End of the Year

Dairy Product Prices: http://usda.mannlib.cornell.edu/usda/current/DairProdPr/DairProdPr-12-30-2010.pdf

All prices, except for whey, fell - what a way to end the year.

We are exporting bunches, including milk powder. The is no NFDM to be had in the country and yet: "Grade A standards averaged $1.14 per pound for the week ending December 25, 2010. The US price per pound decreased 7.5 cents from the previous week."

The shenanigans continue.

Well, here's wishing for a much better New Year for all.

Corn COT

(Click on image to enlarge)

Corn prices fell today. What next. If the CFTC's Commitment of Traders (COT) report carries any meaning, on the commercial side there are a lot of shorts. That should mean prices should continue to drop.. We'll see.

Eating Habits and Employment

A new paper is out on from the National bureau of Economic Research (NBER)

HOW DOES THE BUSINESS CYCLE AFFECT EATING HABITS?
Dhaval M. Dave
Inas Rashad Kelly
Working Paper 16638
http://www.nber.org/papers/w16638

Essentially, the authors have found:

"Estimates, based on fixed effects methodologies, indicate that a higher risk of unemployment is associated with reduced consumption of fruits and vegetables and increased consumption of “unhealthy” foods such as snacks and fast food."

Looking through the data indicates less milk is consumed. So, perhaps the decline in milk consumption is associated with lack of jobs - logical.

According to the BLS:

In November employers took 1,586 mass layoff actions involving 152,816 workers. Layoff events decreased by 65 from the prior month, while initial claims increased by 4,757. Manufacturing accounted for 354 events, resulting in 39,465 initial claims.

2011

Today prices fell again on the CME for cheese. The big picture is quite different:

The global dairy market is likely to “remain tight” in 2011, due to an improvement in demand but limited supply, according to Rabobank.

The bank said in its Global Dairy Outlook report that although consumption rates are set to be strong in the new year, growth in some regions will be constrained by physical limitations of supply.

“Drought in Russia and floods in Pakistan will heavily impact local milk production in the first half of 2011”, said Rabobank.

While these conditions are likely to create increased demand for imports, the bank said that domestic consumption is likely to be restricted.

Consumption is expected to be supported by improving labour markets in the West, strong economic growth in import regions and strong buying in China.

Supply levels

Factors effecting supply levels include higher feed costs, ongoing requirements for farmers to reduce debt levels and the likelihood of limited supply growth beyond New Zealand.

Given the country’s central role in determining Southern Hemisphere surpluses this season, any adverse weather events through the 2010/11 season could have an upside effect on dairy prices in 2011, said Rabobank.

An increase in grain prices could also “dampen” milk production volumes and consequently lead to an increase in dairy prices, said the bank.

According to reports on Rabobank’s latest quarterly statement, international dairy commodity prices drifted higher through Q4 2010, building on already high levels.

Rabobank had previously predicted high price levels for 2011 if prices held firm in Q4 2010. However, the bank said alternative scenarios should also be considered.

Future role of China and India

Rabobank has also changed its view on the likely role of China and India in global dairy markets.

The bank has abandoned the view that the countries will reach self-sufficiency soon and now predicts that they will call on the world market more frequently in the next three to four years.

Rabobank said that China in particular has a structural deficit that will be difficult to erode in coming years.

http://www.ap-foodtechnology.com/Industry-drivers/Dairy-market-to-remain-tight-in-2011-says-Rabobank

Corn & Soy

Today, corn futures for July 2011 rose to 628 cents per bushel. soy bean for May 2011 rose to 1396.6 cents per bushel.

Who really knows who owns the land those crops are harvested form, but farmland price are booming:

DES MOINES, Iowa (AP) — Increased commodity prices and strong demand have sent prices of farmland skyrocketing, making it more difficult for young and beginning farmers to get established but strengthening the balance sheets for those who own the land.

Across the Corn Belt, the price of farmland was on the rise in 2010. The highest increases were seen in Iowa, where values rose 13 percent and an acre of farmland sold for upward of $7,000 in some areas of the state. Minnesota and Wisconsin also saw double digit increases in farmland value, averaging 12 percent and 11 percent respectively, according to the Federal Reserve Bank in Kansas City.

more at: http://napervillesun.suntimes.com/business/3039967-420/farmland-prices-percent-farmers-commodity.html

Dairy farmers turn is right around the corner - or something like that.

