for the same parties.

My suggestion is to keep a list which, even though the exact information on the trader is not there you will be able to see the number of traders.

This is a thin, thin market.

Mercy for Animals

There is a link traveling the Internet today of "Mercy for Animals'" undercover video of Conklin Dairy workers in Ohio. I cannot watch those things happening to animals.

However, it seems to me that we reward treating dairy cows as things. For workers on the lower end of the reward chain, what signal is being transmitted?

W.D.Hoard had a sign in his barn about respecting the cows. Dostoevsky in his famous novel "The Brothers Karamazov" wrote:

Love the animals: God has given them the rudiments of thought and joy untroubled. Do not trouble it, don't harass them, don't deprive them of their happiness, don't work against God's intent. Man, do not pride yourself on superiority to the animals; they are without sin, and you, with your greatness, defile the earth by your appearance on it, and leave the traces of your foulness after you -- alas, it is true of almost every one of us!

My question is how can people expect caring for anybody or anything when there is little reward? I know all the arguments about caring for the property called the cow. Has the trend been to have those who truly like cows, survive"? Or is it all the bottom line?

There are some serious contradictions in our system which need to be examined.

Shadowy Data

(click on image to enlarge)

Milk supply seems, in spite of all claims, to have little to do with milk price. The April 2010 milk production numbers came out and seemed to indicate more milk. What was of particular interest was the "milk per cow" data.

The "milk per cow" is a derived number, as is the number of cows. However, we are in a time period in which the numbers implied in the "milk per cow" seem to be pulled from thin air.

How much more grain would be needed to obtain those numbers? Who is paying the grain bill?

DIAC & CME

(click on image to enlarge)

If you go back to the post on Butter (May 21, 2010) a reader, Ed Maltby, perhaps, said:

As a member of the committee I can flatly deny that the CME is not part of the discussions of this committee. It is being discussed in some depth and the input is not coming just from NMPF and IDFA.

I suspect that all I am doing regarding the Dairy Industry Advisory Committee (DIAC)is calling a spade a spade.

Look at the minutes of the first meeting where the CME was "discussed in some depth":

http://www.fsa.usda.gov/Internet/FSA_File/diac_apr10_mins.pdf

The CME is mentioned a total of five times.

At line 482, "Price discovery is determined using CME futures settlement prices." This mentioned in relationship to the proposed "insurance" program. By the way, there are only two products in which a "thin" cash market is used to determine "futures" prices. One is natural gas and the other is dairy.

Then on line 515 Will Francis states correctly, well almost, that California uses the CME, rather than NASS to determine minimum farm prices. California uses a survey for NFDM because, it is obvious to anyone that almost no NFDM is traded on the CME.

On line 853 is the real smoke screen, which tells everyone the USDA is not serious about looking at the CME:

A question was asked about the affects(sic) of CME prices on producer prices. Larry Salathe, from the USDA Office of the Chief Economist responded that USDA uses prices from NASS surveys to determine minimum classified prices. Mr. Salathe stated that the Commodity Futures Trading Commission may have jurisdiction over CME spot market operations since the spot markets have effects on futures prices.

Shameful and shameless at the same time.

If you look at the above graph, (farm milk is divided by ten to give normal cheese yield) what should be obvious to anyone is the relationship of the CME to farm milk prices. There are two exceptions. The first is in 2004, when DFA ran up block price and then depooled the milk so the end result of the run-up never appeared in the farm milk check.

The second, came when the NFDM price was misreported and then after the correction rose dramatically.

The whole ball of wax constituting the problems with farm milk pricing are buried in the nearly anonymous games played at the CME.

Here's a question for the DIAC; should a corporation which has nothing, absolutely nothing to do with butter,be allowed to trade (sell) butter on the CME, which in turn sets the bf part of farm milk price.

I am not trashing the committee. I am simply saying they will never get to the bottom or reveal any new information about what all apologist for the powerful call the "market."

Time will tell but, for the moment, I say it is an outrage - plain and simple.

H.R. 5288, the Dairy Price Stabilization Act of 2010

After the post yesterday, it occurred to me that I have unintentionally failed to mention H.R. 5288, the Dairy Price Stabilization Act of 2010.

The Milk Producers Council has done much of the leg work in promoting this idea. At the opening page: http://www.milkproducerscouncil.org/ there is a great deal of information on the program.

