Orderly Marketing

A major point of the federal milk market orders is the idea of "orderly marketing", which has come to be interpreted as meaning the milk is on the shelves.

This was not always so. In a famous 1939 case, known as "Rock Royal Creamery", the Supreme court opinion states:

By Section 1, 7 U.S.C.A. § 601, it is declared that 'the disruption of the orderly exchange of commodities in interstate commerce impairs the purchasing power of farmers' thus destroying the value of agricultural assets to the detriment of the national public interest. This interference is declared to 'burden and obstruct the normal channels of interstate commerce.' By Section 2, 7 U.S.C.A. § 602, it is declared to be the policy of Congress, through the exercise of the powers conferred upon the Secretary of Agriculture, 'to establish and maintain such orderly marketing conditions for agricultural commodities in interstate commerce as will establish prices to farmers at a level that will give agricultural commodities a purchasing power with respect to articles that farmers buy, equivalent to the purchasing power of agricultural commodities in the base period.

Has the destruction of dairy farm assets been a "detriment of the national public interest"? Milk is still on the shelves but, is that all that is important?

No Money

Here's a story:

http://www.wcax.com/Global/story.asp?S=12690916

http://www.burlingtonfreepress.com/article/20100623/NEWS02/100622011/UVM-to-sell-cow-herd

The University of Vermont is the first, I think, land-grant to sell its dairy herd. Problem is there is not enough money in the budget to keep the herd.

Here's the budget: http://www.uvm.edu/~ofabweb/FY10%20buddoc.pdf

Is there no market for milk? Are the prices not high enough? Where is Senator Leahy?

Dean Foods Statement

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Dean Foods has submitted a statement to U.S. Department of Justice:

http://www.deanfoods.com/media/39288/dean%20foods%20statement%2006-10.pdf

Dean is a fluid milk processor and when you consider how much milk goes into fluid Dean is admitting to a market share of about 50% nationally. Dean also claims to pay premiums over the regulated price. When DFA began its full supply agreement with Dean, premiums all but disappeared.

Dean states:

As Jerry Kozak, president and CEO of the National Milk Producers Federation,stated, “A worldwide decline in dairy demand, owing to the worst economic downturn in 75 years, is at the heart of the price crunch on the farm.” These global economic forces were exacerbated by an antiquated U.S. pricing system built in the 1930s that was not designed to deal with the complexity of modern global markets and therefore no longer serves the needs of U.S. dairy farmers.

Just above the Kozak quote is a misleading graph from another high paid "friend" of the American dairy farmer U.S. Dairy Export Council. The graph is misleading becuase it is based on "milk solids." Lactose and whey are very big dairy "milk solids" exports and that is not the same as milk.

Read the whole statement and draw your own conclusions.

NFDM Prices

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Hard to think that DairyAmerica is higher than NASS, which was listed at $1.31 per pound for the week ending June 25, 2010. However, there are some reports of NFDM being sold from sources in the East for $1.25 per pound.

To put that into context, prices out of NZ are $1.47 per pound.

Politics of Food

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While many stick to the idea of an "invisible hand" operating in the market, the truth is, the invisible, or perhaps, more correctly,the hidden hand is operating in the political system.

The above graph takes data from USDA's Economic Research Service (ERS)"Marketing Bill" information.

As can be seen,something happened beginning with Reagan. Corporate profits took off. Tax rates on those profits fell.

The Census Bureau has a significant amount of information on income inequality. Looking at incomes in five groups, in constant 2008 dollars, those in the bottom group, the working poor basically stood still from 1980 to 2006. The next two groups faired about the same. However, the to fifth gained almost 50 % in income.

John Rawls wrote "A Theory of Justice" in 1971. Rawls talked about an "original position", which meant if the world were to be reorganized tomorrow, everyone would have an equal interest in justice, including economic justice. As it is there are some who have a vested interest in things being unfair.

Food Miles

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USDA Economic Research Service (ERA) has just published a report on the food marking chain. The report is available at: http://www.ers.usda.gov/Publications/ERR99/ERR99.pdf

I have hardly gone through the report. Dairy begins on page 45. What seems not to be taken into account is the full dairy supply, as opposed to fluid milk. The Washington, DC area, and for that matter, the entire East is deficit of milk. There is a great deal of money spent hauling milk and dairy products East.