Friends and Allies

New Zealand's near-monopoly co-op Fonterra has had partnerships with DFA, DairyAmerica, and now CDI. The deal with CDI is to make a "cheese."

This past week a new patent was issued to Fonterra by the U. S. Patent and trade Office (USPTO. the patent begins:

United States Patent 7,854,952
Carr , et al. December 21, 2010
Process for preparing concentrated milk protein ingredient and processed cheese made therefrom

Abstract

Process for preparing a concentrated milk protein ingredient comprising the steps of: providing a membrane retentate solution having kappa-casein milk protein, adjusting the divalent ion content of said protein solution to a predetermined level at which no gel is formed after treatment with milk clotting enzyme, adding a food grade milk clotting enzyme under conditions where kappa-casein is converted to para-kappa casein while remaining in solution, terminating the conversion by removal or inactivation of the enzyme and concentrating said solution. The resultant milk protein concentrate ingredient is used in the production of cheese.

Very interesting. Who will benefit from this?

Jefferson Bible

Thomas Jefferson was not only a great president but also, an outstanding scholar. His interest in philosophy and morals led him to assemble: "The Life and Morals of Jesus of Nazareth Extracted Textually from the Gospels", more commonly known as the Jefferson Bible.

Jefferson's Bible was given to every entering member of Congress for more than half of the 20th century.

So, on the day we observe the birth of Christ: http://www.angelfire.com/co/JeffersonBible/


I hope everyone has had a good Christmas.

Christmas Eve

Adam smith is the so-called father of capitalism. Smith wrote another book which many, including Smith felt to be more important. The book is: "The Theory of Moral Sentiments."

Many of his thoughts seem appropriate of the season:

How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it. Of this kind is pity or compassion, the emotion we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner. That we often derive sorrow from the sorrows of others, is a matter of fact too obvious to require any instances to prove it; for this sentiment, like all the other original passions of human nature, is by no means confined to the virtuous or the humane, though they perhaps may feel it with the most exquisite sensibility. The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it.

http://www.econlib.org/library/Smith/smMS.html

Merry Christmas Eve.

DIAC

http://www.idfa.org/news--views/details/5488/

Dairy Advisory Committee Votes for Supply Control, Higher Milk Solids


Meeting this week in Washington, D.C., the Dairy Industry Advisory Committee established by Agriculture Secretary Tom Vilsack came closer to finalizing its recommendations for improving profitability for dairy producers and reducing farm-milk price volatility. The major action occurred on Thursday when the committee voted on and accepted approximately 20 recommendations for policy changes.

While most of the proposals represent good steps forward for the industry, the committee also passed by a one-vote margin a recommendation that all states be mandated to adopt California's standards for milk solids and, by a similar one-vote margin, a proposal to implement a government-mandated "growth management program." IDFA is opposed to both of these recommendations.

"The committee has worked to examine price volatility and dairy farmer profitability and has reached broad consensus with support from both processors and producers on the need for new policies and programs to help the industry," said Jerry Slominski, IDFA senior vice president. "But these two highly controversial and extremely close votes in support of policies that have negative track records divide the industry and threaten the good work that has been done to date."

The committee is expected to meet one more time, on January 12-13, to finalize the recommendations and send them to Secretary Vilsack for review.

Regarding a requirement for higher milk solids, IDFA believes implementing California's standards throughout the country would raise retail milk prices, increase the costs of federal nutrition programs and reduce dairy exports. It also could hurt consumption and would increase the calories per serving of milk.

IDFA also holds that government-mandated limits on milk production are short-sighted and counter-productive. A recent study by Informa Economics, sponsored by IDFA, examined what happened in Canada, the European Union and other countries when government-mandated supply controls were implemented and enforced. The study concluded that supply-control programs limit exports, create an economic incentive for imports and increase consumer milk and milk-product prices.

"On the positive side, we are encouraged by the committee's proposals to endorse a new revenue-insurance program and to further review the Federal Milk Marketing Order system," Slominski said.