Official Dairy Policy

Marc Heller has an interesting story http://www.watertowndailytimes.com/article/20100522/NEWS02/305229961

Nothing to do with dairy legislation gets past Congressman Collin Peterson of Minnesota. Peterson runs the House Ag committee and has been a long time hunting buddy of Gary Hanman, former(?) CEO of DFA.

Beginning at the second paragraph:

Rep. Collin C. Peterson, D-Minn., said he believes the past year's deep decline in milk prices will result in momentum for fundamental changes in dairy policy when Congress considers the five-year farm bill in 2012, as long as farm groups can find common ground and opposition from milk processors can be kept to a minimum.

Mr. Peterson outlined his expectations in an interview at his Capitol Hill office in which he also disputed widespread criticism that the dairy industry is plagued by price manipulation and discussed the role Rep. William L. Owens, D-Plattsburgh, may play on the committee, to which he was named two weeks ago.

But, here is the meat and bone of Mr Peterson's mind:

When lawmakers map out a new safety net, it will have to include a supply management system to keep milk production in check, Mr. Peterson said. That could be especially true if lawmakers follow Mr. Peterson's approach and limit any measures that steer more money to smaller farms.

"We can't be about advantaging one size farmer over the other," Mr. Peterson said. "We're not going to save the small family farm. The marketplace is going to take care of that."

What exactly would lead Mr. Peterson to the conclusion the "marketplace" is going to save the family farm? Maybe, that is not exactly what the Representative from Minnesota, where farms tend to be small, said or wanted people to think he said.

Looking at Peterson's record clearly points in the wrong direction.

Butter

Today, the "Cold Storage" numbers came out: http://usda.mannlib.cornell.edu/usda/current/ColdStor/ColdStor-05-21-2010.pdf

The "Cold Storage" numbers are down 14% from last year. You have to go back several years to find butter stocks this low.

Dairy Market News' most recent international report states:

Oceania butter markets are firm with prices trending higher. Cream supplies are tight as the end of the milk production season arrives. Traders and handlers report that stocks are in very close balance to often short of projected last season needs. Especially in New Zealand, manufacturers and handlers were hoping that the end of the milk production season would have stretched out further than it did. Due to the quicker than anticipated end to the season, traders are in communication with customers trying to fulfill contract commitments.

For that matter, Dairy Market News says organic cream is moving into conventional markets because of the severe shortage of cream.

With all of the above in mind, is anyone surprised butter fell on the CME this week? Further, there appears to be no possible connection between the main trader and butter.

The Dairy Industry Advisory Committee will be holding its next meeting in early June. http://www.fsa.usda.gov/FSA/webapp?area=about&subject=landing&topic=dia


Do not expect any serious look at the CME from the DIAC.

You're Kidding

You may have seen this idea repeatedly lately as seen at this link: http://www.cnbc.com/id/37138095

Here's the key point:

According to Pecoriello, Dean Foods [DF 10.34 -0.19 (-1.8%) ], the nation's largest dairy company by revenue, ranked at the top.

The impact of private-label's encroachment has already left its mark on Dean. The company's shares have fallen sharply since the company reported a 43 percent decline in first-quarter profit earlier this month, citing market share gains of store-branded milk for its disappointing results.

According to Dean's CEO, private-label competition is making it difficult for the company to raise prices and improve its profitability.

Any astute consumer knows the "private label" is the same as the branded product - the plant number tells you what you need to know.

Is there anyone who cannot comprehend this simple fact, stores know there is no difference. Hence, the branded milk and the store brand are priced exactly the same to the store. The main exception to this is when the container is different, which is not often.

All the media picked up the Dean excuse, because it sounded so logical. That processor margins may have dropped could be, but, the margins have nothing to do with store labeled milk.

Projections

(click on image to enlarge)

The latest "Livestock Dairy and Poultry Outlook" is available from USDA ERS at: http://www.ers.usda.gov/publications/ldp/2010/05May/ldpm191.pdf

Domestic commercial use is expected to increase this year. A robust 1.2 percent
increase is expected in commercial use on a fats basis while growth in use on a
skims-solids basis is projected at a slight 0.4 percent rise. Stocks should tighten as use increases. Despite the improved demand outlook, prospects are for only modest
price increases in 2011.