Transparency?

Dairy cooperatives hide information which is available regarding many other corporations. Consider executive income: http://www.forbes.com/2009/04/22/executive-pay-ceo-leadership-compensation-best-boss-09-ceo_land.html

For contrast consider: http://openjurist.org/67/f3d/18/shaw-v-agri-mark-inc

67 F.3d 18
Karen SHAW and Forrest Foster, Plaintiffs-Appellees,
v.
AGRI-MARK, INC., Defendant-Appellant.
No. 1038, Docket 94-7713.
United States Court of Appeals,
Second Circuit.
Argued Feb. 8, 1995.
Decided Sept. 27, 1995.
Questions Certified March 2, 1995.
Certified Questions Answered Aug. 2, 1995.
Robert A. Gensburg, St. Johnsbury, Vermont (Peter Welch, Welch, Graham & Manby, White River Junction, Vermont, on the brief), for Plaintiffs-Appellees.

Robert B. Hemley, Burlington, Vermont (Gravel & Shea, Burlington, Vermont, on the brief), for Defendant-Appellant.

Before: LUMBARD, KEARSE, and CARDAMONE, Circuit Judges.

PER CURIAM:

1
Defendant Agri-Mark, Inc. ("Agri-Mark"), a corporation organized for the purpose of processing, handling, and marketing milk and milk products of farmers in the New England states and New York, has appealed a judgment of the United States District Court for the District of Vermont which orders Agri-Mark to allow plaintiffs Karen Shaw and Forrest Foster to inspect certain of Agri-Mark's books and records. Agri-Mark is a stock corporation organized under the laws of the State of Delaware. Plaintiffs are among the members of the Agri-Mark cooperative who supply Agri-Mark's equity capital and directly elect its directors; but they are not stockholders of record. Persons who are not stockholders of a corporation have no right under Delaware statutory law to inspect the corporation's books and records. See, e.g., Rainbow Navigation, Inc. v. Pan Ocean Navigation, Inc., 535 A.2d 1357, 1360 (Del.1987) (interpreting 8 Del.C. Sec. 220). The district court's judgment granting plaintiffs access to the books and records of Agri-Mark was based on the court's interpretation of Delaware common law.

2
The sole issue presented on this appeal is whether nonstockholder members of a Delaware stock corporation have the right under Delaware common law to inspect the corporation's books and records. In Shaw v. Agri-Mark, Inc., 50 F.3d 117 (2d Cir.1995), familiarity with which is assumed, we certified the following questions to the Supreme Court of the State of Delaware pursuant to that Court's Rule 41:

3
(1) Did persons who supplied equity capital to a cooperative stock corporation and directly elected its directors, but who were not stockholders of record, have a right under Delaware common law to inspect the corporation's books and records?

4
(2) If the answer to question (1) is yes, did that right survive the enactment of 8 Del.C. Sec. 220?

5
The Delaware Supreme Court accepted the certification and answered the first question in the negative. See Shaw v. Agri-Mark, Inc., 663 A.2d 464 (Del.Sup.Ct.1995). That Court held "that a member of a Delaware stock corporation must be a 'stockholder of record' to be entitled to inspect the books and records of the corporation under our common law." Id. at 470 (emphasis omitted).

6
In light of this authoritative interpretation of Delaware common law, which is contrary to the conclusion reached by the district court in the present action, the judgment of the district court is reversed, and the matter is remanded for entry of a judgment dismissing the complaint.

Madison DOJ/USDA

One of the larger disappointments of 2010, and there are many, is the hearing in Madison, Wisconsin on June 25,2010 http://www.justice.gov/opa/pr/2010/June/10-at-720.html

DOJ conducted an investigation in the southeast and has boxes, upon boxes of information on DFA. There are multiple antitrust lawsuits against DFA, mainly because USDA and DOJ have not done their job.

Yet the panels are stacked with DFA people.
Jerrel Heatwole:
http://www.dfamilk.com/our-cooperative/leadership/jerrel-heatwole

John Wilson:

http://www.dfamilk.com/our-cooperative/leadership/john-wilson-0

Then there is Ed King on the board of Dairylea (district 12), a wholly owned part of DFA. http://www.dairylea.com/AboutUs/management.htm
Ed is a nominal "farmer", more a per diem farmer.

