Balancing Act

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Milk leaves the farm and theoretically goes to the highest use, which has historically fluid milk. Eventually, when no other home can be found, the milk goes to a nonfat dry milk plant, which is considered the lowest value.

This process is called balancing. But, there is another aspect. The government stands ready willing and able to buy dairy products at the "support" price of $9.90 per hundredweight or for NFDM $.80 per pound.

A look at the graph above should be all the proof anyone needs that sales to the government is an act for reasons known to the big players. For the most part, the sales to the government correspond with low farm milk price and sales to the government are considered "surplus." Logically, the manufacturers warehouses should be filled to the brim. However, that seems to have not been the case.

Backwards and Short on NFDM

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According to theory, prices move forward in capitalism. That is just the exact opposite in pricing raw farm milk from manufactured dairy products.

However, if wholesale manufactured prices are going to be used then why should skim milk powder (SMP)not be included? Lets just say, there is no test which can distinguish NFDM from SMP.

SMP is primarily made for export and when you look at the export prices, the answer becomes apparent - SMP is priced higher. The raw milk going to SMP is priced as if it were going to NFDM.

The difference is $0.102 per pound, using CDFA prices. Adds up to millions of dollars.

NFDM

Today, January 14, 2011 the price of Grade A NFDM rose to $1.4325 per pound. There were an amazing 13 trades this week, where usually there are none. The prior weeks average was $1.2940 per pound.

The answer lies in Brazil with La Nina flooding in which more than 500 have died.

http://edition.cnn.com/2011/WORLD/americas/01/14/brazil.flooding/

The Brazilian government wants an immediate 66 million pounds of NFDM for emergency food relief. New Zealand is hit with another La Nina weather event reducing milk output.

The U.S. manufacturers stocks of NFDM in November were 127.9 million pounds.

This is a big deal. All bets are off. Still time for low ball risk management - if so inclined.

Latest GDT Prices

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As can be seen above, Fonterra's globaldairy Trade auction held today saw prices rise dramatically.

Of particular interest is the skim milk powder, which is essentially interchangeable with NFDM. In the latest NASS dairy Products report NFDM prices fell just over 6%.

Highway robbery.

Dairy Cooperatives

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The latest California NFDM price (September 10, 10) IS $1.0851 per pound. California drives NFDM price because, or maybe because, a lot of NFDM is made there.

But, the California NFDM price makes no sense. Why, when all other dairy product prices are rising, should NFDM prices fall? The NFDM made in California is made by cooperatives. Capper-Volstead only exempts co-ops from antitrust action provided the operate for the mutual benefit of members.

State law is the basis for most co-op rules. California's lae begins:http://law.justia.com/california/codes/2009/corp/14550-14551.html

Agricultural Marketing Associations
CORPORATIONS CODE
SECTION 14550-14551

14550. In order to promote, foster, and encourage the intelligent and orderly marketing of agricultural products through cooperation;to eliminate speculation and waste; to make the distribution of agricultural products between producer and consumer as direct as can be efficiently done; and to stabilize the marketing of agricultural products, this act is passed.

14551. It is here recognized that agriculture is characterized by individual production in contrast to the group or factory system that characterizes other forms of industrial production; and that the ordinary form of corporate organization permits industrial groups to combine for the purpose of group production and the ensuing group marketing; and that the public has an interest in permitting farmers
to bring their industry to the high degree of efficiency and merchandising skill evidenced in the manufacturing industries; and that the public interest urgently needs to prevent the migration from the farm to the city in order to keep up farm production and to preserve the agricultural supply of the nation; and that the public
interest demands that the farmer be encouraged to attain a superior and more direct system of marketing in the substitution of merchandising for the blind, unscientific, and speculative selling of crops.

Someone must have oversight of cooperatives in California.

Within the Federal Orders, the task of oversight is the responsibility of one person:

Order Operations
William Newell, Branch Chief
Phone: 202-720-3869
Fax: 202-720-2454

Some might want to know what exactly he does is his oversight role? Would there be as many dairy lawsuits if actual oversight had been conducted?

Credible?

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Nonfat dry milk (NFDM) continues to be traded (?) on the Chicago Mercantile Exchange (CME). The CME charges a fee for each load traded to both the seller and the buyer.

In 2008 there were a total of 16 loads of Grade A traded on the CME - a real money maker for the Exchange. That works out to 5/100 of a percent of production.

In the real world the real sellers are the big co-ops, such as CDI and LOL. The traders on the CME tend to be brokers, not the manufacturers. The CME sends the price signal heard throughout the land. The signal has everything to do with will of the big players and nothing which could be recognized by Adam Smith as a market.