Cheese prices are forecast to trend higher both this year and next, averaging $1.480
to $1.530 per pound this year and $1.505 to 1.605 per pound in 2011. Higher prices
are also expected for NDM and whey for the balance of 2010 and into 2011. NDM
prices are forecast to average between $1.180 and $1.220 per pound in 2010 and to
climb to average $1.210 to $1.280 per pound next year. Strong exports of whey
products will raise prices to average 36.5 to 39.5 cents per pound this year, and they will rise slightly to average 37.5 to 40.5 cents per pound in 2011. Butter counters the trend; while prices will average higher this year compared with last year, $1.445 to $1.525 per pound, 2011 prices are forecast lower at $1.390 to $1.520 per pound. Butter prices are forecast lower next year because the higher butter prices forecast for the second half of 2010 are not expected to be repeated next year.

The cheese price will have to rise dramatically to meet the expectations of the report. The CME block price has averaged $1.41 per pound at the same time the international (New Zealand) price has averaged $1.81 per pound.

Those "market forces" are so very tricky.

Risk

We have the risk for "market forces", and, of course, the risk from raw milk consumption, depending upon your math ability.

The is a new report by a presidential commission, appointed by George W., titled "REDUCING ENVIRONMENTAL CANCER RISK"

On page ii the report states, "Only a few hundred of the more than 80,000 chemicals in use in the United States have been tested for safety."

Many chemicals used are not exotic:

By applying nitrogen fertilizers, burning fossil fuels, and replacing natural vegetation with nitrogen-fixing crops, humans have doubled the rate of nitrogen deposition onto land over the past 50 years.237 Nitrogen fertilizers may increase cancer risk due to the breakdown of nitrogen by digestive enzymes. Most of the nitrogen in fertilizers is converted to nitrate that seeps into groundwater. Nitrate levels in groundwater under agricultural areas can be several- to 100-fold higher than levels under natural vegetation.238 Rural populations in agricultural areas may have a much greater likelihood of elevated nitrate exposures compared with those using public water supplies. Nitrate levels also can be high in streams and rivers due to runoff of nitrogen fertilizer from agricultural fields. Almost all public water supplies, however, have nitrate levels below the EPA Maximum Contaminant Level (MCL) of 10 mg/L.

Ingesting contaminated drinking water is the primary route of human exposure to nitrate from nitrogen fertilizers.239 Nitrates in drinking water are important because the most likely known mechanism for human cancer related to nitrate is the body’s formation of N-nitroso compounds (NOC), which have been shown to cause tumors at multiple organ sites in every animal species tested, including neurological system cancers following transplacental exposure

What this means is anyone's guess. However, how can the findings in this report be essentially ignored and at the same time have people claiming raw milk consumption is a huge risk?

Report available at: http://deainfo.nci.nih.gov/advisory/pcp/pcp08-09rpt/PCP_Report_08-09_508.pdf

Panic Plotted

(click on image to enlarge)

If the price of farm milk were stable there would be on need for "risk management." In 2008 things looked pretty good. Then something hit the fan and, by all appearances, things seemed to be getting worse. Panic set in. Naturally, there was a lot of that dreaded free advise about how to best deal with the situation.

Lock Step Advice

(click on image to enlarge)


There is something disjointed about advice which cannot be taken by those giving the advice.

At: http://www.cpdmp.cornell.edu/

in the upper left is a link to a series of presentation given in February. The conference was titled:Finding A Price And Living With It. None of the major presenters will ever need "risk management" or for that matter try in any way to make it milking cows.

Andy Novakovic gave a presentation on price transmission. He spend four pages of the power point addressing New Yorks"s "Price Gouging" law. Nowhere does he mention, the law has never been enforced.

Novakovic is "running" the Dairy Industry Advisory Committee (DIAC). Novakovics presentation gives perhaps a glimpse of what can be expected from the DIAC.

No where in the February program was there any discussion of the "thin" market trading at the CME. The question is not likely to be given any time with the DIAC/

The hopw is to keep the status quo in place so those riders of the great dairy train can continue unmolested by uncomfortable question. Too bad.

Cause of Volatility

(click on image to enlarge)




Here's a link to an article on volatility: http://future.aae.wisc.edu/alliance/2012/brief_1.pdf

the article begins:

Month to month changes in milk prices have increased dramatically in recent years. Concern over volatility includes not only the month to month price changes, but also the wider gaps between price peaks and troughs. In the 1970s, the largest monthly increase in all milk prices was $0.68/cwt in September, 1973. The largest decline was $-0.58/cwt in May, 1974. The Nixon price freeze of that decade, a short-term governmental policy to combat inflation, influenced these results. Over the decade,
the highest monthly milk price was $12.90/cwt while the low was $5.37/cwt, a difference of $7.53. In the 1980s, the largest monthly increase in milk prices of $0.80/cwt occurred in September, October and November, 1989 while the largest monthly decline of $-0.50/cwt occurred in March, 1989. The high monthly milk price during the 1980s was $16.00/cwt while the low was $11.30/cwt, a difference of $4.70.