Then you have Denny Wolff, partner, Versant Strategies, and former Pennsylvania Secretary of Agriculture. http://www.versantstrategies.net/clients/ Altria, which used to be Philip Morris, owner of Kraft. Monsanto, which until recent sold Posilac. Wolff tried to work on Monsanto's behalf while Secretary in ramming through a labeling requirement on rbST. You can make an argument in favor of rbST but, it is only a microeconomic argument. In the big picture, rbST has not helped dairy farmers.

Of course what panel would be complete without Robert Yonkers, vice president and chief economist, International Dairy Foods Association.

The litmus test for these two huge government agencies, USDA and DOJ to follow would be, do those on the panels serve the public's interest. On this simple test USDA and DOJ have failed. The meeting will be a cheer leading session for the status quo.

Futures

In the most recent "Commitment of Traders" report, most of the open interest for butter was "short." With butter in such short supply, how that could be is hard to fathom.

However, back in 2002 USDA released a report of a study on forward contracting (read that as "risk Management") http://www.ams.usda.gov/AMSv1.0/getfile?dDocName=STELDEV3004563

Oddly enough, the results of USDA's own study is that farmers lost money with futures. So,why is USDA not looking at the cause of volatility.

Up & Down

Friday, June 18, 2010 14 loads of blocks traded and one offer was left which settled the price at $1.4050 - up half a cent. The traders were Jerome seller/offerer and Schreiber buying.

Today, June 21, 2010 with one trade, the half cent was lost. The traders - the same.

If you were looking for a lot of players in barrels on Friday, forget it. Jerome sold 27 out of the 35 and Schreiber bought all except for four.

Someone recently suggested Jerome had extra cheese which they placed on the CME. The fact is that every load carries a fee from the CME. So, if Jerome is the seller, most often and Schreiber is the buyer, most often, a great deal could be saved by dealing directly with each other. Except, that would not affect farm milk price or, dare I say, futures.

And this is what USDA and all the experts call a market. As the ancient Greeks said, "Who will guard us from the guards?"

Florida

Several writers have noted the dramatic increase in milk shipped out from Florida. Dairy Market News in its most recent report June 16, 2010 (REPORT 24), stated there had been 349 loads out, compared with 240 loads leaving Florida in the same week of 2009.

Why the big increase? Tourism is taking a hit in Florida, because of the BP oil disaster in the Gulf. Fewer people mean less milk consumed.

Retail Milk Prices

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From time to time someone suggests farm milk prices should be the same throughout the country - sounds fair.

However, take a look at retail prices for one gallon of whole milk in various cities throughout the country. I have sorted them from low to high.

Obviously there is little or no connection with farm milk price. There are many reasons for the differences. There is no pattern. Some are good and some are just a case of retail market power.

Butter

Dairy Market News is reporting cream prices are high. Ordinarily, cream is sold in multiples of the CME butter price. The brokers I have spoken with say it is in the 1.5 to 1.6 range.

There are several reasons for cream to be short, including butter exports. However, butter fat test in all the federal orders are lower this year. Protein is also slightly lower.

Probably, the biggest depressor of BF is shortage of energy - grain. So, is there something really wrong with the milk production numbers?

CPI

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Today,the Bureau of Labor Statistics (BLS)published the Consumer Price Index (CPI), which tracks retail prices. As with the PPI, the CPI uses a base period 1982 - 84 = 100.

What is interesting is the fact that the CPI rose in May 2010. The "experts" all talk about large inventories of cheese holding prices down. According to my calculations, the inventories are exaggerated.

Be that as it may be, processors make cheese when milk price at the farm is low. Inventories are reduced when consumers are given deals.

The market system is obviously failing, which is not to say things are not working out according to a basic rule of capitalism, buy low and sell high. How sweet it is.

PPI

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Today,the Bureau of Labor Statistics (BLS)published the Producer Price Index (PPI). The PPI uses a base period 1982 - 84 = 100. So, each month they calculate the change from the base. It is important realize that in the base period both processors and farmers were at 100.

The above graph is for cheese and the milk going into cheese. As can be seen, the processors have seen a gain while the farmers have lost this year.

Where is the Information?

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Above is an unbelievable graph. No one could ever believe there is information divided up among so few players to move cheese prices at the CME up and down, repeatedly.