More details will be available soon on the Dairy Industry Advisory Committee section of the U.S. Department of Agriculture website.

IDFA may seem worried but,as IDFA knows, the status quo will prevail.

Looking Good

New Zealand's ASB bank today stated:

Dairy prices continued to fluctuate through the early stages of 2010 but, since rebounding in early September, they have been largely stable. Stabilising prices have been good news for the market and also for NZ dairy farmers in terms of Fonterra payout. We are positive about the outlook for dairy in 2011. However, some pressure may come on prices if supply growth continues in the main producing nations in the Northern Hemisphere. The latest example is US milk production lifting 2.7% in November compared to a year earlier.

So there you have it. Our fault.

More Consolidation?

http://www.bloomberg.com/news/2010-12-12/a-p-grocery-store-owner-files-for-bankruptcy-as-competition-heightens.html

Supermarkets wear the pants in the dairy business. Consolidation has increased steadily since the early 80s.

Now we find from the above link:

A&P, Century-Old U.S. Grocery Store Owner, Files for Bankruptcy

Great Atlantic & Pacific Tea Co., operator of almost 400 supermarkets under names including Waldbaum’s, Food Emporium and Pathmark, filed for bankruptcy after failing to compete with wholesale clubs and drugstores.

Further consolidation will not serve the public's interest.

Consumer Spending

(click on images to enlarge)

The Bureau of Economic Analysis (BEA) regularly publishes data on consumer spending called "Personal Consumption Expenditures" (PCE). The monthly data for "processed dairy products" shows a clear increase in consumer spending through October 2010. So, what can explain the fall in farm milk price generated by players on the CME. I would suggest someone in a position to do so look at the "shorts" on the class III futures.

Consequencences

Last Tuesday the IBA representative came and dropped off a calendar. a few yeqars ago IBA changed from calendars which had "old" farm pictures to recent "farm" pictures. Many of the recent photos look more like a second home than a farm. However, to me, the real difference is that the old pictures always were filled with people.

On October 3, 2010 Philippa Foot died. She created what is known a s the "Trolley Problem": http://en.wikipedia.org/wiki/Trolley_problem#Overview

In the original problem, which Foot developed, a runaway trolley in heading toward four workers on the track. If you through a switch, the four will be saved but one man working on the spur will die. Do you throw the switch? Most would.

A variation was developed by Judith Thompson. There is no switch but, the trolley can be stopped by throwing a heavy object off the bridge from where the observer is standing. The only heavy object is a fat man - big enough to stop the trolley - he would be killed. Most people would not throw the fat man. The numbers are the same, one death saves several lives.

These are ethical problems. Change the problem to economics, dairy economics, and everything about ethics goes out the door.

Several dairies fall and one is left standing. This is all done in the name of efficiency. However, is there a benefit to society? Depopulating rural America is not in anyone's long-term interest.

I suspect the divorce of ethics from economics is primarily in the manner in which the problem is stated.

Political Tricks

This U.S. Congress is coming to an end. There will be no S.1645 for "everyone" to get behind. This bill has the same fate as all its predecessors, S889 and S.1720. This time, however, there will be no Senator Specter to "sponsor" a new bill.

What were the odds of any (S889, S 1720 and S1645) passing. Totally disregarding merits, there is a 3% chance of any bill becoming law.

Some states have similar problems. In an article "Albany Handshake":

This surfeit of hopeless legislation clogs the
system: New York State lawmakers during
2008 proposed a record 18,000
bills—7,000 more than the U.S. Congress
and more than any other state
legislature. Only 9 percent passed. The
laziness, the corruption, the shameless
posturing, the unchecked power of the
leadership—that’s the deal in Albany;
that’s the handshake.

This is not to say, nothing can be done but, the chances of new legislation are pretty slim.

November Milk Production

(click on image to enlarge)

Today USDA released its "Milk Production" report. The report showed, surprise, surprise, that milk production was up in November 2010 by over 3%. The numbers can be argued until the cows come home. The numbers are not a precise measurement. Exact numbers are very difficult to come by.

There are some, many quite a few, who think all we need is supply management and the farm milk price will rise magically. First off, if the numbers are not precise, how can the supply be managed?