Keep in mind, FAPRI advises congress.

Then in Cheese Market News April 30, 2010 Connie Tipton of IDFA said, "“New tools to manage milk price volatility are necessary for the entire industry, but they must work with markets instead of against them.” She then goes on to warn against the government interfering.

About two months earlier, John Umhoefer, executive director of the Wisconsin Cheese Makers Association, worried, "What tools can the dairy industry employ to manage volatility without moving back to an industry whose product line fits in an 18-inch X 10- inch milkbox?"

The people at Fapri, University of Wisconsin, Connie Tipton and John Umhoefer all collectively or singularly, have the ability to know we do not have a "market."

What we have, and there is no denying, is an oligarchy playing games on the CME.

The real cause of farm milk price volatility is the willingness of the USDA and California to attach its formula to those games. USDA hides behind the NASS survey which even the GAO called a redundancy - nice word for saying it really is the game at the CME.

As can be seen in the above graph, during the 30's, a period of "market" forces, there was no volatility. Farm milk price effectively fell under Reagan. Volatility came in just before milk "futures" were introduced on the CME.

There is an old Chinese proverb which says, "The beginning of wisdom is to call things by their real name." Volatility is government sanctioned plunder.

Flat World

This is the most recent, in part, report from Dairy Market News on nonfat dry milk:

MD_DA640
DA
MD DA640 Nonfat Dry Milk - West

MADISON, WI. May 13, 2010 (REPORT 19)

NONFAT DRY MILK - WEST

Low/medium heat nonfat dry milk prices in the Western region
are continuing to climb higher. The market tone remains
firm. Buying interest is becoming more mixed. Some domestic
buyers have coverage and have slowed down on buying extra
NDM. Export interest is fair to good and clearing product at
higher prices up to the top end of the range. Volumes are
variable and the pricing levels are below other world pricing
indices. The stronger US dollar is making US sourced NDM
more expensive. NDM production in the West is seasonally
active. Stocks are often light to moderate with most being
committed for nearby sales.

And here is a report on the California budget: http://www.reuters.com/article/idUSTRE64D6JZ20100514?type=politicsNews

The movie star turned governor said California, the most populous U.S. state with an economy that would be the eighth largest in the world, faced the same dilemma of dismal growth and budget gaps as Greece, Spain and Ireland.

The U.S. dollar is rising because of Greece and the Euro. What will it take to get the value of U.S. dairy farm milk checks to rise.

Cheese Numbers

Click on images to enlarge)

Take a look at the above graphs. What is wrong?

As can be seen, exports of cheese increased 32.5%. According to USDA, 2.3% more cheese was produced in the first three months of 2010 vs. 2009. Also, according to USDA there was 9% more cheese in storage, at the end of March, 2010.

Somehow, I don't think the problem boils down to a math problem.

Pay no attention to the price. As some people delight in saying, milk is worthless at the farm.

Save C V ?

(click on image to enlarge)

A recent article by Marc Heller: http://www.watertowndailytimes.com/article/20100509/NEWS02/305099964
begins:

"Sen. Charles E. Schumer has called on the Justice Department to leave intact the protections that dairy farmers' bargaining cooperatives enjoy from antitrust laws."

(more at link)

All of this was precipitated by a remark Assistant AG Christine Varney made in Vermont regarding the Capper Volstead Act. Most all the cooperatives are very, very worried. While dairy cooperatives have formed joint ventures and partnerships, the very crux of Capper Volstead has been forgotten.

The Act specifically states antitrust exemption shall apply "Provided, however, That such associations are operated for the mutual benefit of the members."

If you look at the above graph, you will see that New York dairy farmers, which is dominated by Dairy Farmers of America (DFA)and subsets DMS and Dairylea have received less in their milk checks than have dairy farmers in Wisconsin.

Keep in mind, NY has a nearly 50% class I (the highest price) utilization, while Wisconsin, which has something like a 12% class I utilization. NY's milk checks, by all logic, should be higher than Wisconsin's.

The reason is DFA's monopoly grip and side deals with processors.

Of course, Senator Schumer's position could hardly be influenced by DFA's PAC donation to the Senator.