Efficient-market hypothesis

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There actually is an "Efficient-market hypothesis." Underlying all the garbage about milk pricing is a belief held by some but, promoted by many, that the "market" is run by ultimate wisdom.

In looking at the import/export data, which in the big picture shows the U.S. is exporting quite a bit of dairy at fairly high prices,there are some little gray details hidden in the back corners.

Take the MPC trade with Singapore. Maybe Singapore has a use for MPCs so exporting to Singapore might make some sense. But, do we have a use for MPCs from Singapore? The gray color in the graph represents the whole gray area, some of which is entering the American diet.

Money Maker

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There is quite a problem in any attempt to fathom dairy statistics. One thing for certain, we exported a great deal more - particularly cheese. We exported 42% more cheese in the period January - April 2010 than was exported in the same period of 2009.

More importantly, the average export price for the period was $1.87 per pound. As they say, "Don't do no good." as the American dairy farm is paid based on the block Cheddar trading on the CME. Looks like the cheese was made with inexpensive milk and then at world prices.

Dairy Trends

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Most thoughts on "dairy trends" are a matter of opinion. The above graph is not so. The above graph takes USDA dairy farm numbers from 2000 - 2009 and then as a matter of math and statistics, I have constructed a linear trend.

By 2024 there will be no more dairy farms - plain and simple.

The scary part is that there was plenty of warning about the financial collapse. There was plenty of warning about Bernie Madoff. There was even warning about the Gulf oil disaster in 2000. No one has to be told the government did nothing in advance of crisis.

As with all the above, the government allowed big corporation to select the riskiest, and therefore most profitable, direction for dairy.

There is no plan "B." There is no backup. Certainly, USDA and most of the experts can fall back on the old "market forces" excuse. However, the reason there has been no realistic examination of the CME is that USDA knows full well "market forces" have no clothes - embarrassing and ugly.

There is a wealth of scientific evidence on what is called "change blindness."

http://scholar.google.com/scholar?hl=en&q=change+blindness+&btnG=Search&as_sdt=400000&as_ylo=&as_vis=0

However, USDA and other policy formulators have their eyes closed. We are daydreaming toward tomorrow.

Helping Hand

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World price for Cheddar is $1.79 per pound. Today's closing for blocks was $1.37 per pound. So there you have $0.42 to work with. But wait,CWT adds $1.40 to the pot.

The selection process remains a mystery. Certainly, it is nothing like what a single mother would have to go through to get next to nothing.

Oh my, how the money rolls in.

Market System

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The advantage of the market system is the market yields efficient allocation of resources.

As everyone knows the CME is dominated by one or two big players. As can be seen by the above graph, the NASS survey and the CME are the same, except for a time lag.

The Bureau of Labor Statistics (BLS) publishes numerous data bases including the Producer Price Index (PPI). There is a PPI data base for "natural cheese." The correlation between the CME block Cheddar and the PPI is .95 - pretty close to a perfect correlation.

Now if you believe in a market system, you have to raise all kinds of doubts about the control exerted by so few players.

Maybe what we have is "Plutocracy is rule by the wealthy, or power provided by wealth." http://www.google.com/url?sa=t&source=web&cd=1&ved=0CBkQFjAA&url=http%3A%2F%2Fen.wikipedia.org%2Fwiki%2FPlutocracy&ei=4osRTJaJFMTflgfRh7iaCA&usg=AFQjCNEO9XicOAj2rmPhTB0jNPmq_i44tQ&sig2=ERR6DpVgaormpiXQCbvJ5A

Not a pleasant thought.

Saputo's Earnings

At:http://www.marketwatch.com/story/saputo-inc-financial-results-for-fiscal-2010-ended-march-31-2010-2010-06-09?reflink=MW_news_stmp

is the most recent earnings report. Note:Earnings Before Interest, Taxes, Depreciation and Amortization - EBITDA