Perhaps more importantly, there is a genuine need for a small surplus. Milk supply varies day-to-day. But, the consumer expects to find the dairy product on the shelf. To insure the consumer is always supplied requires extra production.

The real problem is not the small "surplus," the real problem is the small surplus is the excuse to undercut dairy farm milk prices.

Essentially, the problem is a moral problem.

New Rating

http://www.tradingmarkets.com/news/stock-alert/df_fitch-rates-dean-s-proposed-400mm-issuance-ccc/rr6--1368466.html

Fitch Rates Dean's Proposed $400MM Issuance 'CCC/RR6'
Posted on: Wed, 15 Dec 2010 01:08:50 EST

Symbols: DF
Dec 15, 2010 (Close-Up Media via COMTEX) --

Fitch Ratings has assigned a 'CCC/RR6' rating to Dean Foods Company's (Dean; NYSE
: DF | PowerRating) approximately $400 million proposed senior unsecured notes. The ratings remain on Rating Watch Negative.

Today Dean announced preliminary plans to offer, subject to market and other conditions, up to approximately $400 million of senior notes. The company also entered into an amendment to its bank credit and receivables purchase agreements, dated April 2, 2007 and subsequently amended and restated on June 30. The amendments are conditioned upon the completion of the notes offering and subsequent debt paydown as described below.

Dean intends to use net proceeds from the debt offering to pay down a portion of its outstanding bank term loan A and to pay fees and expenses related to the credit facility amendment mentioned above. At Sept. 30, Dean had $4.1 billion of total debt, of which approximately $1.3 billion was related to its term A loan. Roughly $1.1 billion of this term loan matures on April 2, 2014.

Fitch's 'CCC/RR6' rating is based on expectations that the newly issued notes will rank pari passu with Dean's existing senior unsecured notes. The company's existing $500 million of 7 percent guaranteed notes due June 1, 2016 contain a change of control provision that requires Dean, or any third party involved in a change of control, to repurchase all or any part of the notes at a purchase price of 101 percent plus accrued and unpaid interest.

Furthermore, due to Fitch's recovery analysis, which incorporates a notching methodology relative to the Issuer Default Rating (IDR), the 'CCC/RR6' rating implies limited recovery in a distressed situation. Fitch does not expect Dean to default on these obligations; however, the unsecured note rating reflects the heavy mix of secured debt in the company's capital structure and Fitch's view that limited value would be available for distribution to unsecured bondholders if there were a recovery event.

On Dec. 3, Fitch downgraded Dean's IDR to 'B' from 'B+' due to materially higher than expected declines in operating earnings and cash flow along with Fitch's expectation that financial leverage will remain elevated through 2011. Additionally, Fitch placed all of Dean's ratings on Rating Watch Negative because of heightened covenant risk under the company's secured bank facility's maximum leverage requirement. The amendment to Dean's credit facility provides increased flexibility under its maximum leverage ratio and minimum interest coverage requirements while introducing a new senior secured leverage ratio condition.

From the effective date of the amendment through Dec. 31, 2011, Dean's maximum leverage ratio will be 5.75 times (x), stepping down by 0.25x increments annually at Dec. 31 until Sept. 30, 2013 when the ratio falls to 4.5x. The company's minimum interest coverage ratio is set at 2.5x through Dec. 31, 2011, stepping up to 2.75x at March 31, 2012 and then increasing to 3.0x at March 31, 2013. Dean's new maximum senior secured leverage ratio is 4.25x through Dec. 31, 2011, declining to 3.75x on March 31, 2012 and then to 3.5x on March 31, 2013.

Fitch currently projects that total debt-to-operating EBITDA for Dean will approximate 5.6x at year end 2010 and 5.4x at the end of 2011. Given that the company's bank covenants excludes up to $100 million of unrestricted cash and adjusts for non-cash expenses and non-recurring charges, Fitch expects cushion under Dean's covenants to gradually improve as operating performance stabilizes and the company uses free cash flow along with proceeds from potential asset sales to repay debt.