Northeast Case

http://www.addisonindependent.com/201005dairy-giants-accused-monopoly

ADDISON COUNTY — Dairy farmers in the Northeast are training their sights on the massive Dairy Farmers of America (DFA) co-op and processing giant Dean Foods in an effort to prove that price fixing and illegal monopolization of the dairy industry has kept milk prices artificially low for struggling producers.

These farmers’ action represents the latest in a series of lawsuits around the country alleging that a lack of competition in the dairy processing industry has resulted in record profits for milk processors at the cost of lower prices for farmers.

Lawyers from Burlington firm Gravel and Shea alongside the Washington, D.C.-based Cohen Milstein firm were slated to make the case for the antitrust class-action suit against four milk processors — DFA, Dean Foods, Dairy Marketing Services (DMS) and HP Hood — in a hearing in U.S. District Court in Burlington on May 6. The defendants are pushing a motion to dismiss the case altogether.

More at link.

The Judge, Christina Reiss, later on May 6, 2010 issued an order for "discovery" with a very - as courts tend to go - fast schedule.

Win or not, each case reveals more about the dairy scam. This latest, at this point, seems hopeful.

There were dairy farmers in court on the 6th, that has to help the newly appointed judge.

More Dean Thoughts

(click on image to enlarge)

On the S & P 500 Index only two stock failed to gain today. Moody's is about to receive a letter (kind of worse than going to the principal's office), from the SEC and Dean Foods, Inc.

Dean is blaming pressure from the retailers. But, Dean also states they gained sales while other processors lost sales. Hard to connect those two facts.

Actually, beginning from the beginning, with what was then known a Suiza Fluid Group, deals were made. Suiza, along with their partner, DFA paid $50 to Stop & Shop supermarket to close its fluid processing plant. Part of the deal was to provide Stop & Shop with cheap milk. That deal continues as can be seen but the above table. Stop and Shop pays $0.08 a gallon less for the milk from the present Dean Foods ( store brand and Garelick).

Dean also got some pretty sweet deals from DFA, some of which ended when Dean in the legacy Dean plants stopped sourcing milk from DFA.

Dean Foods

http://deanfoods.com/our-company/news/press-release.aspx?StoryID=1424465

Dean Foods stock is falling - maybe free falling. Dean blames pressure from retailers - who knows?

The numers in the above link do not add up:

First Quarter 2010 Fresh Dairy Direct-Morningstar Detail
--------------------------------------------------------



Q1 2010 Y/Y
$millions Change
--------- ------

Fluid Milk Volume -- +3.2%

Operating Income $127.0 -41%

Class I Mover $14.74/cwt. +23%

Class II Butterfat $1.48/lb. +31%

More to come.

RAW Milk

According to:

http://www.foodsystemsinsider.com/Floodgates-open-to-raw-milk/2010-05-06/Article_FSI.aspx?oid=1067785&fid=MAY_2010_1ST_FRIDAY

The story is headlined: Floodgates open to raw milk?

Proponents of unpasteurized milk hope a victory in "America's Dairyland" will encourage other states to legalize sales and make it more available nationwide.

Wisconsin Gov. Jim Doyle has indicated he will sign a bill the Legislature passed late last month allowing farms to sell raw milk directly to consumers through 2011. Although the bill is limited in scope, advocates who've worked for years promoting raw milk say legalization in Wisconsin could lead to broader acceptance nationwide.

Needless to say, many are predicting dire consequences if the consumer is allowed to purchase and consume raw milk.

To put that in perspective - one American is killed by a medically induced accident or infection every six minutes. You could graduate a clock fine enough to measure how often an American dies from the consumption of raw milk.

Maybe the government should tax raw milk, like cigarettes, and have a law against under age purchase of raw milk and the dairy farm economy would take off like big tobacco.

Cash Cow?

http://www.ibj.com/lilly-hopes-elanco-becomes-a-cash-cow/PARAMS/article/19823

Lilly hopes Elanco unit becomes a cash cow

May 8, 2010

As Jeff Simmons, president of Elanco Animal Health, ambles to the back corner of a Kroger supermarket in Greenfield, he stops halfway between the milk and the cheese.

On each glass door of the milk refrigerators, a multicolored sign stands out sharply against the white jugs behind them: “Our farmers pledge not to treat their cows with the artificial growth hormone rbST.” The signs, now familiar to shoppers, are a direct attack against Elanco—the Greenfield-based maker of rbST.