-- Net earnings totalled $382.7 million or $1.85 (basic) per share, up
37.2% compared to $278.9 million or $1.35 (basic) per share in fiscal
2009.
-- Consolidated revenues totalled $5.811 billion, an increase of $17.3
million or 0.3% compared to $5.793 billion posted in fiscal 2009.
-- Consolidated earnings before interest, income taxes, depreciation and
amortization (EBITDA)(1) amounted to $692.1 million, an increase of
$144.3 million or 26.3% compared to $547.8 million in fiscal 2009.
-- EBITDA in the Canada, Europe and Argentina (CEA) Dairy Products Sector
totalled $457.9 million, as compared to $378.9 million last fiscal year,
an increase of $79.0 million or 20.8%.
-- EBITDA of the USA Dairy Products Sector amounted to $218.4 million, an
increase of $66.4 million or 43.7% in comparison to $152.0 million for
last fiscal year.
-- EBITDA of the Grocery Products Sector decreased by $1.1 million to $15.8
million in the current fiscal year, from $16.9 million in fiscal 2009.
-- Cash flows generated by operating activities totalled $583.6 million, an
increase of $116.3 million compared to $467.3 million in fiscal 2009.
-- Bank loans and long-term debt were reduced by $314.5 million. The
Company paid $119.0 million in dividends, issued shares for a cash
consideration of $26.0 million as part of the stock option plan and
repurchased $38.1 million of share capital as part of the Normal Course
Issuer Bid.

A 43.7% increase in earnings is very nice.

But for

There is a short legal phrase, "but for", which generally relates to negligence cases. For example, but for A firing his gun at B, B would not have been injured.

There is no doubt an argument can be made that U.S. dairy farmers have been harmed. When you come to the "but for" the likely culprit(s) would seem to be the traders at the CME in block Cheddar.

One could say for the past two days Jerome has been the seller and Jacoby has been the buyer. But, the harm to farmers is not caused by the traders. The "but for" is USDA.

"But for" is USDA's formula obtusely attached to the CME trading, no harm would occur. No law firm is very willing to tackle the government (USDA). Not enough politicians are willing to demand transparency.

There is no doubt but what the dairy farmers have been harmed, even though milk production continues and the milk is on the shelves.

Just as with the financial crisis, panic will have to set in before change can even be considered.

NZ Payouts

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The above is recently from NZ bank ASB.

Today, of course, more falling down on the CME. Now there is nothing illegal, as a matter of fact it is USDA sanctioned. Today, there was a willing seller and a willing buyer. Neither have any interest in farmers getting a fair slice of the pie.

DIAC CME

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At the recent Dairy Industry Advisory Committee (DIAC) meeting a representative of CME gave a presentation: http://www.fsa.usda.gov/Internet/FSA_File/1_perterson_cme_diac_jun_rev.pdf
In spite of how the name might appear to be spelled in the above link, the representative was actually, Paul E. Peterson.

The CME always has the excuse they do not control how people might use the information.

However, the reference to the GAO study: http://www.gao.gov/new.items/d07707.pdf is outright misleading. On page one, the GAO states, "Market Oversight Has Increased, but Concerns Remain about Potential Manipulation"

But, although he never brought it up, the CFTC did find evidence of manipulation in its settlement with DFA. DFA even violated CME rule and never seems to have had a slap on the wrist from the CME.

Look, we have just had the block price fall to near support. The players Jerome and Mullins on the seller side have no interest in farmers getting a fair milk price. On the buying side predominantly,is Schreiber. Where is the countervailing force?

To call the CME a market is one thing. For the CME to actually be a market is quite another. But, what is the difference to political hacks?

Oil

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Here is some food for thought. Here is the link to the story: http://www.econbrowser.com/archives/2010/06/eia_hard_core_p.html

June 02, 2010

EIA: Hard Core Peak Oil Forecast

Today Econbrowser is pleased to host this guest contribution from Steven Kopits, who heads the New York office of Douglas-Westwood, energy business consultants.

EIA: Hard Core Peak Oil Forecast

by Steven R. Kopits

The EIA has gone hard core.

The EIA, the statistics arm of the US Department of Energy, recently released its International Energy Outlook (IEO) for 2010. This is an important document for forecasters, as it represents the EIA's integrated view of the global energy markets in the years to come and contains a long term forecast on the range of energy sources and CO2. Like it or hate it, the IEO is a touchstone for the energy industry and is treated as the authoritative government forecast in the press and in capital raising documents like prospectuses. It influences policy-makers, the media, public opinion and investors. What it says matters.

And what does it say?

That peak oil is all but on us. And that's new.