Negative Rating Watch and Rating Triggers:

Fitch views the amendment to Dean's credit and receivables-backed facilities positively and currently believes the company's liquidity is adequate. At Sept. 30, Dean had $1.5 billion of liquidity which included $102.1 million of cash, $863.1 million of revolver availability and $481.3 million of borrowing capacity under its receivables-backed facility. Of the secured revolver, $225 million expires on April 2, 2012 while $1.3 billion is due April 2, 2014. Once the amendment becomes effective, the maturity date on the company's $600 million receivables-backed facility will be Sept. 30, 2011 versus June 30, 2011 currently.

Dean's ratings will be removed from Negative Watch once the amendment of the company's credit facility becomes effective. As previously mentioned, effectiveness is conditioned upon Dean issuing up to $400 million of the aforementioned rated notes (which must be at least seven years in tenure) on or before Feb. 28, 2011 and using net proceeds to prepay its term A loan as outlined by the agreement.

Fitch currently rates Dean and its wholly-owned subsidiary Dean Holding Company as follows:

Dean Foods Company (Parent)

--Issuer Default Rating (IDR) 'B';

--Bank credit facility 'BB-/RR2';

--Senior unsecured debt 'CCC/RR6'.

Dean Holding Company (Operating Subsidiary)

--IDR 'B';

--Senior unsecured debt 'CCC/RR6'.

This is what it means to be "King of the Mountain."

Cheddar Prices

(click on image to enlarge)

We do live in interesting times. Today, the Bureau of Labor Statistics (BLS) released Consumer Price data through November 2010. Retail price of Cheddar cheese rose in November 2010 while the Cheddar price on the CME fell. The CME Cheddar price determines both wholesale cheese prices and dairy farm milk price.

In November, the spread between CME and retail was $3.54.

Meanwhile on the CME the second highest amount of cheese was traded - a total of 45 loads. All trades were based on bids. Five players placed bids. Jacoby bought the most. All loads were sold by Jerome.

If all these players needed cheese why did the price not go up? The price fell by 1 1/4 cents to $1.3225. One also would have to assume Jacoby could not find Jerome's number so the cheese could be bought off the exchange without having to pay the CME fee.

Fonterra's GlobalDairy Trade auction prices all rose today. There are serious concerns about the global dairy supply.

Dairy Market News lists Oceania Cheddar (Dec 9, 2010) at $1.905, which is the world price.

Which Way

(click on image to enlarge)

Today, December 14, 2010 CME block prices fell again to $1.3350 per pound. USDA released its latest World Agricultural Supply and Demand Estimate (WASDE). The dairy page is above.

There is a serious disconnect between the activity on the CME and WASDE report. January's class III futures on the CME settled at $13.11.

There is a serious disconnect between CME block prices and other prices on the CME. NFDM Grade A $1.27 per pound.

Eye of the Beholder

(click on image to enlarge)

A commenter complained on Saturday's post that I had not taken ethanol subsidies to task. Ethanol certainly has driven up dairy farm feed costs, adding to other dairy farm concerns.

We truly need fair market prices for all farm products - not subsidies. But, dairy farmers have benefited from subsidies to grain farmers. As can be seen from the graph above corn farmers have lost money most every year. There would be no corn for dairy farmers without subsidies.

Many U.S. dairy farmers feel the Canadian farm milk pricing system is not market oriented. However, a recent study from Canada by, Peter Clark, president of Grey, Clark, Shih and Associates Limited. found U.S. dairy farmers are heavily subsidized. The study, according to a press release found, "U.S. federal, state and local governments continue to subsidize their agriculture industries with a labyrinth of programs that are conservatively estimated at over US$180 billion in 2009 and representing well more than half of total U.S. farm gate revenues of US$290 billion."

The release stated, "In summary, the subsidies to U.S. dairy producers are essentially equivalent to revenue the industry receives from the market place. This generous support enables U.S. producers to sell below their fully absorbed cost of production by insulating them from the need to earn a profit from the market. The support also permits insulation from international price pressures."

The selling price for a product, according to the dictates of capitalism, is costs plus profit equals selling price. The CME trading flies in the face of capitalism.

Butter Prices

(click on image to enlarge)

The above graph tells a couple stories. First, butter exports are doing nothing to boost U.S. dairy farm milk prices.

http://www.usdec.org/home.cfm?navItemNumber=82205

"USDEC is funded primarily by the dairy promotion check-off program. It also receives export activity support from the U.S. Department of Agriculture's Foreign Agricultural Service (FAS). Membership dues fund the trade policy and lobbying activities of the Council."