But no such sign appears amid the blocks, bags and cartons of cheese—meaning those products are made with milk from cows given rbST.

Simmons is making a huge bet the cheese will win over the milk. He predicts retailers and consumers—especially in emerging markets—will opt for food made cheaper by using Elanco’s productivity-enhancing drugs over the pricier organic and locally grown products made without them. But, as a hedge, Simmons has Elanco developing products to help organic farmers, too.

Indianapolis-based Eli Lilly and Co. needs Simmons to cash both bets.

Lilly is counting on rapid growth from its hitherto sleepy Elanco unit to help offset some of the $10 billion in current revenue it stands to lose over the next five years as patents on its best-selling drugs expire.

Lilly CEO John Lechleiter is high on Simmons. Just before Simmons took the top job at Elanco in January 2008, Lechleiter predicted great things.

“More energy than I’ve had hot meals,” Lechleiter said of Simmons, a 42-year-old father of six.

But the heat on Simmons and his Elanco compatriots rises every day that Lilly goes without producing a new breakthrough in its human medicines. Lilly has launched only one new drug in the past five years, Effient, which is so far producing minuscule sales.

“Five years ago, [Lilly] people said, ‘Don’t go to Elanco because they’re going to get sold,’” Simmons told IBJ. But today, he added, “We know the limelight is on us.”

Indeed, Lilly is investing more resources in animal health than ever before. On May 27, Elanco will stage a grand opening of its $25 million, 135,000-square-foot headquarters in Greenfield—home to Elanco’s 350 local employees and a symbol of its growing importance within Lilly.

Lilly has made a string of animal health acquisitions in the past three years. On Simmons’ recommendation, it bought rbST, also known as Posilac, for $300 million from Monsanto Co. Most recently, Lilly acquired the European rights to animal health products from New York-based rival Pfizer Inc.

In 2007, Lilly launched a fast-growing pet health business, which sells medicines for dogs to treat fleas and separation anxiety.

Elanco relies on acquisitions and Lilly’s laboratories to discover animal drugs. But it has no trouble finding new ones. From 2002 to 2008, Elanco launched 15 products—more than any of its competitors, according to statistics from United Kingdom-based consulting firm Vetnosis Inc. Simmons said Elanco has four dozen products in development and could launch as many as five this year.

Almost none of the Wall Street analysts following Lilly pay much attention to Elanco, since it accounts for less than 6 percent of the company’s sales. But they do expect it to grow nicely over the next few years—from $1.2 billion to as much as $1.8 billion by 2015.

Elanco’s sales rank it fifth in the $19-billion-a-year global animal health business. However, it will be dwarfed by the $5-billion-a-year giant joint venture being formed by France-based Sanofi-aventis and New Jersey-based Merck & Co. Inc.

Those companies are going after the same opportunities as Elanco: Rising world population and burgeoning middle classes in Asia are expected to double the world’s cattle population and global meat consumption by 2050.

“Animal health is a growth driver [albeit not high growth],” wrote analyst Les Funtleyder of Miller Tabak & Co. in a note to investors, “due to an increase in companion animals as well as a move to a more protein-based diet in emerging economies.”

Consumer company

One way Elanco is trying to grow faster than its industry is by turning itself from a farm-focused company to one focused on the actual steaks, chickens, eggs, milk and cheese consumers eat.

“We used to say, ‘We can help you [farmers] need one less pound of corn per hundred head of cattle,’” Simmons said while perusing the meat cases at Kroger with an IBJ reporter. “No, no, no. We’ve converted our business. We are a people business.”

The next day, Simmons was scheduled to meet with the president of Wal-Mart Stores Inc.—the biggest food retailer in the country.

It’s a big shift in mind-set for the 56-year-old company. Until recently, Elanco’s primary focus has been on feed additives and antibiotics for farm animals. For instance, it uses a compound called ractopamine to boost muscle formation in pigs, beef cattle and turkeys.

It’s also a big shift for Simmons. He strolled through Kroger in typical attire for a corporate executive—black suit and BlackBerry—which he had to turn off after getting three calls in half an hour. But Simmons was raised in a farm family in upstate New York. He has owned his own vineyards since he was 9 years old.

Simmons is a believer in the superiority of technology-driven farming methods—what critics call factory farming—even though he also has steered Elanco to begin to develop products for organic farmers.