As recently as 2007, the EIA saw a rosy future of oil supplies increasing with demand. It predicted oil consumption would rise by 15 mbpd to 2020, an ample amount to cover most eventualities. By 2030, the oil supply would reach nearly 118 mbpd, or 23 mbpd more than in 2006. But over time, this optimism has faded, with each succeeding year forecast lower than the year before. For 2030, the oil supply forecast has declined by 14 mbpd in only the last three years. This drop is as much as the combined output of Saudi Arabia and China.

But that's not the interesting part. The more salient development is the reduction in the forecast to 2020. Forecasts beyond ten years are highly uncertain and more subject to massaging and interpretation. Shorter term forecasts are more definite, and the forecasters are more accountable. As a consequence, the outlook for the short to medium term warrants greater attention. In the case of the EIA, the forecast changes most dramatically here. For the remainder of the decade, even though China would be expected to hit its stride for increased oil demand, the EIA sees no year in which liquids production will increase by even 1%. Petroleum liquids supply increases by an average of 0.6% per year from 2011 to 2020. In other words, the EIA is expecting the oil supply to be essentially flat for the rest of the decade. The supply will creep up from 86 mbpd today to approximately 92 mbpd to 2020, but that is not much growth, and indeed, is about the same as current global liquids production capacity. Moreover, it represents a reduction of nearly 4 mbpd from last year's forecast for 2020. On paper, the output of China has disappeared over the course of the last year.

In its forecast, the EIA, normally the cheerleader for production growth, has become amongst the most pessimistic forecasters around. For example, its forecasts to 2020 are 2-3 mbpd lower than that of traditionally dour Total, the French oil major. And they are below our own forecasts at Douglas-Westwood through 2020. As we are normally considered to be in the peak oil camp, the EIA's forecast is nothing short of remarkable, and grim.

Is it right? In the last decade or so, the EIA's forecast has inevitably proved too rosy by a margin. While SEC-approved prospectuses still routinely cite the EIA, those who deal with oil forecasts on a daily basis have come to discount the EIA as simply unreliable and inappropriate as a basis for investments or decision-making. But the EIA appears to have drawn a line in the sand with its new IEO and placed its fortunes firmly with the peak oil crowd. At least to 2020.

We'll see how it plays out. But for now, the EIA appears to be making a statement. Perhaps we should sit up and pay attention.

Milk?

While the industry worries about the "problem" of raw milk, here is, perhaps, a bigger deal: http://www.webmd.com/food-recipes/news/20100603/report-protein-drinks-have-unhealthy-metals

Consumer Reports Study Finds Worrisome Levels of Lead, Cadmium, and Other Metals
By Kathleen Doheny
WebMD Health News Reviewed by Laura J. Martin, MD
June 3, 2010 -- Popular protein drinks with names like Muscle Milk and EAS Myoplex -- favorites of teens, gym rats, boomers, and pregnant women -- can contain potentially unsafe levels of heavy metals and other harmful substances, according to an investigation by Consumer Reports.

''Consuming these kinds of protein drinks on a regular basis can in some cases create the risk of chronic exposure, even at low levels, to heavy metals such as cadmium and lead that can pose health problems, particularly to vulnerable people," says Andrea Rock, the Consumer Reports editor for the investigation. Among vulnerable people are children under age 18, pregnant women, and people with diabetes or chronic kidney conditions, she says.

Makers of protein drinks disagreed and said there were flaws in the investigation.

While the protein drinks are marketed as convenient, Rock says, "Most people can meet their protein needs through diet. And that can be better for both your health and your wallet.''

The full report will be in the July issue of Consumer Reports.

The article continues at link.

Many of the products have names like "Muscle Milk High Protein Shake." The ingredients, the dairy ingredients, are imported caseins and caseinates.

NFDM & CME

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Today Grade A NFDM fell on the CME. Big surprise, there were no loads traded. The fact is CME works its magic even when no product changes hands, as can be seen in the above graph.

Fonterra Auction

Yesterday, Fonterra held another internet auction for whole milk powder, skim milk powder and anhydrous milkfat. There was some small drop in the powders prices but, anhydrous actually increased.

Even though the price of skim milk powder fell, the average price was $1.57 per pound. Compare that with $1.30 per pound on the CME.

DIAC June 3 2010

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Probably better just let everyone come to their own conclusions.