Secondly, you will note Hoogwegt is a member of USDEC and is the main player on the CME driving down butter prices.


So who is watching the store?

Best Dairy State oh Boy Youbetcha

In America the leading policy formulators for dairy ascribe a certain omniscience to the "market." Omniscience is the property of having complete or maximal knowledge.

Well, it would seem that a certain buyer of milk, who makes Cheddar, thinks (is certain) its suppliers can make milk with block Cheddar on the CME at $1.39. Most anyone who cares to know, knows there is a near perfect correlation between CME block prices and dairy farm milk price.

So, if you put it all together, you must conclude Idaho is the best state to have a dairy operation - and that Washington D.C. is the best place to take a nap.

Dean Foods Bonds

(click on image to enlarge)

Dean stocks rose significantly today, mostly on news regarding bonds. The bond interest rate is more than twice the 30 year mortgage rate.

A Bloomberg report: http://www.bloomberg.com/news/2010-12-09/dean-foods-chief-engels-loses-59-as-s-p-s-worst-after-milk-takeovers-sour.html

"Credit Suisse Group AG analyst Robert Moskow says Dean’s strategy of driving down costs to undercut smaller, less efficient milk processors and force them to scale back capacity hasn’t yielded results. At the same time, Dean is facing pressure from retailers who are discounting milk to attract penny-pinching consumers while demanding price breaks from suppliers. Also, more shoppers are buying cheaper private label milk products instead of Dean’s brands."

So, here we are with dairy farmers near the bottom and the largest fluid in terrible financial shape.

Dean Settles

In an 8K SEC document filed today Dean stated:

The Company has reached an agreement with the plaintiffs in its previously disclosed purported class action antitrust lawsuit filed in the United States District Court for the District of Vermont to settle all claims against the Company in such action. The settlement agreement is subject to court approval. There can be no assurance that the court will approve the agreement as proposed by the parties. Pursuant to the agreement, the Company would be obligated to pay $30 million, and would agree to other terms and conditions with respect to its raw milk procurement activities at certain of its processing plants located in the Northeast. The Company expects to take a charge in the fourth quarter of 2010 of approximately $18.4 million, net of tax, with respect to the proposed settlement.

Well, we'll see. At this point DFA and DMS (one and the same) have not settled and the case moves ahead with "discovery" extended to April 15, 2011.

Numbers

(click on image to enlarge)

The numbers used to justify changes in farm milk price are not precise measurements. A look at the above graph is interesting. Nationally, there is one cow herd. If a farm had the variations seen above, the owner would know there is a problem.

Retail Milk Prices

The Bureau of Labor Statistics (BLS) regularly publishes extensive data. Among the data available is the retail price of milk. For June 2010 the BLS lists the retail price in the average U.S. city as $3.30 per gallon for whole milk.

The Australian Bureau of Agricultural and Resource Economics (ABARE)publishes extensive dairy data. ABARE lists the retail price for a gallon of milk (converted from liters to U.S. gallons) in Australia for June 2010 as $6.92.

The point is there is no relationship between farm milk price and the price consumers pay.

New Zealand & U.S. Dairy Farm Milk Price

(click on image to enlarge)

In the above graph I took some liberties. The New Zealand production year starts in the middle of the calendar year. Therefore, some time adjustment is needed. Next, by placing the NZ price on the right axis, I was surprised to note that the two prices, visually, can be compared.

Recently, the price NZ farms receive has become higher than the U.S. price. Both the U.S. and NZ prices have been rising but, note the trends. NZ farm milk prices have been rising at a faster rate.

All the conventional experts talk about a world market. Exports are very, very important everyone is told. Well, if U.S. prices are lower than world prices, exports are very, very important to someone but, not dairy farmers.

External Capital

(click on image to enlarge)

Conventional thinking, like the carnival worker, wants attention focused on supply/demand as the sole driver of production - simple answers are always favored.