He once took his mother-in-law to a “chicken house” to cure her of eating only free-range chickens. He grabbed two chickens—one free-range and one not—pulled their heads off and cut them open with a jack knife. The intestine of the free-range chicken was filled with stones, mud and “lots of enteritis.” The one fed chicken feed in a pen had an intestine that was “pure and almost looked like meat,” Simmons said.

“She was convinced,” Simmons said. “And she has convinced over the next 10 years probably 150 to 200 people never to eat free-range chickens.”

Sales pitch

Simmons has asked his Elanco team to think about their business in terms of how much money Elanco’s animal drugs save consumers on each kind of product in the grocery store. And that’s his message to the president of Wal-Mart and other retailers, too.

“We save 45 cents on every pound of beef, 11 cents on every gallon of milk, 22 cents on every package of shredded cheese,” Simmons said.

Simmons also is taking that message around the world—where many countries ban Elanco’s products—including rbST and ractopamine—but where less-efficient agriculture means consumers spend far higher percentages of their income on food than Americans do.

Simmons says he’s getting traction. Uruguay recently approved Elanco’s growth hormone for dairy cows. And India has put rbST into a development trial that Elanco hopes leads to its approval in the world’s largest milk-producing country.

In Uruguay, it takes more than 2-1/2 cows to produce as much milk as one cow in the United States, according to statistics from the 2009 World Dairy Situation report, made available on the Web site of the International Dairy Federation. In India, it takes more than 7-1/2 cows to equal the production of one American cow.

Other foreign markets where Elanco is trying to introduce rbST and some of its other products include Argentina, Brazil, Russia and, of course, China.

“We never bought it with the assumption that it was going to come back in this market,” Simmons said of rbST, acknowledging its controversy here and in Europe. “But China, its government, is trying to triple its citizens’ daily intake of milk. They need 36 million more dairy cows. They said, ‘There’s no way we can do this.’”

Courting controversy

As Elanco becomes a consumer-focused business, it’s also a bigger target for criticism and the kind of controversy formerly reserved only for Lilly’s psychiatric drugs.

Some question the safety of Elanco’s products or the long-term health impact they have on consumers. In February, the liberal Web site CounterPunch.org published a story citing a 2002 warning letter from the U.S. Food and Drug Administration about ractopamine, which said Elanco had failed to disclose instances where animals had adverse reactions to the drug.

CounterPunch called ractopamine’s muscle-boosting effects “a macabre version of economies of scale.” Elanco sells ractopamine under the names Paylean, Optaflexx and Topmax.

Some researchers claim that overuse of ractopamine in pigs has contributed to higher numbers of pigs that can’t walk. But whatever the FDA’s concerns, they’ve been satisfied. The agency has continued to approve new products that have ractopamine in them—including one in February.

Jill Richardson, a food activist and author of the 2009 book “Recipe for America,” recently attacked a white paper written by Simmons, which called for retailers to refrain from marketing products, such as milk, by trumpeting that they don’t contain rbST, also known as rbGH, or other animal health products.

“They call for two things: technology and choice,” Richardson wrote of Simmons’ white paper, on her blog La Vida Locavore. “Translation: Legalize our products please. We have technology, and consumers should be able to choose whether or not they buy foods that were produced using our technology. But please don’t actually inform the consumers about that or label your foods ‘No rbGH.’ Just feed it to them without a label and they won’t know the difference.”

Simmons is happy to spar with critics of Elanco and the “factory farms” its antibiotics, insecticides and growth hormones make possible.

He’s swapped e-mails with one of the producers of “Food Inc.,” the 2009 documentary that lambasted industrial agriculture. He’s done a point-counterpoint debate with Michael Pollan, the New York Times Magazine writer who has become the most famous critic of factory farms and food products—as opposed to simple food, which our great-great-grandmothers would have recognized.

“I go to the heart of the storm,” Simmons said. His main counterargument comes from a prediction by the United Nations: The world’s growing population will require twice as much food in 40 years but, because of a land shortage, 70 percent of that food must come from efficiency-enhancing technologies.

Simmons even says he’s thankful for the controversy. As he stood between the milk and cheese cases at Kroger, he said the criticism Elanco has faced—especially over rbST—has forced it to get smarter about how its business affects stores and their shoppers.

