Markets or Marketing?

In the midst of record low milk price in real dollar terms, there is a nearly daily reminder of how much U.S. dairy exports have fallen. The pundits, to a person, all point to the world financial crisis, saying the markets have dried up.

The U.S. exports in the 12 months ending in April 2009 were actually off 15 per cent in dollar terms.

Meanwhile, New Zealand in the same time period (YTD April 2009) increased their exports of milk powder, butter and cheese 4.8 per cent. The dollar value of casein and caseinate exports increased 15.6 per cent from NZ.

While NZ dairy farmers are in something of a bind right now, it is nothing like the situation the U.S. dairy farmer is in.

Parity

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Today USDA released their Agricultural Prices report. The “all milk” price for June 2009 is $11.40 per hundredweight, down $7.90 from June 2008.

To put that is perspective; the “all milk” price was 25% of parity. Parity, of course, is the great boogie man from the 1980s. Parity, as everyone has been told over and over, ad nauseam, brought about a huge surplus of milk. And of course, the government had to buy the entire surplus and it was just bad beyond belief.

One problem with the conventional thinking on parity is when parity ended milk production continued to rise. Oddly, government purchases pretty much ended when parity ended. Dairy farmers simply received less for their milk.

Now, we are told, people stopped consuming dairy products and there we have the explanation for low prices. Somehow, other foods continue to be consumed. The average per cent of parity for all the commodities USDA lists is 40.63%. Potatoes are 50% of parity. Soybeans are 56% and grapefruit is 59%.

There is a problem with this picture.

Humor and Not So Funny

Mark Twain said something about humor was the only thing going for mankind. Here is something along that vein:

http://www.youtube.com/watch?v=lWDdcD-1xoo

http://www.youtube.com/watch?v=ScwGBNMH428

For those who prefer the serious:

http://levin.senate.gov/newsroom/supporting/2009/PSI.WheatSpeculation.062409.pdf

“A commodity index, like an index for the stock market, such as the Dow Jones
Industrial Average or the S&P 500, is calculated according to the prices of selected
commodity futures contracts which make up the index. Commodity index traders sell
financial instruments whose values rise and fall in tune with the value of the commodity
index upon which they are based. Index traders sell these index instruments to hedge
funds, pension funds, other large institutions, and wealthy individuals who want to invest or speculate in the commodity market without actually buying any commodities. To
offset their financial exposure to changes in commodity prices that make up the index and the value of the index-related instruments they sell, index traders typically buy the futures contracts on which the index-related instruments are based. It is through the purchase of these futures contracts that commodity index traders directly affect the futures markets.”

Subcommittee Chair Carl Levins said” that excessive speculation in commodity indexes has created great losers.”

Dairy farmers tend to be buyers of grain. No one can say if dairy farmers have benefited from grain subsidies by way of lower price dairy ration or have lost by way of former Senator Phil Gramm and the Commodities Futures Modernization Act of 2000 which allowed the speculators in the exchanges to run rampant.

Phil Gramm serves as Vice Chairman and a member of UBS Investment Bank of UBS AG, a European bank which has received a bundle of U.S. bailout money. Gramm’s wife, Wendy Lee Gramm served on the board of Enron and until recently, on the Board of the Chicago Mercantile Exchange.

Contradictions Abound

At the end of May 2009 butter stocks were down 7% when compared with the same time in 2008. Butter stocks in May 2008 were down slightly from May 2007.

So, that the U.S. would be subsidizing butter exports might seem surprising:

USDA ANNOUNCES BONUSES FOR EXPORTS OF BUTTERFAT UNDER DAIRY EXPORT INCENTIVE PROGRAM

WASHINGTON, June 8, 2009 – The U.S. Department of Agriculture today announced Commodity Credit Corporation (CCC) bonuses per metric ton on eligible sales of butterfat under the Dairy Export Incentive Program (DEIP) Invitation GSM-511A-59, issued May 22, 2009.

The announced bonuses are as follows:

Butter $450.00 per metric ton

Anhydrous Milkfat, Butteroil, Ghee $650.00 per metric ton

Then the ante is raised:

USDA ANNOUNCES NEW BONUSES FOR EXPORTS OF BUTTERFAT UNDER DAIRY EXPORT INCENTIVE PROGRAM

WASHINGTON, June 22, 2009 – The U.S. Department of Agriculture today announced Commodity Credit Corporation (CCC) bonuses per metric ton on eligible sales of butterfat under the Dairy Export Incentive Program (DEIP) Invitation GSM-511A-59, issued May 22, 2009. This announcement supersedes Press Release number PR 0083-09, issued June 8, 2009.

The announced bonuses are as follows:
Butter $850.00 per metric ton
Anhydrous Milkfat, Butteroil, Ghee $1050.00 per metric ton

Then consider the following graph:



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Everywhere there is money to made in dairy except where the milk is produced.

Uncharted Waters

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If you look at the above graph, which covers more than five years, one obvious conclusion which can be reached by urban based policy makers, California dairy producers are willing to produce more milk with a complete disregard for profit.

Therefore, it should be small wonder that state and federal governments are perfectly willing to do nothing while lending a sympathetic ear.

This is not a market based system. The driver of production has been external capital provided by the real estate bubble. California production is now falling.

Policy makers need to understand the age of predictability is over. Dairy policy can no longer be based on unfounded assumptions.

Market Smoke

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At: http://www.bloomberg.com/apps/news?pid=20601087&sid=a9WBQ0UBiWCY

Bloomberg’s article on milk price is loaded with conventional economic myths. The article states:

“Farmers plan to shift the pain to consumers. The National Milk Producers Federation in Arlington, Virginia, will pay dairies to slaughter 103,000 U.S. cows in coming months. Milk futures prices will double next year to a record $23 per 100 pounds (43.5 kilograms) as the herd shrinks by 171,000 head, the most since 1989, said Michael Swanson, a senior economist at Wells Fargo & Co., the largest lender to U.S. farmers.”

Another interesting, albeit confusing, quote from the article:

“Retail butter prices may rise above the record of $3.937 a pound and cheddar cheese may top $5.097 a pound, according to Jerry Dryer, 65, the editor of the industry newsletter Dairy & Food Market Analyst in Delray Beach, Florida.”

The truth is, milk production is fairly predictable. Consumption is also quite predictable. Under those two givens, how can it be that farm milk price has very little to do with how much milk is produced.

Milk price, in essence, is the result of the internal needs of the powerful buyers of dairy farm milk. The myths are just smoke screens.

Where's the Money

Recently, I posted information on May 2009 milk production data. A friend, Kurt Williams, wondered about FMMO production for May. I suggest looking at May 2008 as well. You would never guess this out in a 1,000 years. In the FMMOs there was 16% more milk in May 2009 than in May 2008. What that means is that in May 2008, when prices at the CME were high, milk was depooled.

Depooling milk means farmers did not get the full value for the actual usage. There are many ways to extract money from dairy farmers. Usually, dairy farmers are not even aware it is happening.

When federal order reform of 2000 took effect, the numbers on the milk check seems like a foreign language.