We will soon hear some reports from the Dairy Industry Advisory Committee (DIAC) and the combined DOJ/USDA hearing. One could almost guarantee, there will be no mention of external capital driving production. That is capital not derived from the business of dairy farming.

In 2003 Rural Sociology magazine published a paper "Dairy Industrialization in the First Place" The article was all about the importance of L.A. real estate values driving dairy production.

Then in 2006 McKinsey & Company published a report ($2.3 million price tag) for the California Milk Advisory Board titled, "Foundations for a Consumer-Driven Dairy Growth Strategy" which stated, "The industry also benefited from a vitalizing cycle of reinvestments, spurred by steadily appreciating land values, useful capital gains tax treatment, and cash accounting."

So, even though there are dairies all over the country, growth has been driven primarily in the West funded with "appreciating land values" mostly from L.A. There is a .61 (positive) correlation between L.A. real estate values and the number of cows on farms in the U.S. As can be seen in the above graph, there is a lag factor.

The likelihood of real estate gaining legs and walking again is pretty remote. Unemployment is serious. Beneath the normally reported unemployment data are some very gruesome details. The employment participation rate for men age 25 to 54 (prime working years)fell in November to a record 88.8%. Without jobs there can be no buying of homes.

Capitalism holds that the selling price of anything is costs plus profit. The "real" profit generates capital. How long has it been since dairy has generated capital? How long has it been that policy makers have attributed growth in milk production to the wrong factor?

The Failure of Conventional Thinking

(click on image to enlarge)

A few post ago, I cited an article which mentioned a milk glut because of high farm milk prices a couple years ago. I said some, not all farmers expanded.

However, the real economic measure is not high milk price for a few months, but rather, profitability. Many dairy economist have used milk/feed ratio as a measure of profit. Some have even mentioned that expansion is only likely when the ratio is over three.

A look at the above graph shows there is no relationship between expansion (number of cows) and the milk feed ratio. The trend for the ratio is down and yet the cow numbers have grown. The statistical correlation between the two sets of data should be positive - the higher the milk feed ratio, the higher the number of cows should be. Instead, the statistical correlation is -.61.

Clearly, there is something else at work with expansion. If policy makers and the public media do not understand the total picture, how sound can any dairy policy be?

Butter Moving Up

The latest Dairy Market News states:

DECEMBER 3, 2010 MADISON, WI (REPORT 48)

BUTTER HIGHLIGHTS: The CME Group AA cash butter price
declined early in the week but recovered late to close at
$1.6100 (-6 cents from last Wednesday, November 24 close).
Churning was more active over the long holiday weekend while
many other cream users were closed. Printing continues to
fill last minute orders from bulk and fresh stocks. Export
interest has improved with the lower prices. Some
manufacturers are looking at increasing butter/butterfat
exports, particularly during the yearend holiday season.
The "new crop" butter production year started December 1,
allowing CME Group cash butter market sale eligibility until
March 1, 2012.

At the CME butter went up 5 1/4 cents yesterday December 2, 2010. Today, butter went up 21/2 cents. Interestingly, Daisy Brand has been active on the selling side. Daisy Brand does not make butter.

Dairy Products

(click on image to enlarge)

Today USDA NASS released its "Dairy Products" report, which is available at: http://usda.mannlib.cornell.edu/usda/current/DairProd/DairProd-12-02-2010.pdf


Total cheese was up 3.5%. Whey is a by-product of cheesemaking. If cheese production increases whey production should increase proportionately. However,as can be seen above, whey production was down. What is going on?

Notice though, lactose production was way up. Traditionally, lactose was part of whey and taken from whey. But, ultrafiltration of milk which is used to bump up cheese yield. Lactose is a by product of ultrafiltration.

Not only is imported MPCs bumping up cheese yield , but also, ultrafiltration is contributing to cheese stocks.

As with MPCs, ultrafiltration produces an inferior product. Whey, minus the lactose is retained in the Ultrafiltered milk. Hence less whey.

Commercial Disappearances

(click on image to enlarge)

If there is any meaning to the word "glut", that meaning cannot be found in the data. As can be seen above, "Commercial Disappearances" as reported by USDA exceed the farm "marketings." Through September 2010, the Commercial Disappearances have been 1.4 billion pounds more (milk equivalent) than farm marketings.