“We are twice the company today in retail than two years ago,” he said. “We know food policy, we know retailer policy, we know state labeling. Our retailer team is twice the size. We’re going to be a better company for it.”•

USITC

Docket No: 2724
Document Type: 332 Request
Filed By: Max Baucus and Charles E. Grassley
Firm/Org: United States Senate
Behalf Of: United States Senate
Date Received: April 1, 2010
Confidential: No

Senators Baucus and Grassley have requested USITC conduct an investigation of agricultural trade with China:

Commodity: Agricultural Trade


Country: China




Description: Letter to the Honorable Shara L. Aranoff, Chairman, USITC; requesting that the Commission conduct an investigation under section 332(g) of the Tariff Act of 1930 regarding competitive factors affecting agricultural trade between China and the United States. The report should cover the period 2005-2009, or the period 2005 to the latest year for which data are available.

La La

http://www.earthtimes.org/articles/show/research-and-markets-mexico-agribusiness-report-q2-2010,1286689.shtml

While many Mexican companies were suffering over the past year, the country's largest dairy company, Grupo Lala, took the opportunity of falling asset prices to go on a buying spree north of the border. The Coahuila-based dairy splashed out on three US dairy companies, Promised Land Dairy, Farmland Dairies and National Dairy. The most significant purchase, Dallas-based National Dairy, was bought for a reported US$435mn from its former parent company, co-operative Dairy Farmers of America. National Dairy gives Lala control of 18 dairy-processing facilities in the US as well as number of well known regional brands. The acquisitions followed the purchase of Nebraska-based Wells Dairy in 2008. The acquisitions make Lala the second largest dairy company in the US and the fifth biggest in the world. BMI believe the purchases will prove to be astute moves. Buying at a time when dairy prices were crashing and dairies across the country were losing money, the purchases came cheap relative to what they would have cost a year or more earlier. BMI believe Lala will now be in an excellent position to benefit from the expected continuing recovery in the world dairy market in coming years.

Theory on China Dairy Ban

(click on images to enlarge)

It seems to me that if China out of the clear blue placed a ban on the importation of American dairy products, a letter outlining the reason(s) would be easy to obtain. Not so. No one I know has seen a letter.

So, my thoughts have turned to why no letter is readily available? My main suspicion is now, some U.S. agency goofed in responding to a request from China, within a broad time frame.

The images above, are from another country but, I am going to guess the U.S. got a similar letter and some agency failed to act. Judging from the request to another country, I would guess, the failure lies with USDA. There are enough people at USDA who have my email address and they can just send me a copy of the letter from China, if they wish.

Northeast Case

There will be a hearing tomorrow on the NE case. It might be good to have some farmers show up:

1:00pm
Judge Reiss
Burlington - 542 Courtroom
ALLEN et al v. DIARY FARMERS et al
5:09-CV-230, Motions to Dismiss
Manitsky/Brown/Johnson/Pierson/Abrams/Commins/Foix/Minerva/Miller/Hardy/Kuney/Miller/Feeney
Denis/Frangie/Friedman/Sartore/Dean, Jr./Lerner/Rosenbaum/McKnight

This will be mostly a formality - an important formality.

Fonterra SMP Auction Price

The latest Fonterra Internet auction was held today. The average whole milk powder was down 1% while the average anhydrous (butter oil)was up 4%.

Skim milk powder (SMP) average was down 1.4%. Actually, nearby (July 2010)contracts were down but, August through October 2010 were up 1.8% at $1.81 per pound.

For comparison, the most recent NASS price (April 30, 2010) for NFDM was $1.18 per pound.

The Signs Are There

(click on image to enlarge)

The above graph show mozzarella production for the first three months in a five year period, 2006 -20010.

Mozzarella is made on order is is a good indicator of the market for farm milk.

Comparing March of 2010 with March of 2008, mozzarella production has increased 4.9%, whereas milk production has only increased 7/10th of a percent in the same month.

The average farm "all milk" price in 2008, for the first three months was $19.23. In the same period for 2010 the "all milk" price is $15.60 - a 19% reduction.

Letter to DFA

(Click on images to enlarge)

Above is a letter written by Gary Genske to Rick Smith of DFA. The substance of the letter to go to many "leaders" in the dairy industry.

Telling Trade Data

(click on image to enlarge)

Note the fall off in "American" cheese imports. In this case "American means Cheddar types such as Colby and Jack to name a couple.

The above table shows imports through March. USITC trade data base only shows through February. Nevertheless, it is interesting to note that imports of cheese from New Zealand have fallen by 99.5% (Jan - Feb 09 vs 10).

A representative from Fonterra was asked why imports of cheese had dropped from NZ. The obvious and only answer, there is no money to be made exporting to the U.S. becasue cheese prices are lower than world prices. Bingo!